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Policy Objective

To ensure that liabilities existing at the fiscal year-end for work performed, goods received, services rendered, transfer payments and other items are recorded in the accounts and financial statements of Canada.

Policy Statement

It is the policy of the Government of Canada to record liabilities to outside organizations and individuals incurred up to and including March 31st in each fiscal year and to charge them to existing appropriations or provide for them through a central provision for valuation.

Application

This policy applies to all federal government organizations considered to be departments within the meaning of Section 2 of the Financial Administration Act.

Policy Requirements

Departments and agencies must identify and quantify liabilities to outside organizations and individuals resulting from operations up to and including March 31st in each fiscal year. In the absence of certainty, estimates must be used to determine the amounts of liabilities, as long as reasonably accurate values can be assigned.

Liabilities that exceed designated materiality limits must be charged to a relevant lapsing or non-lapsing appropriation and recorded in the appropriate liability account. If this is not possible the liabilities must be reported to the Treasury Board Secretariat.

Liabilities must be charged to appropriations even if they cause the appropriation to be overexpended.

Settlement of recorded liabilities must be charged to the appropriate liability account. Where a settlement exceeds the recorded liability, the excess must be charged to a current-year appropriation. Where the recorded amount exceeds the settlement, the excess must be credited to current-year non-tax revenue.

Subject to direction of the Treasury Board, liabilities to organizations and individuals outside the government entity which are charged to existing appropriations under this policy must remain recorded until settled or for as long as the liability exists.

Amounts owing between organizations of the Government of Canada must be recorded against appropriations as specified by this policy.

Where the limit of an appropriation is overexpended by recording these liabilities or for any other reason, a reserved allotment for the amount of the excess must be established against the equivalent appropriation in the following fiscal year.

Procedural Requirements

Technical requirements for identifying, quantifying, recording and reporting liabilities are contained in Appendix A attached.

Monitoring

Monitoring of the PAYE process will normally be accomplished by the interaction of departmentally established internal controls and the internal and external audit functions, and by scrutiny of the central accounts maintained by the Receiver General. If needed, the Treasury Board Secretariat may require departments to report relevant data for monitoring the PAYE process.

References

This policy is issued under the authority of Sections 9, 37, 63 and 64 of the Financial Administration Act.

Cancellation

This chapter cancels chapter 6-4 of the "Financial Management" volume dated December 31, 1991; and the previous policy on PAYE, contained in Chapter 9, Section 13 of the Treasury Board Guide on Financial Administration for Departments and Agencies of the Government of Canada is superseded by this policy.

Enquiries

Enquiries concerning this policy should be directed to your departmental headquarters. For interpretation of this policy, departmental headquarters should contact:

Comptroller Sector
Program Branch
Treasury Board Secretariat
Ottawa, Ontario
K1A 0R5

Telephone: (613) 957-7233
Facsimile: (613) 952-9613

Appendix A - Technical Requirements for Identifying, Quantifying, Recording and Reporting Liabilities

Liabilities

Liabilities are financial obligations to outside organizations and individuals as a result of transactions and events occurring on or before the accounting date, that is, March 31. They are the result of contracts, agreements and legislation in force at the accounting date that require the government to pay for goods and services acquired or provided on or before the accounting date. They also include obligations for certain transfer payments.

Liabilities for transfer payments are recognized in the period that the events giving rise to the transfer occurred, provided:

• a liability exists;
• the transfer is authorized;
• eligibility criteria, if any, have been met by the recipient; and
• a reasonable estimate of the amount can be made.

These definitions are in general accordance with accounting and reporting principles recommended for governments by the Public Sector Accounting and Auditing Committee of the Canadian Institute of Chartered Accountants. However, the Government's appropriation, accounting, and reporting policies and practices impose some special criteria for defining and recording liabilities. These criteria are incorporated in these technical requirements.

Liabilities to be considered under this policy do not include items that are recorded through other departmental or central procedures such as vacation pay, accrued sick leave, termination benefits, and pension obligations.

Liabilities do not include commitments for payments resulting from transactions and events occurring after the fiscal year-end date.

