Since 2009, and PS 3150 adoption, many governments have not performed a structured and systematic asset register data review. The purpose of this review is to identify and correct the historical errors that have been sitting on the books for the past decade. In the case of the Township of Wilmot and the District of Squamish, these data errors had been perpetuating significant incorrect balances for TCA values and material misstatements. In both cases, correcting these prior Asset Register Data errors has improved integrity and trust in the numbers for Council decision-making. These organizations are making better decisions and have improved the data used for capital budgeting and planning.
1. Enhancing Data Accuracy and Improving Decision-Making
Local governments and their finance departments are tasked with many reporting responsibilities. At a basic level, in addition to daily operations, the governments are responsible for presenting budgets or financial plans to outline the activities for the upcoming year, reporting the expenditures and revenues of the previous year, and updating any long-term strategic objectives. Governments must also communicate with key stakeholders regarding these key reporting responsibilities.
The basis of any policy or strategic decision for a local government is determined by the information the municipality has available to inform key decision makers. If the information used by the government to make decisions is inaccurate, the subsequent policies, plans, strategies, and decisions that are implemented may be misdirected and potentially embarrassing to everyone involved.
Beyond the impacts and implications of bad policy decisions, there is also substantial reputational risk to the government and staff involved. No government leader wants to be the one responsible for making a poor decision based on bad information. As a result, any action that a local government can take to ensure better accuracy and data to help with the decision-making process should at the very least be investigated.
One such action that can enhance data accuracy and improve decision-making power at a local government is a formal review of its Tangible Capital Asset (TCA) register. A TCA register contains a list of all capital assets and any important data associated with those assets such as in-service date, historical cost, and estimated useful life. Reviewing the data in the TCA register may not be an easy task, but there are significant benefits that can be realized through such an activity. While initial work and reviews would have taken place with the adoption of PS 3150 in 2009, when TCAs were required to be incorporated into financial statements, periodic reviews of the TCA register should have been completed within the past decade.
For any governments that have yet to thoroughly scrutinize the TCA data, it is recommended that a review be performed prior to the adoption of PS 3280 which requires asset retirement obligations to be accounted for in financial statements.
2. Background of TCA Data
Before understanding why a review of the TCA is warranted, we must remind ourselves about how we adopted PS 3150 a decade ago. In 2009, all Canadian governments reporting under public sector accounting standards (PSAS) were required to incorporate capital assets into their financial statements and report the net-book-value on the statement of financial position (balance sheet) and the amortization expenses on the statement of operations (income statement). The objective for the Public Sector Accounting Board (PSAB) with PS 3150 was to help governments demonstrate stewardship of major infrastructure and assets, and for the public sector to consider the cost of using those assets annually to deliver programs and provide services over the useful life of the assets.
Preparing for PS 3150 was a major endeavour and a significant challenge for many local governments. The process required the collection of data and valuation approaches of all TCAs owned by each municipality, which was something never completed by local governments previously. Adding to the complexity of the task, TCA definitions were extremely broad and diverse. For example, the following categories of assets were required to be collected and incorporated into financial statements but there were more questions than answers for many finance departments:
- Land & Land Improvements
- Buildings & Building Improvements
- Fleet, Vehicles, and Machinery & Equipment
- Information Technology
- Public Infrastructure (Transportation, Water, Sewer and Other Utilities)
The sheer variety of asset classes and types that needed to be accounted for made the task incredibly difficult for most local governments. Many governments struggled to reference and substantiate meaningful asset data, especially for assets that were decades old with limited information available.
In an effort to become compliant with the requirements of PS 3150, and to best deal with the pressures that local governments faced during this time, often without the benefit of historical documentation, many municipalities compiled their TCA registers with estimates and best guess information. Most municipalities achieved the required compliance, but most also maintained those initial TCA values with incomplete or inaccurate asset detailed information.
Compounding the problem of the incomplete or inaccurate TCA registers, any data errors that were not identified shortly after the initial adoption of PS 3150 pose a risk to the current TCA values. Many governments are finding that errors remain in the TCA register that have been carried forward in perpetuity each year in the financial statements.
3. Periodic TCA Data Reviews to Correct Errors
A best practice to resolve these potential errors is to conduct a formal review of the TCA register and correct any inaccuracies that may have been carried forward over the past decade, since PS 3150. If inaccuracies or errors are identified, a Prior Period Adjustment (PPA) should be made to the financial statements in order to address any previous errors.
Keep in mind, that prior period adjustments to financial statements are dependant on the nature of the data issue and materiality. Bill Cox, a Partner with BDO Canada provides his insight:
“As to whether a change in asset valuation is an error or change in estimate, it can sometimes be a difficult call. I’ve seen situations where assets were completely missed in 2009 and only discovered later by comparing with GIS records. That would likely be an error [and corrected through a PPA]. I have also seen situations where [municipalities] thought the sewer line was 18 inch and turned out to be 24 inch – that might be an error too, but for many other situations, change in estimate would be more appropriate.”
A review of TCA values is also more feasible now as opposed to 2009. Since that time, many governments should now have access to improved asset data and information. For example, the requirements of local governments in some provinces to develop an asset management plan (AMP) has enhanced activities as it relates to tracking assets and improved data. Reviewing the TCA asset register data is the next step to ensure that the most accurate and current asset data is being used to report TCA values in the financial statements. This should also reconcile to the TCA data that a government is using in its planning activities. There are municipal examples across Canada that display the method by which TCA values can be adjusted and the implications and benefits of addressing potential data errors.
