Now Available! Meeting Report from PSA DG Meeting – November 16, 2023

ITEMS PRESENTED AND DISCUSSED AT THE NOVEMBER MEETING 

Considerations on Developing a Natural Resources Inventory

This submission asked the Group to discuss recent developments in establishing natural resources  inventories. The Group was asked to discuss methodologies and processes as an essential first step as public sector entities develop their natural asset management plans and ascertain how to value and manage their natural resources.

The Group discussed a variety of considerations in developing a natural resources inventory as outlined in the submission, including the following:

• It is important to first consider what natural resources may exist before determining whether the asset definition is met.
• A natural resources inventory may be difficult to complete. Several Group members mentioned that perfection is the enemy of progress, and that public sector entities should prioritize material and important natural resources as a starting point.
• Before involving experts, it is important to consider scoping and phasing of what natural resources may exist. The expected benefits from putting together a detailed inventory of natural resources may not justify the costs of engaging experts to assist. In sharing this perspective, some Group members noted that many smaller public sector entities may lack the internal expertise required to inventory their natural resources.
• Control and responsibility over natural resources must be determined. For example, a Group member recalled that First Nations have long-standing unresolved land claims with various levels of government. The difficulty in determining control and responsibilities over resources in disputed lands must be recognized when determining the control over natural resources.
• The services that natural resources provide must be factored into public sector entities’ asset management plans. How such resources are managed is a matter of public interest and accountability. Many Group members noted that the value of natural resources should not only consider their commercial value but also their ecological and other benefits that contribute to the public sector entity meeting its service delivery and stewardship objectives.
• Many Group members noted that creating a natural resources inventory is an iterative process, for example, in narrowing down the intended use of resources. Placing a value based on the derived benefits from natural resources is important in understanding the important ecological benefits they provide.

Group members were asked to share their views on the following inventory approaches:

• CSA Group published CSA W218:23, Specifications for natural asset inventories.
• The Global Reporting Initiative (GRI) released its standard, GRI 3: Material Topics, which provides step-by-step guidance for organizations on how to determine material topics.

Group members shared the following perspectives on the inventory approaches:

• Although non-authoritative from a financial reporting perspective, CSA W215.23 may provide public sector entities with an approach to begin compiling their natural assets.
• The associated costs with the inventory approaches are a significant factor in determining how public sector entities may apply such approaches. A Group member noted that GRI 3 may be an important first step in gathering information on natural resources that may have a material impact.
• Public sector entities must consider investing in maintaining and preserving their ecosystems. Collecting information on natural resources (e.g., condition, intended use, costs to maintain, and other details) is important to consider. Many Group members said that attributing a value to natural resources should not be the primary purpose of preparing a natural resources inventory.
• Challenges in resources, knowledge, methodologies, assumptions, systems, and documentation will be important areas to consider when determining the extent and scope of a natural resources inventory. Some Group members noted that GRI 3 focuses on material topics, which may help public sector entities prioritize natural resources.
• Group members noted that what gets measured tends to get managed. Taking initial steps in collecting information that is readily available should be considered as public sector entities manage their natural resources.

The submission provided examples of how some municipalities report on natural resources.¹ The Group was asked to discuss the Natural Assets Initiative’s approach and how it helps many municipalities with natural resource management considerations² The Group discussed the merits of having such information available, and reflected on what information may be more appropriately appear on financial statements or other reports. It concluded that the information in the examples was useful, but the associated costs, benefits, and intended use of such information must be considered.

¹ Rossland, BC, is creating a natural asset inventory, summarizing the natural asset types within the municipal boundary. The city uses Agriculture and Agri-Food Canada land-cover data combined with local data.

² In 2018, NAI launched a second cohort of six projects to further refine the municipal natural asset management methodology and expand the evidence base, focusing on the role of healthy natural assets in supporting resilience to climate change and to increased urban development.