Recording liabilities in the accounts

Liabilities determined under the terms of the policy must be charged to an existing departmental appropriation (if there is one) pursuant to section 37(1) of the Financial Administration Act. Liabilities must be charged to the relevant appropriation even when the appropriation has been, or will be over-expended.

If there is no existing departmental appropriation against which the liability may be charged, and the liability exceeds designated materiality limits, it will be recorded through the Treasury Board Secretariat.

Because liabilities accrued under PAYE related to lapsing appropriations represent approved spending authority, accurate measurement of the use, or non-use of this authority is essential. To permit identification of recorded amounts for measuring use of this authority, liabilities related to lapsing appropriations must be determined on the basis of individual debts. For non-lapsing authorities, the use of appropriation authority is not restricted to a period and the PAYE process is primarily intended to measure amounts incurred during the period. Therefore, liabilities related to non-lapsing authorities may be calculated by group or class of recipient, as long as reasonably accurate values can be assigned.

Amounts accrued under this policy must be recorded in the accounts of Canada in designated liability accounts. They must remain recorded as liabilities until:

• they are paid or otherwise settled;
• they cease to be liabilities; or
• they are cancelled by the expiry of any time limit or other direction of the Treasury Board; or
• in the case of non-lapsing authorities only, they are reversed against the subsequent year's appropriation.

Liabilities to be charged to existing appropriations

For liabilities to be accrued and charged to appropriations:

• there must be an existing departmental appropriation to which the amount may be legitimately charged;
• as at March 31,
• the work has been performed;
• the goods have been received;
• the services have been rendered; or
• the amount is owing in accordance with a contractual arrangement or other enforceable agreement entered into on or before March 31;
• the amount:
• meet stated materiality limits;
• can be substantiated and valued;
• can be identified with subsequent payments or settlements;
• is expected to be paid in subsequent fiscal years;
• the charges to the appropriation must be fully codable;
• the accounting entries can be input before the accounting deadlines established for the particular fiscal year-end.

Liabilities for transfer payments must be recorded if:

• the above criteria are met where applicable;
• the transfer is authorized; and
• any required eligibility criteria are met.

In the absence of certainty, estimates must be used to determine the amounts of liabilities where the above criteria are met, as long as reasonably accurate values can be assigned.

Other liabilities

Liabilities that cannot be charged to an existing departmental appropriation must be reported to the Treasury Board Secretariat for possible recording as a general liability, provided materiality requirements are met.

General use of this provision is not expected as there should be few liabilities that cannot be applied against existing lapsing or non-lapsing appropriations.

Interdepartmental amounts (PAYE-OGD)

Amounts owing between government organizations should be billed and settled through the interdepartmental settlement process in the fiscal year in which they were incurred. However, due to the short time available at the fiscal year-end, debtor departments may not receive billings in time to make these settlements.

In these circumstances departments must charge or credit the amounts unilaterally to their own appropriations, using offset accounts assigned to them by the Receiver General. Debtors should not rely solely on creditor billings to establish their PAYE-OGD entries. If invoices are not available, the amounts should be determined by reference to internal data or information from the creditor. Disputed amounts should be recorded at the amount of the expected settlement. The amounts must be auditable.

Only amounts that fit the above criteria for "Liabilities to be charged to existing appropriations" can be accrued. This process is intended for recording OGD (Other Government Departments) receivables and payables related to appropriations. It must not be used for accrual of receivables related to non-tax revenues.

PAYE-OGD amounts charged or credited to appropriations must remain recorded until they are settled or cease to exist. When prior year accruals are deleted from OGD accounts:

• debtors must reverse them to "Non-tax Revenue-Adjustments to Payables at Year-End (PAYE)".
• creditors must charge them to the successor or equivalent appropriation.

Materiality limits

Liabilities to be charged to an appropriation must be accrued if they exceed the lesser of $5,000 or one-half of one percent of the appropriation authority. Lesser amounts may be accrued at the discretion of each department.

Liabilities to be reported to the Treasury Board Secretariat should exceed $100,000.

