Ask the Experts Webinar on the First Nations Financial Transparency Act (FNFTA)
Thank you for joining us today for the Ask the Experts Webinar. I'm Nola Buhr. I am a professor of accounting at the Edwards School of Business at the University of Saskatchewan.
I've been working on the topic of financial reporting by First Nations for about ten years now. This includes serving as the researcher on the CICA report, Financial Reporting by First Nations. As well, I have developed and delivered workshops on financial reporting for the AFOA. And for those of you that don't know, the AFOA is the Aboriginal Financial Officers' Association.
We are here today to ask the experts to talk about financial reporting and to provide answers to questions about financial reporting required by the First Nations' Financial Transparency Act.
I am joined by four panellists and I want to make it clear that that the panellists are qualified experienced professionals. The four panellists work for accounting firms. We have two firms represented today - Deloitte and Ernst & Young.
We are not representatives from the federal government nor do we speak on behalf of the federal government. So we're here for some good old fashioned accounting questions.
I do want to stress that point - we are talking about financial reporting and we have three aspects that we're covering today. So we're going to talk about audited consolidated financial statements. The Statement of Renumeration and Expenses, and as well the role of auditors and the emphasis we place, will depend on what kind of questions we get coming in.
Let me introduce our panellists first. I'm going to start with Lynn Pratt who is from Deloitte here in Ottawa and Lynn is a long standing partner of the Ottawa office of Deloitte. She has over 24 years of public accounting experience and she has developed deep skills in assurance and financial reporting under a variety of frameworks including the public sector. Her specialization is advisory services for her client base and her clients are almost exclusively public sector and public company clients. Lynn is a frequent speaker on financial reporting matters and she's worked on a number of engagements for AANDC and as well for certain First Nations.
We also have Francis Séguin from Deloitte who works in the Ottawa office and Francis is a Senior Manager in the assurance and advisory services group. He specializes in the public sector area. He is fluently bilingual and he has significant experience with First Nations and AANDC. He's worked in this area for over 5 years and he's also a part time lecturer at bachelor and graduate programs at the University of Ottawa and also at the Université du Québec en Outaouais, where his lectures include the fascinating topics of accounting for consolidation, employee future benefits and other complex accounting questions.
Next to me we have Deanna Monaghan who is from Ernst & Young in Ottawa. She is Ernst & Young's national public sector assurance leader and the market leader for Ottawa's assurance practice. She was admitted to the partnership in 1994 and served as the Ottawa office managing partner from 2004 to 2013. Deanna has over 30 years professional experience in the firms audit practice focusing on assurance and directing major assignments in financial statement audit, accounting and advisory services to a variety of public companies, government organizations, not-for-profit organizations and Crown corporations. Deanna has also provided audit and advisory services to AANDC, First Nations and Aboriginal financial institutions during her career.
Now through the wonders, or not, of technology, so apologies for being a few minutes late here but this is our technology. We have our fourth panellist joining us from Edmonton today and that is Kevin Hamel. He is a partner at Ernst & Young in the assurance services area. Kevin Hamel has a long track record in the area of financial reporting by First Nations. He's worked with various First Nations across Canada over the past 19 years both in external auditor and advisory roles. He is the national Aboriginal practice leader for Ernst & Young and Kevin is based out of Ernst & Young's Edmonton office.
So let me just give a little background to our webinar today. This webinar is designed as a follow up presentation to the presentation that AANDC representatives have already been making at the AFOA chapters across Canada and as well, a follow up to the presentation they did at the AFOA National Conference.
What we're going to do to set the background and so you can hear a little bit about the First Nations' Financial Transparency Act from AANDC, we're going to play a short clip from the AFOA National Conference so you can hear some explanation and background information.
I will turn the video over to our video folks.
AFOA Video Starts
The Financial Transparency Act really started in the 2011 speech from the throne when the government committed to supporting transparency for First Nations Communities by requiring Chiefs and Councillors to publish salary and expenses.
We all know that, that information, as well as financial statements, are provided by First Nations governments to the department through their funding agreements.
This particular Act, is intended to provide the transparency between First Nations Citizens and their leaders and to shift the accountability bargain from First Nations to the Government of Canada more to First Nations being accountable to the people they serve.
This particular bill received Royal Accent on March 27, 2013 so, actually it's February 27 today I think so were are about a month away from the first anniversary of the Royal Accent of the Act.
This Act is applicable to the 582 Indian Act bands across the country. What this means is that it excludes First Nations that are part of self-government agreements that have negotiated self-government agreements so that's why we have a number of 582.
