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Treasury Board

Standard 1.1 -
Policy and
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Departments will follow generally accepted
accounting principles as defined in the
Canadian Institute of Chartered Accountants
Public Sector Accounting (PSA) Handbook.
Specifically, departments will use the
"expense basis" of accounting as referred to
in the handbook (PS Section 1500.93).
Subject to modifications or interpretations
by the Treasury Board, the PSA Handbook
will be the authoritative reference manual.
In situations where a specific item is not
covered in the PSA Handbook, then the
Canadian Institute of Chartered Accountants
(CICA) Handbook will be used.

This policy applies to all organizations
considered to be departments within the
meaning of Section 2 of the Financial
Administration Act (FAA).

Policy requirements
Each department, as defined by Section 2 of
the FAA, will produce annually a full set of
financial statements as at March 31 that can
withstand the test of audit. These
statements will consist of a Statement of
Financial Position, a Statement of
Operations, a Statement of Cash
Requirements and a Statement of
Expenditure Authorities Used, together with
required Notes and Schedules.
The financial statements, accompanied by a
Statement of Management Responsibility
and an Auditor's Report, if required by
legislation or policy, must be available to
the Receiver General for Canada by June
15th of each year. Furthermore,
departments will publish the financial
statement package in their Departmental
Performance Report.

Generally, departments will record all
accounting transactions specific to their
department. Thus, departments will be
responsible for such things as allowances
and valuation accounts that are department
specific e.g. allowance for bad debts,
accrued vacation pay, etc. Any exceptions
will be determined by the Treasury Board
Secretariat (TBS) and departments will be
advised accordingly.
To the extent possible, department specific
financial information now contained in the
Public Accounts will be included in either the
departmental financial statements or the
supplementary financial information
attached thereto. All financial information
required on a government-wide basis would
continue to be included in the Public
Except to ensure an appropriate level of
consistency for government financial
reporting, departments will establish
accounting policies specific to their needs
subject to the recommendations contained
in the PSA and CICA Handbooks.
This policy is issued under the authority of
the Financial Administration Act
section 9. (1).

Effective date
This policy is effective 1 April 2001.
However, departments that are FIS system
compliant are encouraged to implement it
Treasury Board
Standard 2.2 -
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The following sections of the Handbooks
contain useful reference material: PSAB
1400 and 1500, CICA 1000 as well as
section 5130 of the Assurance Handbook
and Aug 7 Applying Materiality and Audit
Risk Concepts in Conducting an Audit.

1. Paragraph 1000.17 of the CICA handbook
contains the following on materiality: "Users
are interested in information that may affect
their decision making. Materiality is the
term used to describe the significance of
financial statement information to decision-
makers. An item of information, or an
aggregate of items, is material if it is
probable that its omission or misstatement
would influence or change a decision.
Materiality is a matter of professional
judgement in the particular circumstances."
2. To understand how any piece of
information may influence or change a
decision, there must be an appreciation of
potential readers of the information and the
range of decisions they may make.
3. There are two basic types of users of
financial information: those internal to the
organization and users external to the
4. Examples of external users include
suppliers, journalists, investors, unions,
creditors, lenders, other jurisdictions,
special interest groups and international
organizations. The list of possible decisions
and assessments these people may make is
virtually endless. Some examples are:
(a) Assess government's compliance with
various regulations;
(b) Determine capacity for future program
(c) Give a credit-rating; and
(d) Find out how much revenue has been
raised from user fees.
5. Internal users include parliamentarians
and members of the public service. As with
external users, the list of potential decisions
is virtually endless. Examples include:
(a) Determine what services can be
provided at what cost;
(b) Plan for future funding requirements for
asset maintenance and replacement;
(c) Manage cash position and financing
requirements; and
(d) Find ways to deliver services more
6. Given this range of users and decisions, it
may be very difficult to say with any degree
of confidence that a particular piece of
information would not influence a decision.
This would suggest that all financial
information be recorded and reported in
copious detail. However, too much detail
would make most financial reports too
confusing for users. Properly applying the
concept of materiality ensures that for all
financial reporting sufficient and appropriate
information is presented in such a manner
as to assist the user in the decision-making

