In late 2008, The Globe and Mail raised some concerns about the way provincial governments account for their revenues and implied that some of these practices are inappropriate. Entitled “B.C.’s $1.7-billion surplus kept under wraps,” the reporter, David Ebner, alleged that the government of British Columbia has been hiding a “secret surplus.”
At the time, the economy of B.C., Canada, and in fact most of the world was de-teriorating rapidly following the financial crisis that began three months earlier. With shrinking tax revenues, the finance minister in B.C. updated the province’s budget for the year ending March 31,2009 to show a much reduced surplus of $450 million. Ebner alleged that this surplus could have been much higher had the government reported in a different way.
The issue that was the focus of Ebner's criticism is the way the B.C. government accounts for money the province receives from energy companies for rights for natural gas exploration, primarily in the northeast corner of the province. According to Ebner, Alberta and Saskatchewan record the full amount of such cash receipts as revenue. In contrast, B.C. divides this revenue over eight years, which was the average duration for the exploration rights. Ebner calculates that, had B.C. recorded its revenues in the same way as its neighboring provinces, it would have a surplus of $1.7 billion instead of $450 million, for a difference of $1.25 billion.
In 2008-2009 B.C. was paid $2.18 billion, but the statement of revenues showed only $928 million. This latter figure includes a mere one-eighth of the $2.18 billion and the remainder was carried over from a previous year. The gap between the amount accounted for and the cash received was $1.25 billion.
Ebner noted that the accounting method used in Saskatchewan contributed to a huge surplus in 2008-09 of $2.3 billion, largely because of an additional and unexpected $1 billion received from selling exploration rights. (Saskatchewan has one-quarter of the population in B.C., so a surplus of $2.3 billion is enormous.)
Of key concern to Ebner was that, as a result of this accounting policy, money that existed could not be spent on programs or to make tax cuts that might help the province’s floundering economy. On the other hand, Ebner acknowledges that the money was being spent on infrastructure, which has a capital budget that is separate from the operating budget, the latter of which is what produces government surpluses and deficits.
Each of the three provincial governments appear to believe that its interpretation of accounting rules is appropriate, so convergence is unlikely to happen anytime soon.
Required:
Discuss the issues raised by the above commentary by applying financial accounting the-ory, the conceptual framework for financial reporting, and accrual accounting concepts. In particular, evaluate the different revenue recognition policies used in the provinces mentioned, and critique the chosen perspective on the issues.