4. Local Government Examples
Five years after the implementation of PS 3150, the Township of Wilmot, Ontario (population 20,545) began their asset management initiatives. These activities included the acquisition of CityWide Asset Manager and the development of an AMP with the assistance from PSD’s team of asset management consultants. Through undertaking these asset management activities, the Township was able to gain a better understanding of their capital asset details and identify significant gaps in asset data and infrastructure valuations.
The gaps in asset data and infrastructure valuations that were not properly identified prior to the review totaled $44 million. The Township’s Director of Finance, Patrick Kelly noted that “this was a major adjustment, which seemed scary because it was so materially significant.” However, he mentioned that continuing to move forward with the adjustment was imperative to the organization despite the fear of making such a change, as “the integrity in the numbers is the most important reason to make changes to the statements, especially when senior levels of government are making funding decisions based on those TCA numbers.”
Figure 1. The Corporation of the Township of Wilmot, Notes to the Financial Statements FY2015, Note 13.
Kelly stressed that the asset data review provided him with the confidence to push for changes to be made within their financial statements. He commented, “it is incumbent on the Finance Officer(s) to make adjustments [to the financial statements] based on the best available information at the time.” He continued to say that “improving the TCA data and adjusting the net-book-value on the statements is a worthwhile endeavor for every community.”
Similar to the Township of Wilmot, in 2009, the District of Squamish, BC (population 19,512) had prepared an asset register from a variety of source documents in order to reach compliance with PS 3150. However, there were material errors in the data that were not discovered until a review was conducted and support was sought in advance of preparing the 2017 financial statements. Figure 2 shows how they disclosed the correction of a material error in the TCA data of approximately $15 million.
Figure 2. District of Squamish, Notes to Financial Statements FY 2017, Note 21.
For Squamish, the utilization of CityWide Asset Manager was critical to easily identify the errors in the TCA data. By using the system, the District dentified the overstated TCA values, working with the auditors to prepare the necessary PPA.
5. Impacts of the TCA Adjustment and Restating Financials
For the Township of Wilmot, upon identification of the $44 million in missing asset data they worked in partnership with their auditor and prepared a PPA for their financial statements. This adjustment accounted for a major increase to the total value of assets owned by the Township; in one year the TCA values went up by 44.3 percent.
As a result of adjusting the TCA values on the statements with more accurate asset data, the Township has seen a direct corresponding increase in the allocated infrastructure funding each year provided by the Ontario Community Infrastructure Fund (OCIF). Additionally, Kelly noted that the financial statements were more in-line with the asset management and capital planning initiatives. The Township had a better understanding of the financial position related to the assets they owned.
6. Recommendations & Best Practices
Once an organization understands the value of performing an effective review of the TCA register, and the CFO or Director has the confidence to engage in a review activity, there are a variety of actions that are recommended to ensure that the activity is performed with the highest level of efficiency and accuracy. Some recommendations are as follows:
1. Maintain one corporate source for all TCA data (e.g. asset management software)
What the examples above have displayed is that governments that use asset management software have a far easier experience resolving these errors and find a significantly easier link to establishing buy-in from senior management, council, and the public for ensuring the accuracy of the data and subsequent asset management practices.
2. Use external professionals for support on TCA data review projects
CFOs and Financial Directors have a variety of important tasks and initiatives they must perform on a regular basis. Reaching out to an external financial expert can alleviate much of the time required of the CFO in order to review the TCA documentation and ensure the accuracy of the information within the register.
3. Be confident to adjust prior year financials (and work collaboratively with auditors)
The focus of the exercise is to ensure that information is as accurate and complete as possible. If errors have been made in the past, correcting them will only result in positive outcomes, both for the organization and the reputation of the CFO or Director. Bringing forward the errors with the confidence to address them will result in significant buy-in throughout the organization and improved planning activities moving forward.
7. Going Forward and Preparing for PS 3280
In addition to utilizing the opportunity to review TCA inventory data to improve efficiency and capital planning initiatives, the new Asset Retirement Obligation standard PS 3280 should incentivise local governments to engage in TCA data review activities. PS 3280 is designed to provide users of financial statements with better information related to the full cost of capital assets in order to help in making decisions about purchasing or constructing such assets. As such, municipalities will be required to address the following in order to be compliant with the upcoming standard:
- An analysis of the legal obligations in conjunction with the asset, including:
- A review of previous contracts and agreements, and
- A review of legislation
- The past transaction or event giving rise to the liability has occurred
- This means that the retirement is triggered from its acquisition or the asset has reached the end of its asset obligation
- The economic benefits associated with the asset are willing to be foregone or have diminished
- An assessment of the value of the asset has been completed with a reasonable estimate for how much the asset could be sold for.
A decade has passed since PS 3150 has been implemented. Activities within local government have allowed for better collection of data to transpire and information systems to be implemented. Leveraging the improved data and information systems to correct historical errors will allow for a renewed sense of confidence to be established within the finance departments of local governments. Additionally, addressing any potential errors prior to the implementation of PS 3280 will alleviate municipalities from facing potentially large liabilities or reduce the potential for errors to occur within financial statements in the future.
In order to achieve these efficiencies, follow the examples of the District of Squamish and the Township of Wilmot. Don’t be afraid to hire help, there are external financial experts that are more than willing to offer assistance, and the efficiency gains can far outweigh the costs of the consulting engagements. Work towards the development and establishment of good information systems, whether through the adoption of an asset management software program, or proper controls throughout the asset inventory documentation. Finally, take advantage of the time available and engage in these activities now, a new standard is coming for fiscal year 2021, which will require a review of the data prior to the adoption; reviewing the TCA register earlier will allow for an easier adoption of the upcoming accounting standard.