Settlement and adjustment of PAYE liabilities

Lapsing authorities

For lapsing authorities, payment of amounts accrued under this policy must be charged against the liability account in which they are recorded. If a liability was not set up in the old year, it can only be paid out of, or charged against, a new-year appropriation.

The amount to be charged to the PAYE liability account is the lesser of the amount recorded as payable or the actual payment.

If the settlement is higher than the amount accrued, the difference must be charged to the new-year appropriation.

If the settlement is less than the amounts accrued, the difference must be credited to the non-tax revenue account "Adjustment to Payables at Year-End (PAYE)". This amount will not be available for spending in the new year except where a reserved allotment for over-utilization has been established. In this case, amounts over-estimated or accrued in error may be available for spending in the new year provided that Treasury Board approval is obtained.

Non-lapsing authorities

Settlements of amounts set up against non-lapsing appropriations are not dependent upon the authority retained through the PAYE process. Therefore, where PAYE amounts were set up against non-lapsing authorities, they may be treated in either of the following methods, at the department's option:

• payments may be charged to the PAYE liability account established; or
• the liabilities set up may be reversed against the subsequent year's appropriation and any payments charged to the appropriation.

General

Payment of liabilities can only be charged against a ministry's voted or statutory appropriations or the authority carried forward in it's PAYE liability account. If there is no such existing authority, it must be obtained before payment can be made.

Carry forward of recorded liabilities

The Financial Administration Act permits the Treasury Board to specify the period during which payment of PAYE liabilities is allowed. Since no time limit has been specified, unsettled liabilities related to lapsing authorities must be carried forward until they cease to exist. This can occur for one or more of the following reasons:

• the amount is paid or otherwise settled;
• the amount was overestimated or was accrued in error;
• the amount was forgiven;
• the amount became unenforceable through legal decision, or action of legislation including any applicable statute of limitations;
• the amount was settled by means other than payment such as set-off against amounts owed to the Crown.

Removal of liabilities from the accounts

Recorded amounts that cease to be liabilities must be cleared from the accounts before the end of the fiscal year in which they cease to be liabilities. They must be credited:

• to the non-tax revenue account "Adjustment of Prior Year's PAYE" for amounts charged to lapsing or expired appropriations;
• to a revolving fund if the amount was originally charged against a revolving fund authority; or
• to the non-lapsing authority against which the original debt was charged.

Disputed amounts

Where the amount of a liability is in dispute, the best available estimate should be accrued. Only if there is significant or total rejection of the product or performance related to the claim should no amount be recorded.

If there is a significant difference between the claim of a creditor outside the entity and the amount accrued, reporting it as a contingent liability must be considered. The annual Public Accounts instructions contain the requirements for reporting of contingent liabilities.

Special items

Goods and services tax

The policy on Goods and Services Tax (GST) requires that it should be recorded only at the time of payment. Therefore GST must not be included as part of the liability set up under PAYE.

Work, goods and services

At the end of a fiscal year, appropriations are to be charged with all outstanding debts arising from work performed, goods received and services rendered on or before March 31.

The value of work performed and service rendered is determined on the basis of performance up to and including March 31 and billings or estimates of the debt owing for that performance. The value of goods received is more complex as it involves ownership of the goods.

Ownership can be interpreted as physical control or possession (actual or constructive) of the goods that leads to a legal liability to pay the supplier. If ownership is obtained by March 31, and inspection has determined that the goods are acceptable, the goods are considered to have been supplied by the accounting date and their value must be set up as a debt.

If physical control and title to the goods have not passed to the Crown, only outstanding payments for work-in-process completed to March 31 can be accrued as a debt, and then only if the purchase contract provides for the payment(s).

In the case of large, long term contracts for supply of works, buildings, major systems or equipment where physical ownership has not been transferred, calculation of liabilities should be based on the percentage of work completed which has not been paid. Acceptance or non-acceptance of work or product completed should be taken into account in determining the amount to be recorded, but only significant or total rejection of the product or performance should be considered as cause for not recording a liability. Otherwise, the best estimate available should be used.

Transfer payments

Transfer payments are transfers of money from the government to an individual, an organization or other government for which the government making the transfer does not:

• receive any goods or services directly in return, as in a purchase/sale transaction;
• expect to be repaid in the future, as in a loan; or
• expect a financial return, as in an investment.