It applies to the financial year that begins after the Bill received Royal Accent. So we're talking about the 13-14 financial year for First Nations - that's the year, and this coming year will be the first year that the terms and conditions of this particular legislation will apply.
This act requires First Nations to prepare annual audited consolidated financial statements and schedules of remuneration and expenses paid to Chief and Council. Again this is not a new requirement, it's something that is part of the funding agreements that First Nations have with the Department of Aboriginal Affairs.
The legislation requires these documents to be made available to members and to be published on a website within 120 days of the end of the fiscal year. There's also a requirement for my minister, the Minister of Aboriginal Affairs and Northern Development Canada, to publish this information on the AANDC website as well, and the quote that you will see on the slide here is without delay after the First Nation has provided him or her with those documents or they have been published.
So this is a new requirement for the department to publish these documents. Once again, just to repeat a little bit of what was said in the background, this reinforces the accountability measures in funding agreements for First Nations Governments.
A little bit of a schematic here because I think this is really important. I've heard in a number of sessions and in conversations with folks yesterday that the reporting burden is still front and centre in everybody's minds. So we wanted to reinforce the facts that this new piece of legislation does not require additional reporting for the First Nation. What it does is take the information that was required to be submitted to the department before the legislation, that is the before side and it's got the blue schedules and the funding agreement and all the brown or the beige pieces are the audited and consolidated financial statements and so now what happens is the audited consolidated financial statements and only the schedule of remuneration and expenses are posted on the web and the other schedules which are submitted to the department pursuant to the funding agreement are not published.
So it basically takes that one package, divides it in two, those things that are to be published and those things that are still part of the internal accountability and reporting between the First Nation and the Government of Canada.
So the documents that are below the line and these are all the schedules that are laid out in the financial reporting handbook - these things are still required to be prepared and submitted, but they will not be published on the web so there is that delineation.
AFOA Video Ends
Great, now before we turn to our panellists I'd like to underscore the financial reporting aspects of the Act that we are talking about today. So first and foremost we have audited consolidated financial statements - so we need to keep in mind that is general purpose reporting for use for, as it says, general purposes.
These financial statements must be prepared in accordance with public sector gap as published by CPA Canada which was formally CICA. Then once these statements are prepared they must be audited in accordance with generally accepted auditing standards published also by CPA Canada formally CICA.
I think it is important to underscore at this point that these requirements are the same requirements that apply to governments all across Canada. So all governments in Canada are responsible for preparing their statements in accordance with public sector GAAP.
These standards do change from time to time and that's based on due process and the decision making of the Public Sector Accounting Board. So that's the general purpose reporting required by the Act. The Act also requires what we call in the accounting world, special purpose reporting and this is where the user or the client, in this case the federal government department AANDC and the First Nations' Financial Transparency Act, has laid out certain information that is needed for their purposes and this is the statement of Remuneration and Expenses.
So this is defined by the Act. I'm not going to reread the paragraph for you here. I'm sure you're familiar with it and we are going to talk about it in a little more detail in next few minutes.
This statement must have audit or review level assurance.
Okay, now - first of all, before we get into consolidation - some juicy material there - I want to make it clear that we are presenting the webinar in English. However we do have the capacity to answer questions in French. So please don't hesitate to send in your questions in French.
Now we will begin with Francis who is going to talk to us about consolidation. Over to you Francis.
Thank you Nola. So our first topic today deals with consolidation.
Consolidation is important. The reason being the First Nations must report back on the overall activities of the First Nation regardless of the structure of those activities.
So there's two underling concepts here - the first one is the concept of the economic entity and the second concept being the substance over form.
So if a First Nation would create a company to deliver some activities, for example - electricity, power, liquor and so on - regardless of the legality of the process, from an accounting perspective those activities should be reported back in the First Nation's financial statements.
So overall, we should be reporting back the entirety of the assets, the liabilities, the revenue, the expenses, as well as the cash flow related to those activities.
So when considering what is control, we have a basic definition on the slide at the bottom – it's the power to govern the financial and operating policies of another organization. So that can be translated, for example, as having the majority of the board of directors having the power to nominate them. Or to have, for example, a veto power to block any decisions that the First Nation may not feel appropriate to the needs of the community.
There are also other factors that are included in the Public Sector Accounting Handbook. So all in all whether the First Nation controls another entity is always a matter of professional judgement in most cases.
So what is involved when we talk about consolidation? So in the majority of cases, there are a few exceptions we will go through later on, it's adding the assets, liabilities, revenue, and expenses of controlled entities, as well as eliminating what we call inter-organizational transactions. So thereby not over stating revenue expenses and assets amongst the controlled organization.