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Exploring Scalability of Standards

This submission asked the Group to discuss the merits of and issues with customized reporting for public sector entities, using as a basis for discussion the questions raised in the recent Accounting Standards Board’s (AcSB) Consultation Paper 1, “Exploring Scalability in Canada.”³

The Group discussed the issues and implications of customization and how such challenges may apply to PSAB. They included the following:

• A few Group members mentioned issues the International Public Sector Accounting Standards Board (IPSASB) raised,⁴ and suggested that application support and navigation tools for the standards could be provided to assist public sector entities.
• In some cases, government business enterprises (GBEs) lack the resources or the same conditions that would require applying complex accounting standards. The Group discussed whether a targeted effort could ease such reporting requirements for GBEs without customizing or scaling of broader standards.
• Group members suggested that small Indigenous GBEs may be better served in applying Accounting Standards for Private Enterprises (ASPE) rather than IFRS^® Accounting Standards. If PSAB allowed use of ASPE, the small entities would benefit from lower costs and would not need to consider accounting matters targeting large entities. Group members noted that non-authoritative guidance similar to “How to Evaluate a GBE’s Financial Self-sufficiency” could be helpful.
• PSAB may want to consider exploring areas where its standards are difficult to apply. Additional guidance may be more helpful than exploring a customization approach. This would be consistent with the Board’s 2022-2027 Strategic Plan, which stated on page 10 that “[p]otential customizations will be considered only in specific cases where substantive and distinct accountabilities for different public sector entities are noted.”
• Chapter 7 of the Conceptual Framework for Financial Reporting in the Public Sector provides materiality considerations for determining information to present in financial statements. ⁵ The chapter notes that materiality would be considered from qualitative and quantitative perspectives, adding that materiality is entity specific. Some Group members thought that materiality should be factored in determining the extent to which an entity applied the standards and the extent of disclosures required. Small entities may not have the complex transactions addressed in the IFRS Accounting Standards, or their magnitude and complexity may be less than for larger entities.

The next series of questions in the submission asked the Group to discuss recognition, measurement, presentation, and disclosure when reflecting on potential customizations options. The Group noted the following:

• The balance between the flexibility allowed by standards and the financial information needs of users must be considered when reflecting on potential customization. Understandability, comparability, and accountability should not be compromised.
• Chapter 10 of the Conceptual Framework promotes the preparation of understandable financial statements to meet the accountability objective. It is important to consider potential implications from the Conceptual Framework. The Group referred to the illustrative examples of financial statement presentation in the appendices to the new reporting model in Section PS 1202, Financial Statement Presentation. These financial statements reflect five types of public sector entities. They show similar presentation in the financial statements. The reporting model in Section PS 1202 is a benchmark for PSAB to differentiate a particular type of entity in the future if it is important for that type of entity to demonstrate accountability.
• Many recently issued standards may require extensive work before their effective dates. Some Group members thought that PSAB should focus on maintaining Public Sector Accounting Standards and help with implementing its new and upcoming standards rather than explore differential reporting.
• PSAB should explore options to allow some entities to provide fewer disclosures or simplified reporting. Most Group members cautioned the Board against allowing for too many options, because such differentiation may create confusion rather than promote stability.

In summary, the Group discussed how some small entities may benefit from scaling standards. Most Group members suggested that, given all the complexities, sizes, and types of public sector entities, scaling may become onerous, if not inappropriate. Instead, they encouraged PSAB to consider additional guidance, such as practical application material, or to explore scaling options only for certain types of public sector entities, such as Indigenous GBEs. These entities may face unintended consequences when applying existing standards. Given the timing and volume of new standards, along with the Board’s current projects, the Group members thought that the Board should focus on stability rather than taking on issues that may result from customization of its standards.

³ The AcSB’s Consultation Paper explores how to scale the standards to better meet different reporting needs for interested and affected parties in the private sector, especially entities using Part II of the CPA Canada Handbook-Accounting, ASPE.