Generally liability for transfer payments is determined on the basis of the government's obligation to make the payment and the entitlement of the recipient to receive payment.

Liabilities for transfer payments should be recorded if

• the Government has Parliamentary approval;
• the transfer is authorized;
• the recipient has met the eligibility criteria, if any;
• the amount is quantifiable and has not been paid; and
• any specific criteria required for accrual of the particular type of transfer payment are met.

Grants are transfer payments for which the government has discretion whether or not to pay. Although legislative authority has been granted to make the payment, no obligation to pay exists until the grant is approved. For this reason, there is no liability to be recorded at the year end, except:

• when final supplementary estimates contain grant items and specify that the items are deemed to have been made in-and are chargeable to-the fiscal year just ended, the amounts may be paid out of supplementary period cheque issue or accrued as liabilities provided they have been approved; or
• for grants approved by Parliament when a commitment has been made by an authorized person, and is properly approved for payment before the end of the fiscal year; and
• when the entitlement of the recipient has been established.

For certain continuing benefit programs, such as Old Age Security, although entitlements are established and exist until they are cancelled, such entitlements actually remain valid only on a month to month basis. Eligibility is considered to come into existence on the first day of the month in which it is paid. Therefore, at the end of any one month, including the fiscal year-end, no eligibility exists which would create a liability to be recorded. For this type of payment, a liability should be recorded only when eligibility for a retroactive payment has been verified and quantified by the accounting date but not paid.

Contributions are paid under contractual arrangements. For a contribution payment to be recorded as a payable at year-end, the following conditions must be met:

• if the payment is a reimbursement of expenditures made by the recipient by March 31, the amount is determined either by reference to a payment claiming document or by an estimate made on the basis of consultation with the recipient or program officer. A record of correspondence, conversations, rationale and calculations used to make an estimate must be prepared and kept available for audit;
• if the payment is a scheduled payment (i.e. the date and amount are specified in the contractual arrangement) the amount must be set up if it is due but unpaid by March 31;
• in all other cases, either entitlement of the recipient to be paid must be established and quantified, that is, a claim for payment must be received to establish entitlement under the agreement, or if it is an advance, it must be due under terms of the agreement.

When the liability for a contribution is accrued, the appropriate program officer must be satisfied with the reasonableness of the charge to the appropriation.

Salaries

Amounts incurred by March 31 and to be paid after that date for salaries and wages, overtime, retroactive wage and salary settlements, and other entitlements for items such as compensatory leave, extra duty, shift work and lay days for ships crews are debts and therefore must be accrued under the requirements of this policy.

Retroactive salary settlements

Retroactive salaries determined by contract agreements negotiated but not paid on or before March 31 are deemed to be debts under the following conditions:

• When salary contract agreements have been ratified and signed before March 31, the retroactive amounts incurred under the agreement must be charged to the appropriation to the extent they satisfy PAYE requirements for recording debts.
• If the contract agreements have been ratified but not signed, the amounts must be accrued, but only upon direction of the Treasury Board Secretariat. Calculation of the accruals may be done by either departments or agencies or the Treasury Board Secretariat as required by the situation.

Retroactive salary accruals are normally calculated by Supply and Services Canada. If this is done in time to enter the data before the PAYE year-end cut-off, the transaction will be treated as follows:

• Retroactive salaries processed for payment during April by the close-out of the old-year pay master are automatically charged to old-year appropriations by the pay system. No additional action is required of departments and agencies.
• Retroactive salaries processed for payment after the close-out of the old-year pay master are charged to the new-year appropriation by the pay system. Based on the pay information provided by Supply and Services Canada, departments are able to identify the portion of the retroactive salaries applicable to each fiscal year. Departments are then required to charge the portion applicable to the old fiscal year to that year's appropriation and to ensure the amounts accrued are deleted from the new-year appropriation.

If the liability for retroactive salaries cannot be input into the accounts before the established input cut-offs and they exceed designated materiality limits, the amounts must be reported to the Treasury Board Secretariat for central accrual.