So by consolidating the entities we have a global picture of all the activities of the First Nation in relation to delivery of its mandate. Nola…
Thank you Francis. I am going to ask Kevin now to speak to the topic of how GBE's - Government Business Enterprises - are included and disclosed.
Thanks Nola. Government Business Enterprises sector accounting rules - they have to be consolidated using the modified equity method.
So under the modified equity method, the Government Business Enterprises, their net assets will be presented in the consolidated statement of financial position and the net income of the Government Business Enterprises will be shown as a separate item in the Statement of Operations.
From a presentation perspective there are some additional disclosures that are required as well.
So in addition to including the info that I just talked about, the First Nation must also include, usually in the notes of the financial statements, some additional supplementary financial information relating to these Government Business Enterprises. So that would include assets and liabilities by major classification, total revenues, total expenses and what not. Nola, back to you.
Okay, great. Now I'm going to get into the special reporting and this is the remuneration and expenses. And I'm going to ask Deanna to talk about what remuneration is included.
Thank you Nola. As Nola mentioned, the First Nations' Financial Transparency Act requires that a schedule of remuneration be included with the financial statements. That schedule has to include the remuneration paid to the Chief as well as to Councillors of the First Nation. And another point that's really important is that it's all remuneration that's paid in an official capacity as well as any other capacity. In regards to that – remuneration - what does it include?
It includes all cash remuneration as well as any non-monetary benefits that are paid. So you'd be looking at salaries, wages, commissions, bonuses, fees, honorararia, dividends, gifts, other non-monetary benefits. What you would not include there is any type of reimbursement of expenses which we will touch upon in a few minutes.
You also have to take a look at remuneration that would have been paid by any entity that is consolidated within the financial statements, so not just the First Nation, but any other types of entities that would be consolidated in the financial statements. For example, the type of entities that Francis just referred too.
So effectively it is a fairly comprehensive list and all of the remuneration should be disclosed if the entities are consolidated in the financial statements.
Thank you Deanna. And to finish off on that, we're going to ask Lynn to talk about what expenses are included in the statement required by the Act.
Thank you Nola. So expenses include the cost of transportation, accommodation, meals, hospitality, as well as any other incidental-related expenses. To the extent that these amounts are reimbursed to the Chief and any Council members, they have to be reported in the Schedule of Remuneration and Expenses.
This would also include any amounts that are reimbursed by any entity that is controlled by the First Nation, and as a result, is consolidated therein or accounted for, using the modified equity method which Kevin described. Those are the GBE entities.
This would also include any amounts reimbursed to the Chief and Councillors by non-consolidated entities which then are, in turn, reimbursed by the First Nation.
Since the source of the funding is ultimately the First Nation it makes total sense that those amounts would be reported as well.
To the extent that the amounts for expenses are paid directly to a third parties supplier. So for example, an airline - these amounts are considered to be paid on behalf of the Chief and Council and again would be reported.
Finally, amounts that are paid by a First Nation to one party, such as the Chief, on behalf of other Council members for reimbursable expenses, may be reported as paid to the Chief, but perhaps are better characterized if they're specifically allocated to the persons to whom they related on Council.
Note however, that if the person who paid the expenses on behalf of the Chief and Council are not subject to the requirements of the FNFTA, then those amounts are still considered paid on behalf of, and would still be reported within the schedule of remuneration and expenses. Nola, back to you.
Thanks Lynn, that's helpful.
Now let's open things up for questions. And we will be able to answer questions in French as well.
We have a couple of questions that have already come in here and I think my first question is for Francis.
So Francis what I want to know is how did the Act change the audited consolidated financial statements from what was expected before?
Thanks Nola. From my perspective, I would say there are two significant differences from the previous process. The first requirement, and it's included in the First Nations' Financial Transparency Act, are for the financial statements to be finalized within 120 days so July 29th.
Previously there was no such formal requirement. Some First Nations had their financial statements completed in June, some in August, some in September, and some at a later date. Now there is a formal drop date, July 29th. So there is potentially some changes as far as the reporting process - to make sure that the financial statements are audited and finalized within that 120 day period. So auditors may recommend to have some interim audits performed - increase the year end reporting, additional controls to be put in place by management – so there are some aspects to consider in this area.
The second aspect from my perspective as well - are that financial statements must now be published. Previously there were no such formal requirements and again, some financial statements were public, some were not, some were partial, some were complete. So now there is a formal requirement to have these published, so it is an increase in transparency. It's not uncommon for financial statements to be public. So for example, public companies, a number of non-for-profit organizations and so on.