⁴ In March 2022, the IPSASB added the Differential Reporting project to its work program. The IPSASB reflected on the findings from its research and scoping phase and decided not to pursue a standard setting solution.

⁵ Material that links to the CPA Canada Handbook is available to subscribers only. However, all information needed to understand this document is provided.

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Accounting for Extreme Weather: Effects on Tangible Capital Assets

The submission sought to gather feedback from the Group on measuring and recognizing the financial impact of extreme weather events on a public sector entity’s tangible capital assets. The submission offered the following scenarios so the Group could discuss whether Section PS 3150,Tangible Capital Assets, should be updated to specifically include guidance on accounting for the impact of extreme weather events:

• Extreme flooding events;
• Forest fires;
• Freezing rain and cold weather extremes; and
• Extreme heat and record high temperatures.

The Group was asked to discuss the challenges of applying the existing guidance in Section PS 3150 to these events. The submission asked the following⁶

1. Are there any climate-related impacts that would require a change in the amortization method or useful life of any of the public sector entity’s tangible capital assets?⁷
2. Are there any climate-related impacts that would require the write-down or write-off of any of the public sector entity’s tangible capital assets?⁸

The Group acknowledged the topic’s timeliness, given the future magnitude and expected occurrence of these events. The Group shared the following:

• It is important to assess the impairment in an asset’s the service potential following significant damages that have occurred and damages that are expected to occur.
• Some assets may have no market value yet may still possess significant service potential. This may be the case when purchasing land to act as a flood plain. The land should be recognized as a tangible capital asset whose value is solely provided as a component of flood-protection infrastructure.
• Disclosures should be provided in accordance with the future use of the asset. One Group member noted that the purchase of flood plain land could be seen as an improvement rather than an impairment as it involves the best future use of the land based on changes in circumstances.
• Disclosing impacts and risks is at the core of public interest. Public sector entities should disclose both current and potential events and their impacts to tangible capital assets. Most Group members acknowledged it is important to be able to value the asset for its intended use.
• It is important to monitor and assess the condition of assets. Increases in extreme weather events may be detrimental to the useful life of assets that are exposed to the effects of climate change. Disclosures should appropriately reflect the changes in circumstances arising from current and expected weather events.
• Permanent versus temporary impairment can prove difficult to establish when dealing with assets impacted by climate change and extreme weather. While the likelihood of future events may be probable, the Group reflected on the challenges in addressing measurement uncertainty and the professional judgment required when relying on estimates.

The Group encouraged PSAB to consider providing further guidance given the issues raised in the discussion. The Group recognized that what currently exists in Section PS 3150 has been useful. However, componentization of how different classes of assets are impacted by extreme weather events may be appropriate as climate change continues to influence how public sector entities adapt, recognize, and disclose the risks and consequences stemming from such events.⁹

The Group recommended the following:

• Additional application guidance in determining if an asset is permanently versus temporarily impaired. Some Group members noted that with the rise of extreme weather events, having the ability to account for instances where assets may be partially impaired would be helpful. For example, a forest fire would destroy trees, yet forests will regenerate over time.
• Public sector entities must assess if they plan on repairing, replacing, or bettering an asset following the consequences from these events. The interaction and timing of how costs are allocated depend on the government’s intended use for the asset, and guidance or examples of such instances would be helpful.
• Guidance or a statement of recommended practice would be helpful in clarifying areas such as adjustments in the useful life of an asset, appropriateness of amortization rates, and professional judgments involving measurement uncertainty and reliance on estimates.

⁶ This submission raises questions in response to those asked about public sector tangible capital assets in the CPA Canada Research Guidance and Support publication (see Group meeting on May 12, 2022) “Climate-related Issues: Questions to Ask Under Existing Public Sector Generally Accepted Accounting Principles (GAAP) and Statements of Recommended Practice (SORPs)”

⁷ Paragraph PS 3150.29 states: “The amortization method and estimate of the useful life of the remaining unamortized portion of a tangible capital asset should be reviewed on a regular basis and revised when the appropriateness of a change can be clearly demonstrated.” Paragraph PS 3150.30(a)-(g) addresses the revision of amortization methods or rates.