Other pay accruals

Accrual of amounts for overtime, shiftwork, extra-duty and other items related to work performed by an employee before March 31 and to be paid after that date must be accrued on the basis of application documents and should be only for amounts not automatically charged to the old year through the pay system or accrued centrally.

Amounts owing but not yet paid for severance and separation payments to individuals who have been struck off strength by March 31st must also be accrued.

Salary transfers

Salary amounts owing between departments as at March 31 as a result of secondments or transfers of employees that cannot be settled through the interdepartmental settlement process before applicable cut-off dates may be recorded through PAYE-OGD.

Advance payments

An advance payment can be a liability only by virtue of a contractual arrangement and must not be confused with progress payments, which are made on the basis of actual or estimated work performed.

For an advance payment to be recorded as a payable at year-end, the following conditions must be met:

• must be required under the terms of a contractual arrangement; and
• if it is a scheduled payment, the amount must be due on or before March 31, or
• if it is based on estimates or forecasts prepared by the other party, the documentation supporting the request for the advance must be received by the department or agency on or before March 31, because the amount becomes payable only on receipt of the estimate or forecast.

Holdbacks

Where there is a holdback element in liabilities determined under PAYE, the holdback amount should be recorded in the PAYE liability accounts.

Issuing of loans

Loans are subject to this policy because they are payable under a contractual arrangement. The wording of the loan agreement establishes the conditions under which a payment is required to be made. The amount must be accrued and charged to the old-year appropriation if the conditions under the contractual arrangement are met by March 31.

Real property

Where the transaction involves the transfer of real property that is already held in the name of the Crown, the amount owing is to be recorded as a payable at year-end if by March 31:

• the parties have agreed on the terms and conditions; and
• final Treasury Board and Governor in Council approval has been obtained, where required.

Where the transaction involves the acquisition of real property that is not already held in the name of the Crown, the amount owing is to be recorded as a payable at year-end if:

• as of March 31 there was a binding agreement of purchase and sale;
• all required approvals (Ministerial, Treasury Board, etc.) are obtained by March 31; and
• by the final date for recording payables at year-end, title search has been completed or the period for raising objections has expired.

Where the amount owing has been recorded as a payable at year-end, payment is to be charged to a liability account in which the debt was set up (see "Settlement and adjustment of PAYE liabilities", above). Under no circumstances are cheques to be requisitioned other than immediately prior to the closing date.

Crown corporations

For the purpose of this policy, Crown corporations are considered to be outside the entity and ordinary debts to them should be treated in the same manner as debts to any other outside party. Appropriations granted for funding those corporations are treated as follows:

• For corporations using the Consolidated Revenue Fund for their banking operations, amounts for liabilities may be charged to the funding appropriation in accordance with PAYE policy requirements applicable to departmental operating appropriations.
• For corporations not using the Consolidated Revenue Fund for their banking operations, amounts may be charged to the funding appropriation for amounts due and payable to the corporation at the accounting date, billed before the PAYE cut-off date and in accordance with the Government's cash management policies.

The following are required to be recorded in the Accounts of Canada through PAYE;

• amounts owing to a Crown corporation as at March 31st by the Government of Canada in accordance with the terms of a contribution arrangement;
• amounts owing to a Crown corporation as at March 31st by the Government of Canada under the provisions of a vote which specifically provides for the reimbursement of expenditures made or expenses or costs incurred by the corporation, as the case may be;
• amounts owing to a Crown corporation as at March 31st by the Government of Canada in respect of program, operating or capital expenditures incurred by the corporation to March 31st;
• amounts payable as at March 31st by a Crown corporation that are chargeable to a vote for program or operating expenditures which it is required to pay from funds appropriated by Parliament;
• amounts to which the Crown corporation is entitled under its vote wording.

Appropriations are granted to ministries and therefore responsibility for recording amounts payable to a Crown corporation usually resides with the ministry concerned. However, where responsibility and signing authority for the appropriation has been delegated to the corporation, the corporation is responsible for recording debts under the policy.

Ex gratia payments

An ex gratia payment is one for which the government recognizes no liability. Therefore, no liability can be normally be accrued.