So it is a change but it is common now in the marketplace.
One thing I would also mention as well, the financial statements per se, will not change. So we'll still have the Statement of Financial Position, the Statement of Operations, Statement of Changes in Net Debt, the notes, Statement of Cash Flows and so on.
While there's an additional statement which Deanna and Lynn mentioned, the core statements in themselves will not change nor will the accounting policies of a First Nation.
Okay, thank you very much Francis.
I have a question here for Deanna. How do you deal with pay and benefits that Chief and Councillors get from band owned businesses?
Thanks Nola. The Transparency Act refers to any organization that needs to be consolidated in accordance with generally accepted accounting principles with the financial statements of the First Nation would be subject to the same rules with regards to disclosure of remuneration.
So if the GBE is required to be consolidated with the financial statements then any remuneration paid to the Chief or the Councillors would also be included in the Schedule of Remuneration.
Okay, thank you Deanna.
Question here - does this reporting include revenues from a band owned for-profit corporation that may have no funding from the department or any other federal government funding?
And I am going to ask Kevin, would you mind answering that question?
So the accounting rules dictate what needs to be included, as Francis had eluded to earlier. The accounting rules say control. So if it's an entity that's controlled by the First Nation, the accounting rules say that it has to be included. It has no bearing where it gets its revenue and its sources of income has no bearing on that whatsoever.
It's 100 per cent that goes back – that's what the accounting rules say. So that instance that you just suggested, yes, that needs to be included.
Okay thank you Kevin.
I've got another question here about reporting travel expenses. And the question here says - What if the First Nation pays upfront, say to hire a charter flight, does the First Nation need to report these costs by individual? Lynn, I'm going to ask you to answer that question.
Sure Nola. As we've talked about already, any amounts that are paid on behalf of the Chief and Council must be included in the Statement of Remuneration and Expenses. Similarly, if an amount is paid for a flight up front, a charter so to speak, those amounts would have to be allocated amongst all the people who were on that flight and that might include people who are part of Chief and Council, but it also might include others as well, and so a reasonable allocation has to be undertaken.
I would suggest to people that not only does the allocation have to be reasonable, it need to be auditable as well. So making sure that there is supporting documentation, the methodology is reasonable as I said, and that it's well documented.
Okay. Thanks Lynn. So what you're saying essentially is that, it's a case of whose getting the benefit, not necessarily how it's being paid - that's the issue? Exactly. Okay, thank you.
Got another question here. This one I think is for Deanna. This looks like an audit question. So Deanna the question reads - the audited consolidated financial statements are due 120 days after year end - is that enough time to do the necessary work? Good Question.
Yes it is a very good question. With regards to the amount of work that's required to prepare this information, 120 days generally is a reasonable amount of time to prepare the information and have it audited . With regards to being able to meet that time line preparation is required - I think there needs to be consultation with your professional advisors, with your auditors and make sure that the required information is properly outlined and the work that needs to be done is properly planned, but generally 120 days after year end is a timeline that should be viewed as reasonable and if there are any issues, maybe try to identify where they might be and how they can be worked out prior to the year-end so the timeline is met.
Okay, thank you Deanna. I think this is a question for Kevin. Kevin was on talking to us about own source revenue and this question is about own source revenue from a shopping centre. Let me just read this carefully. We have own source revenue from a shopping centre that we lease. Because this is a competitive business, we don't want to disclose any information. What will our auditors say if we don't provide any note disclosure on this business? Kevin, if you would answer that one.
Yes it is a good question Nola. That really comes back to what the auditor's role and responsibility is. So as auditors, our role is to provide an opinion on the financial statements under compliance with the accounting rules. So in that case, I am assuming that shopping centre is supposed to be, according to accounting rules, included in the audited financial statement. If that's the case then the auditor has to decide how does omitting that information affect their audit opinion. Really it more than likely can do one of three things – the auditor would evaluate the materiality of it and find out if omitting that information, not being in accordance with GAAP, causes any issues. If it was immaterial, perhaps the auditor would issue an unmodified opinion.
The auditor may also determine that, okay it's material to the statement – it should be included and we can quantify it and perhaps, they qualify their audit opinion saying that it's in accordance with GAAP, except for the fact that this isn't included.
The third and the worst case scenario would be one where the auditor then is unable to give an opinion – they're not able to quantify what amount the information is, and then they give a denial of opinion which says they cannot opine as to whether or not the financial statements are in accordance with GAAP.