Materiality requirements
7. There is no general rule of application for
materiality. Materiality depends on
8. There are two aspects to the application
of materiality:
(a) Quantitative Materiality - Auditors have
determined quantitative materiality to range
between 1/2% and 2% of total expenses,
depending on the size of the department or
agency. This threshold is applied to the
aggregate of all errors and misstatements,
not on an individual item basis. These
percentages are a guideline only; items
below the threshold are probably not
material, items exceeding it probably are. In
neither case does the application of these
percentages definitively determine
(b) Qualitative Materiality - The qualitative
aspect recognizes that materiality cannot be
determined solely by means of the
application of a numeric threshold. There
are many instances, beyond consideration
of influence in decision-making, where an
item may be material even though low-
dollar. Some qualitative considerations are:
(i) Deviations from PSAB, CICA
recommendations or the requirements of
Treasury Board Accounting Standards and
other policies - materiality is not a licence to
disregard the rules;
(ii) Potential effect of a misstatement on
trends and their analysis by users;
(iii) If the misstatement affects
determination of an entity's compliance with
legislation, regulations, etc.;
(iv) Nature of the misstatement - does it
arise from an item that can be accurately
and objectively measured, or arise from the
subjectivity of estimated amounts;
(v) Potential of offsetting effects of
individually material misstatements;
(vi) Immaterial now, but may become
material in future with accumulation over
several periods;
(vii) Motivation - using materiality to
manage financial reporting results,
continuing unwillingness to correct known
weaknesses in the financial reporting
process, etc.; and
(viii) Misstatement on segment information.
9. The CICA Assurance Handbook lists
suggested quantitative guidelines and
includes a caveat that they are not a
substitute for the auditor's professional
judgement as to what he or she considers to
be material but are to be used only as an
aid in developing those judgements. The
same caveat applies to any quantitative
measures: these measures should not
substitute for the professional judgement of
departmental financial personnel.

Application of materiality
10. Materiality can be impacted both
through policy and through the application
of policy at a transaction level. Generally
speaking, a policy has a more significant
impact on materiality than the application of
a policy at a transaction level. As an
example, if the Government of Canada were
to adopt a policy that is contrary to PSAB, all
transactions applied in accordance with the
Government's policy would be contrary to
PSAB. In their aggregate they could
potentially represent a material deviation
from PSAB and result in a qualified audit
opinion on its financial statements from the
Auditor General. Individual transactions,
that are accounted for incorrectly, are less
likely to be material on the overall financial
statements. As such, policy must be
designed and applied in such a manner as
to not result in any material error or mis-
representation in financial reporting.
11. Although most accounting literature
discusses materiality from the standpoint of
reporting and auditing, reporting and
auditing are after the fact; departments
must apply the concept of materiality
primarily when recording individual
transactions. The detail and accuracy used
to collect and record the information
determines the possible detail and accuracy
of the information in any financial reports.
12. Materiality at a transaction level
(a) When a transaction is recorded or the
frequency of recording, examples being:
(i) Theoretically, transactions for the
purchase of goods and services should be
recorded on receipt of those goods or
services. In practice, many departments
record the transaction on receipt of the
invoice. During the year, this is not likely to
have any material impact, however, at year-
end, accruals should be recorded for
significant amounts.
(ii) Month-end accruals for overtime and
other non-regular salary items may not have
to be recorded.
(b) The classification of the elements of the
transaction, examples being:
(i) In theory, the payment of a two-year
magazine subscription should be recorded
as an asset and allocated to expense over
those two years. In all likelihood, the
amount involved is too small to influence
any decision and would be expensed in the
year the subscription is obtained; or
(ii) Some departments have mixed
inventories, that is, items that are both for
resale and for internal consumption. These
departments may record the entire
inventory as inventory for resale or for
consumption, depending on what is the
majority. Although not completely accurate,
it is unlikely to influence a decision, and so
is not material.
13. As applied at the detail transaction
level, materiality is an important element in
designing the accounting policies and
practices of a department or agency. In
developing policies and procedures, the
following should be considered:
(a) Materiality should be an opportunity for
departments to design accounting policy to
take into consideration administrative ease
in the handling of certain types of
transactions. However, this must be done
within the overall materiality limits noted
above and without deviating from the
recommendations of CICA, PSAB or TBAS.
(b) Departments must apply the principle of
consistency. Similar transactions should be
accounted for the same way. As well, they
should be accounted for the same way
across different periods. When a change is
accounting policy is deemed appropriate,
then appropriate disclosure of the change
should be made in the notes to the financial
statements in order to maintain
comparability between periods.
(c) Policies and procedures designed to
ensure the most detailed information is
recorded properly will automatically ensure
that the requirements for reporting are met.
14. Application of materiality in reporting
determines what information is shown at
what level of detail.
(a) Specific Purpose Financial Reporting -
Specific purpose reports are included in
Volume II of the Public Accounts. Where a
report has the word "other" in one or more
column headings, a materiality limit has
been applied: some types of information
have been deemed not important enough to
appear separately and have been
aggregated. In some reports, Ex Gratia
Payments for example, there is no
materiality limit and all details are reported.
(b) General Purpose Financial Statements -
The CICA and PSAB Handbooks provide
accounting and financial reporting
standards that are to be applied in external
financial statement reporting.
(c) Management Reporting
(i) The major distinction between managers
and users of financial statements is the level
of decision-making. Managers make
operational decisions. These decisions
generally require a greater amount of
information, in greater detail, than that
provided by financial statements.
(ii) It follows that if the level of decision-
making is lower, the amount that would
influence a decision is lower as well. Thus
materiality amounts are considerably lower
than those for general purpose financial
15. With very few exceptions, the concept of
materiality does not apply in recording and
reporting on appropriations usage; all
amounts are important.