Valuation in Public Sector Agencies: Impact on Financial Reporting through the Implementation of International Financial Standards : Focus on Canadian Workers Compensation Boards

By Rixon, Daphine; Faseruk, Alex | Journal of Financial Management & Analysis, January-June 2009 | Go to article overview

Valuation in Public Sector Agencies: Impact on Financial Reporting through the Implementation of International Financial Standards : Focus on Canadian Workers Compensation Boards


Rixon, Daphine, Faseruk, Alex, Journal of Financial Management & Analysis


Introduction

Many organizations around the globe are currently in the process of preparing for the implementation of International Financial Reporting Standards (IFRS). While these new standards are more often associated with commercial, profit maximizing enterprises, they also apply to public sector agencies that are considered to be government business enterprises (GBE). The aim of the current study is to investigate issues encountered by a unique group of GBEs, Canadian Workers' Compensation Boards (WCBs), documenting the effect on valuation through the adoption of fair value accounting for financial instruments. This study examines the impact of fair value accounting for financial instruments on the WCBs' respective financial positions and key performance indicators. The paper explores how this change in accounting standards has affected the ability of these public sector agencies to demonstrate accountability to stakeholders through inter-jurisdictional comparability. The introduction of these standards has wider public policy implications extending beyond the WCBs to other public sector agencies, as well as to charitable organizations and those in the not-for-profit sector.

The move to IRFS began in Canada several years ago with the adoption by the Canadian Institute of Chartered Accountants (CICA) of fair value accounting for financial instruments. According to Ian Hague1, Principal with the Canadian Accounting Standards Board (AcSB), Canada needed a new standard for financial instruments since the existing standards did not comprehensively address when a financial instrument should be recognized or how it should be measured. Canada could not wait for international consensus, thus the CICA introduced a new standard in April 2005 dealing with recognition, measurement and disclosure of financial instruments, hedges and comprehensive income. These changes reflected, to the largest extent possible, international accounting standards. They were effective for the fiscal years beginning on or after October 1, 2006, with early adoption permitted (CICAa)2. The CICA defines financial instruments as any "contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party" (CICAb)3.

The impact of the 2005 requirement to measure financial instruments at fair value offers insight into some of the issues that are likely to be encountered by GBEs, when IFRS changes are fully implemented in Canada in 201 1. This 2005 change in accounting standard had a significant impact not only on commercial enterprises, but also on certain public sector agencies, such as, WCB's since they meet the CICA's criteria of a GBE. WCBs hold significant financial instruments to meet their long-term liabilities arising from benefits paid to injured workers. While the mandate of workers' compensation agencies in Canada, United States and other countries are similar, they differ in their funded structures. The Canadian system is a totally public monopoly system whereas the American system varies among the states. In some states, workers' compensation is provided solely by the state, whereas in other states, the state-run programs compete with private insurance companies. The United Kingdom has a dual system comprised of Industrial Injuries Disablement Benefits administered by the Department of Work and Pensions and privately through employers' liability insurance.

* Framework

Workers' Compensation Boards (WCBs)* are public sector agencies established by provincial government legislation to levy sufficient revenue from employers to provide wage loss, health care, rehabilitation, and long-term disability benefits to workers who are injured during the course of their employment. Workers' compensation is a mandatory, no fault, collective liability system that is compulsory for employers and workers. This means employers and workers have relinquished the right to pursue litigation to establish fault for an injury; thus, neither employers nor workers can be found 'at fault' for a workplace injury. …

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