Really, that's a question for your individual auditors. That is a situation that you want to encounter, deal with them because professional judgement really is a factor in that decision. Nola…
Okay. Thank you Kevin, that's some helpful guidance. I think, as always, it's good to have a conversation between the preparer and the auditor to sort these things out.
Now, I've got a question here – looks like it's on consolidation. Francis, would you answer this question? It says – what if the band is a partner in a for-profit joint venture – so not a Government Business Enterprise, I'm thinking here – but a joint venture or a partnership. Does that get included in the consolidated financial statements?
Thanks Nola. So under the rules of public sector accounting standards, joint ventures are subject to what we call proportionate consolidation. So what we mean by proportionate is the First Nation picking up its portion – let's use as an example, 50 per cent of the assets, liabilities, revenue and expenses – so yes, a joint venture is subject to consolidation, however it's not a complete consolidation, it's only proportionate. So, its share of the activities of the joint venture. Nola…
Okay, thank you. I've got another question here. I think this one is for Lynn. It says – some of our travel expenses are paid for by our Tribal Council. Do we have to include these too?
Thanks Nola. I think that to the extent that the Tribal Council is part of the consolidated entity, we can come back to that first principal whereby those expenditures would be reported in the statement of remuneration and expenses – so to the extent that the Tribal Council is consolidated, you would have to report if you were, of course, subject to the Act itself.
And if the Tribal Council wasn't included in the consolidated statement?
If the Tribal Council is outside the perimeter of the consolidation then you're going to exclude that – any reimbursement of expenses or remuneration paid by that Tribal Council, to those individuals, including Chief and Council, from the statement of remuneration and expenses.
So it's only if the entity is part of the consolidated…
Consolidation is the key there.
Okay, that's helpful. I've got a couple of questions coming in here that I need to sort out. Bear with me a minute here. I have a question here. It's a short one. I'm going to give it to you Deanna. It says – isn't a person's salary information private?
Well that's a very good question Nola. I am not a lawyer so I can't give a definitive answer but my understanding is that the Privacy Act governs the disclosure of personal information that would be required by government institutions like AANDC. And that would also include the schedules that are required with regards to remuneration. With regards to the requirements, as a result of the Privacy Act governing the requirements under the Act, it would be subject to the Privacy Act and it would be included and would be in compliance. So as I mentioned, I am not a lawyer. But it's my understanding that disclosure of this information is in compliance with the Act.
Thank you. Now I have a question here about elders. It says – As a way to thank our elders, we pay for a trip for them each year. Does this have to be included in the list of expenses? Lynn, would you take that question?
Sure. I think for the most part, on the assumption that the elders are not part of Council, then no – those amounts don't have to be included in the statement of remuneration and expenses. However, to the extent that there is a member of Council who forms part of the elders, then that person's expenses would have to be reported.
Okay, so it's not whether they're an elder or not, it's whether they're a Councillor…
Exactly. Are they either Chief or part of the Council?
Okay. Thank you Lynn. Let me just shuffle through here. I have a question here. This is a general auditor question. It's an interesting one. Kevin, I'm going to give this one to you. It says, we had a new financial officer during the year – so I am assuming this is in the band office, they had someone start during the year – what happens in the auditors are not happy with her work? If you would take that please Kevin.
The report on the financial statements – evaluate whether they can conclude on the audit. If they have enough audit information to form their opinion. I mean, the experience I've had, we've had situations like that. We talk to Chief and Council about that. We outline if there are some issues with what the person is doing and what their capabilities are. But at the end of the day, the auditor has to make the decision, how far they're going to go on how much work they can do to stay within their own professional guidelines. And as auditors…part of the audit report that we do, we also typically issue a management letter where we discuss that with those charged with governing, so the Chief and Council in most cases – talk about the capabilities and just make sure that they're getting the help that they need as well. Nola…
Kevin, I'm going to ask you a follow up question there. What's the problem with, why can't the auditors just go in and do the accounting work? Sure they're going to have to bill more for it, but why can't they do the accounting work and then do the auditing…what's the problem with that?
We're governed by our independence rules which dictate how much we're allowed to do. And in that case, we're not allowed to make executive and management decisions on behalf of the client. The client has to be able to do that themselves. So we've got professional standards that we have to follow, which dictate what we're allowed to do.
Kevin, when you say professional standards, you mean because you're a professional accountant – so this is part of your ethics and the requirement to do your job?
Right. Our Code of Ethics as Chartered Accountants or CPAs. Correct.
And I guess if I want to be a little bit…looking at it, you're supposed to be independent because you have to take an objective view of this and it's hard to be objective about examining your own work. Is that right?