Nugatory payments

A nugatory payment is one where no value or service has been received but for which a liability is recognized. The amount should be recorded if all required authorization for payment is obtained before March 31.

Specified purpose accounts

For the purposes of this policy, liabilities will not be accrued against these accounts. However, the revenues and expenditures of certain of these accounts are reported with those of the government. Any accruals needed for reporting these amounts will be separately obtained as required.

Signing authorities

Accrual of liabilities results in a charge to an appropriation, and subsequently a payment may be made out of the Consolidated Revenue Fund. Section 33 certification of requisitioning authority is required when the debt is charged against the appropriation and again when the debt is settled. This permits financial officers to review the legality of the transaction and to exercise the appropriate controls in both instances. Where PAYE is not used and both the payment and the charge to the appropriation are effected by a payment requisition, section 33 is required only once.

Section 34 certification for performance or compliance with contract is required at the time the appropriation is charged. For an estimated debt, an "interim" certificate under section 34 must be provided at the time the appropriation is charged with a debt, and a "final" certificate provided when the debt is settled.

For accrual of transfer payments, certification under section 34 is not required, because that section relates specifically to work performed, goods supplied or services rendered. Instead, where an amount is being accrued, a signature must be obtained from the person authorized by the appropriate minister to approve payment of such amounts, certifying that the recipient is entitled to the amount being charged to the appropriation, or in the case of an estimate, that the amount is reasonable.

Over-utilization of appropriations and allotments

Appropriations

Where the limit of an appropriation is exceeded, the Financial Administration Act requires that the subsequent year's appropriations should be reduced by the amount of the overspending.

This process is controlled by establishing a reserved allotment for the amount of the excess against the equivalent appropriation and the equivalent allotment in the subsequent fiscal year. This is a mandatory reserved allotment established by legislation rather than management and restricts the use of spending authority granted by Parliament in the following fiscal year. It is required to compensate for the over-utilization of the old-year appropriation authority, and must be established when the excess has been determined. This reserved allotment must be approved by the Treasury Board, since its establishment will require adjustments to new-year allotments previously authorized by them.

When there is no identifiable equivalent or successor appropriation in the following fiscal year, parliamentary authority must be obtained to permit payment.

Subject to Treasury Board approval, the reserved allotment may be reduced by the amount of over-utilization caused by an overestimate of debts established under the prior year's PAYE. The remainder of the reserved allotment represents overuse of the prior year's lapsed authority which must be compensated for by the reduction of the following year's spending authority. The subsequent year's authority reported in the Public Accounts as a part of the source and use of authority must be reduced by the final balances of any frozen allotments established for the year.

An overestimated debt can contribute only once to an overexpenditure. If a reserved allotment contains an overestimated PAYE debt which is not discovered until the following fiscal year, the reserved allotment may be reduced at that time.

Many appropriations do not lapse or do not have a legislated spending ceiling. These authorities cannot be exceeded and therefore are not subject to these requirements for reporting or creating reserved allotments for exceeding appropriation authority.

Allotments

Where an allotment within an old-year appropriation is exceeded by recording payables at year-end, but the appropriation as a whole has not been exceeded, the department or agency concerned must obtain authority from the Treasury Board to make old-year allotment transfers within the vote so the unused authorities of other allotments within the vote can be used to cover the over-utilization of the allotment.

Reporting

Departments and agencies that have exceeded their appropriations must provide to the Treasury Board Secretariat, in writing, the reasons that led to the appropriation authority being exceeded and, if applicable, the corrective measures undertaken to prevent future over-utilization. Unless otherwise specified, this must be done no later than August 31st of the subsequent fiscal year.

All departments and agencies that have exceeded an appropriation or an allotment must report such excess to Estimates Division, Program Branch of the Treasury Board Secretariat together with a request for establishing any required allotment adjustments.

Operating procedures

Departments and agencies must establish systems and operating procedures that will enable them to identify and record all the debts that are subject to this policy. In addition, the financial control systems, especially the commitment control system, should ensure that there is no over-utilization of appropriation authority.

Procedures to be used to record old-year payments and payables in the accounts of Canada are contained in instructions issued by the Receiver General.