⁸ Paragraphs PS 3150.31 and PS 3150.34 outline the write-down of the tangible capital asset’s cost and what to consider when determining a reduction in future economic benefits that is expected to be permanent.

⁹ Paragraph PS 3150.12 states: “Many tangible capital assets, particularly complex network systems such as those for water and sewage treatment, consist of a number of components. Whether a government decides to record and account for each component as a separate asset will be determined by the usefulness of the resulting information to the government and the cost versus the benefit of collecting and maintaining it.”

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Natural Resources – Upcoming IPSASB Exposure Draft

The IPSASB issued its Consultation Paper, “Natural Resources,” with the objective of developing guidance that addresses issues relating to the recognition, measurement, presentation, and disclosure of natural resources.¹⁰

In addition to the Consultation Paper, the basis for this submission is the IPSASB’s Natural Resources project in its drafting of its Exposure Draft, “Natural Resources,” The Group was asked to discuss and consider the session as a Canadian roundtable on the IPSASB’s draft Exposure Draft. The Group was asked to discuss the questions and materials introduced in the Exposure Draft, and shared the following perspectives:

• Time remains of the essence as climate change continues to effect public sector entities. The Group noted that, although it supports the IPSASB’s work, the guidance on natural resources reporting must advance as quickly as possible.
• The revised definition of “natural resources” the IPSASB proposes is an improvement as it includes broader types of natural resources that are held for conservation. The Group supported the revised definition, which allows the recognition of natural resources that came into existence without artificial aid.¹¹ This definition would allow the recognition of a broader range of natural resources and activities relating to their preservation and maintenance.
• The Group discussed the difficulties that arise when determining whether natural resources should be reflected in the financial statements. The discussion called into question whether the reporting of natural resources may be more appropriate in the broader general purpose financial reports. The Group thought that the intended objective should be focused on providing necessary information to assist in making better decisions.
• Placing a monetary value on natural resources should not be the absolute objective in determining how natural resources are reported. The Group reflected on the management and reporting of natural resources so that informed decisions can be made as to the condition, risks, investments, and other considerations involving natural resources management.
• Comprehensive reporting of the intended use of natural resources should be considered. The Group supported the concept that a current operational value for natural resources may be more appropriate than other measurement principles, such as market value.
• Different concerns outside the reporting of financial impacts of natural resources must be contemplated. The Group noted that the values attributed to greenspaces and ecosystems must be considered so that such natural resources are disclosed, maintained, and managed appropriately.

The Group discussed the challenges in PSAB’s International Strategy while awaiting progress from the IPSASB’s Natural Resources project. The Group encouraged PSAB to consider taking additional steps in providing public sector entities with guidance and tools on this topic given the timeliness of the issues concerning natural resources reporting. Green infrastructure was mentioned as an area of Canadian interest. Acknowledging green infrastructure as both a natural resource and a means to mitigate climate change is critical. Recording green infrastructure, like urban forests, would encourage funding it, instead of funding grey infrastructure, like highways.

The Group concluded the discussion would help informing PSAB’s response to the IPSASB’s Exposure Draft once it is finalized and available for comment (likely in Q2 2024).

¹⁰ During the summer of 2022, PSAB consulted with Canadians to ensure Canadian-specific issues and perspectives were provided to the IPSASB, and responded to the Consultation Paper.

¹¹ The term ‘naturally occurring’ is not explicitly defined in the TNFD or UN SEEA Central Framework, but its usage is consistent with the plain English meaning of “coming into existence without artificial aid”, “existing by nature without artificial aid”, or “happening or existing as part of nature and not made or done by people”.

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