I can't give an opinion on my own work. You have to be independent of that information in order to give a clear and independent opinion on it.
Okay, thank you Kevin. We'll let you have a rest now. Another question here. This is a general one. It says how do we decide what organizations are included in the consolidated statements? So Francis, I'm going to turn this one over to you. What would you do when you're sitting down and deciding what's in and what's out?
It's a good question. If I'm the controller or the director of finance, I would need to know which organizations I actually control. So typically when an organization is created, there's a purpose. There's a mission, there's a mandate, there are bylaws and those documents would state the purpose of your organization and how it relates back to the First Nation. So as the director of finance of a First Nation, I need to be able to make the assessment, do I control that organization? So going back to the previous definition we've seen, do we have, as the First Nation, the capacity to dictate financial, operational, investing, capital matters of any organization. So as previously mentioned, it's a question of judgement. One person could say I control entity X, another person could say I disagree. These types of decisions should be done in consultation with the auditor so there is agreement in terms of the overall financial statements – what's in and what's out. And having those discussions ahead of time help to meet the 120 day deadline under the new Act. Nola…
Thank you very much Francis. So if you're developing some new business lines, don't wait until year-end to discuss this with your auditor – is that correct?
Okay, I've got a question here – this might be a little bit complicated. I think this one is for Lynn. It says – we have a Councillor who sold the band winter tires for the band's plow truck. Would this payment need to be included as remuneration paid to the Councillors? I'm thinking the Band Council said okay, the winter tires are yours. Go and sell them and keep the money. Lynn, do you want to take that one?
I'm just going to repeat that back to you, to make sure I got the facts straight. So, the Band Councillor sold…
The winter tires.
To the band?
It just said it sold the tires for the band's plow truck. So I'm thinking it sold it to somebody outside of…
Yes, and what I'm taking from that is that the Band Councillors were acting as an agent almost on behalf of the band and I would think that in that case, the band actually kept the money. So I think in that case, it seems clear, if I have assumed all the right things, that the Councillor was in fact not acting on his own behalf but was really acting as an agent for the band so to me, that would not be reported in the schedule of remuneration and expenses,
But I'm just going to make sure we've got our facts straight. If the band Councillor kept the money…so let me change the facts a bit. Let's say the Band Councillor says, I've got a buddy who needs the winter tires – we're replacing them anyway – can I sell them and keep the money?
Well I think in that case, if he keeps the money, then that's a form of remuneration of some sort.
And so in that case, to Deanna's earlier point, I think that would be included in the schedule.
Okay, so the case is going to be – who gets the money?
Who gets the money.
Who gets the money, okay. Let me see here. I think this is an interesting one. I think this is for Deanna. It says – do you need to disclose remuneration to Chief and Council for services they would receive as a client? So for example, if they got medical services or education services. Would you need to include that in the remuneration, that's why I am interpreting that.
So let me just repeat that – so, if the First Nation pays Chief and Council for services, or pays their medical and pays education?
Yes, those are the examples.
If it's evaluated to be a personal benefit, I think you would have to include it. I think there would be an assessment done as to whether it was business related or not. But I do believe it would likely be included but I think it's an item that would have to be discussed with your auditor to have a full understanding of the nature of the payments and the purpose of the payments.
And I'm going to make an interpretation here. It might make a difference if I was the Chief and simply using the health clinic for my annual checkup or whether the band was paying for travel somewhere for medical treatment. Would that make a difference?
If it's a personal benefit, and having the medical care, I think that would be viewed as a personal benefit, so I would think it would be included. The transportation as well. But I think we need to know the details.
Okay. Now I have here an auditing question and I'm going to give this one to Francis. I'm going to read it out. I'm not completely clear what the person is asking. It says, regarding the statements – I think this is the…I don't know if this is the financial statements or the statement of remuneration and expenditures. It says, does the Act require two levels of reporting – audited, consolidated with the schedules being notice to reader? I think maybe they're asking about the schedules to the financial statements and the assurance required on the schedules to the financial statements. Francis, if you take that one.
Sure. So based on the requirements of the new Act, financial statements themselves must be audited. They must be audited by external auditors with an audit report produced in accordance with Canadian auditing standards. The statement of remuneration and expenses – that one can be either audited or reviewed. So there is some assurance provided by the external auditors and in 99.9 per cent of the time, the auditors of the First Nation would also audit that schedule. While there is no requirement being the same, in practice, it makes sense that it's the same firm. Unfortunately you cannot have a notice to reader. A notice to reader is in essence a compilation – so taking information from the trial balance and producing a report. That unfortunately is not assurance. So that option is prohibited under the new Act. So in recap, the financial statements are audited. The schedule, audited or reviewed. And there's no right or wrong answer based on what's in the Act.
Okay, I'm going to ask Kevin - I think Kevin has a follow up on that, is that right Kevin?
Yes, I'm wondering if that question isn't geared towards…so, if I go back a couple of years, the Year-end Reporting Handbook used to stipulate that, in addition to the consolidated financial statements, there were schedules of revenues and expenditures by program. So that would be like the administration program, public works…all these various programs. Those before…the Year-end Reporting Handbook required those to be part of the audited financial statements. They're no longer part of the requirement any more. So I know I have had some discussions with some other accounting professionals and they've outlined the fact that now those schedules are required to be submitted but not part of the audited financial statements. So they're required to be submitted by the Nation to AANDC. The problem is this – that a lot of times the auditor is actually the person whose helped prepare those schedules. So the auditor wonders, okay – is there a notice to reader or a requirement for me to put some kind of a report on the financial information, because they may be perceived to be associated with it. I believe that's up to the individual auditors to make that decision themselves. They have to evaluate their own circumstances, find out if they are going to be associated with that, and if that's the case, they'll probably make their own decision on that. There is no requirement that AANDC has given out, or no clear guidance to say whether or not a report is required on those schedules. That's up to the individual auditor really to make that determination themselves.
Okay, thank you Kevin. If I could add to that, I think it's fair to say that whichever decision is made, it's very important to make it clear on the face of the schedules and the face of the financial statements what is included in the audit opinion and what is not. Is that a fair comment Kevin?
Yes, absolutely. The schedules that I'm referring to would not be part of the audited financial statements. Myself, I'd definitely be making it clear that's not my information.
That's good. Thanks very much Kevin. I've got a longish question here as opposed to a shortish question. So pay attention. If our First Nation pays a significant amount for services to a company wholly owned by a person who is a Councillor, as I understand it, the amount paid to the company should not be included in the statement of remuneration. So Deanna, I want to see if you want to take that one. So it sounds like the First Nation has a contract with another company, but it turns out that other company is wholly owned by a Councillor. So what do you do about that contract for services?
Okay, that company is a separate legal entity so as a result, I don't believe the amount paid needs to be included in the remuneration schedule. It would be wise to disclose the amount if it's significant in material. But with regards to remuneration, because it is a separate legal entity, I don't believe it needs to be included in remuneration.
Okay, so the issue here is it's a separate legal entity and it can't be controlled by the First Nation so it's not part of the First Nation consolidated statements. I'm thinking back to my public sector accounting standards. Wouldn't there be an accounting standard on related parties that might require some disclosure under this?
That's right, and that's why I think disclosure of the amount paid on a schedule but it would not be included as the Councillor's remuneration.
So it's kind of a different financial reporting issue.
Okay, thank you. I have another complicated question. This one is about travel expenses, so Lynn, this one I'm going to send your way and it's complicated. So if a First Nation starts paying half a million per year to the Tribal Council – so we're presuming the Tribal Council is not part of the consolidated entity – money goes to Tribal Council, then the First Nation asks that Tribal Council to administer the First Nation travel expenses. So I'm thinking this is like a flow through. Does any travel have to be reported by the First Nation – and here it is, assuming the Tribal Council is not consolidated with the First Nation? So Lynn if you would take that question.
Okay, so I am going to approach this question in two parts. I'm going to say the Tribal Council, similar to the other example we had, is not consolidated and therefore amounts that are paid to the Tribal Council don't need to be reported. But in this particular example, it sounds like the Tribal Council, while it's not consolidated, it is, in fact, acting almost as an agent in some respects, on behalf of the Council because it's paying expenditures that would appear to be related to Chief and Council and ultimately it's being reimbursed by the First Nation. So if I've understood the facts correctly, I think to the extent that Tribal Council is acting as an agent, I think that those expenses reasonably should be reported.
Okay, thank you very much. Now, I should put out that we have a couple of questions here that don't relate to the panel so we're not going to answer them – so someone is asking me what the Minister might decide and if I could speak for the Minister…well, I can't. So I won't answer that question.
But here's another one here. This one is kind of a general question. I think maybe I will ask this of you Kevin. This is an auditing question and it says, does the auditor need to review the personal financial information of the Chief and Councillors? So we talk about the relationship between the First Nation and Chief and Councillors. Does the auditor need to go in and look at the personal information of the Chief and Councillors?
My response to that would be no. The auditor is not providing an opinion on anything about the Chief and Council personally. They are providing opinions on schedules of amounts paid to that individual from the Nation. And again, I'm just referring to the Schedule of Salaries and Honoraria and Expenses here. So no, my answer to that would be no, they don't need to look at the personal information.
Okay Kevin, can I ask you a follow up question? I know in the corporate world, more and more we have sign-off by CFOs and that sort of thing. What do you have for Chief and Councillors to sign-off for the financial statements?
Yes, I'd say those charged with governance have to approve the financial statements. So in this case, when I am dealing with the First Nation, typically it is the Chief and Council. We typically would have a draft meeting to review the draft financial statements. They would give the final sign-off, approving it. At the end of the day, it's their financial statement. As auditors, we provide an opinion on their financial statements, so it has to be approved by those.
Okay. Thank you very much. So they'll have a say in what's included for sure because it's their statements.
Francis, I've got a question for you here. It looks like an eager student. What does the word modified mean in the modified equity method?
That's a good technical question. So there's a difference between public sector accounting and we'll call it, private accounting when we talk about the equity method. So under private accounting, when we use the equity method, we have to adapt the accounting policies of the controlled entity to match those of the First Nation. So making sure, for example, amortization periods are consistent, revenue recognition, accounting for inventory and so on. When we look at modified equity, we do not change those accounting policies. So going to consolidation, Government Business Enterprises actually report back in accordance with International Financial Reporting Standards or IFRS. First Nations public sector accounting standards – significant differences between both accounting frameworks. To facilitate the consolidation process, we've created the modified equity method, so let's pick up the net income regardless of the accounting framework and the policies of that organization. So that's the modified equity in a nutshell.
Thank you Francis. I think modified means easier?
It's much easier, yes.
Okay thank you, and I think we have time for one last question and this is for Deanna. And this is on remuneration and it says – we pay the cell phone bills for our Chief and Councillors. Does that have to be included in remuneration?
The Act requires monetary and non-monetary benefits to be included in the statement of remuneration. In this situation, if there is a personal use benefit included in those payments – so if the cell phone is being used personally, then that would be considered a remuneration that should be included in the schedule. If it's a reimbursement of expenses because a cell phone is used solely for business purposes, I think that would be included in the expense reimbursement category. With regards to cell phone costs, I think it really comes down to determining the use of the cell phone and determining the dollar value – it may be something you might want to talk to your auditors about to see how significant the personal use portion of the cell phone bill would be and whether it's significant enough to be included. But if it is a personal use benefit, then I would suggest that it should be included in the statement of remuneration as an item.
Okay, thank you Deanna. Our time for questions is up because I wanted to save a couple of minutes for me for some closing comments. Thank you for joining us in the video. The video of the webinar will be posted on the AANDC website, so you can watch, re-watch and send the link to your friends.
Accompanying this webinar we will have a transcript in both official languages so you will be able to access the transcript of the webinar in both official languages.
Also, with this last slide, I want to point you to some additional resources on the AANDC website, some you are no doubt familiar with but it doesn't hurt repeating. We have the reporting guide, there's the link there for it. We have Frequently Asked Questions, So on the AANDC website, there are already a list of 34 questions, very similar to the ones we've been asking today. But you have it there with some other details and some other examples. There's also some interesting documents on the AANDC website. One of them is Annotated Guide to Reading Financial Statements. This may be helpful for the members of your community because it tells you how to interpret a financial statement and in general terms, what a financial statement means. There is another resource on the website – didn't have space for a link here and that's the consistent consolidated financial statement format and that is a format that AANDC is looking for, and they're looking for it because it's based on public sector GAAP so if you're wondering which do I follow – well, public sector GAAP is the authority and the consistent consolidated financial statement framework is merely an example of guidance for you to follow.
Last but not least and most important perhaps for you who still have questions, AANDC is planning to develop an online Ask the Experts type of forum for ongoing questions and answers related to financial reporting under the First Nations' Financial Transparency Act. I don't have any further details at this time but do stay tuned, check on the website and there will be an opportunity to post your questions and we will have experts like the experts with us today to answer them.
And with that I want to thank our panelists who have participated in the webinar today and given their time today without payment. And we certainly appreciate their participation and professional advice. We have Francis Séguin from Deloitte Ottawa, and we have Lynn Pratt from Deloitte Ottawa – we have Deanna Monaghan from Ernst & Young Ottawa and joining us from Edmonton, we have Kevin Hamel from Ernst & Young.
So thank you again for joining us and good bye.
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