Rescinded [2009-10-01] - Policy on Commitment Control

1. Commitment accounting entries should be made in the department's financial reporting system when a contract is entered into or an order is placed for goods or services. The entries record the amount that is to be reserved out of the unencumbered balance remaining in an allotment or appropriation or item in the Estimates in order to honour the commitment.
2. The delegation of responsibility for control of commitments may vary among departments, depending on various circumstances. Among these are the nature of departmental operations, the degree of decentralization, the type of materiality of the financial undertaking, and the adequacy of the departmental systems for budgetary control and financial reporting.

1. Commitments should be recorded at the value expected to be incurred in each particular fiscal year as follows:
   • for capital, operations and maintenance, all commitments should normally be recorded individually and maintained by fiscal year. When it is impractical to formally record commitments individually (e.g. low-value commitments, salaries and wages), departmental procedures should identify these instances and describe how they may be accounted for; and
   • grants or contributions that are described in the Estimates by class of recipients should be recorded individually and maintained by fiscal year.
   • grants or contributions specifically identified in the Estimates (e.g., a grant or contribution in a specific amount to a named recipient), when there is a requirement for a separate Treasury Board, approved allotment, the allotment control records may suffice as commitment documentation.
2. Records of the dollar value of continuing commitments should be kept separately for the current fiscal year and for each future year within the most recent ARLU planning period or subsequent years.

1. A periodic review of commitment information should be made to confirm the validity and the accuracy of the outstanding commitments and the amounts that are expected to be charged against the appropriation.
2. Periodic reviews of commitment information should be carried out either by responsibility centre managers or officers delegated this responsibility. The reviews should be performed more frequently toward the end of a fiscal year and when there is any significant uncertainty about the timing of payments or the validity of the amounts recorded.

All departments should prepare periodic forecasts of financial requirements to the end of the current year. The forecasts should be based on year-to-date net charges to appropriation, together with outstanding current-year commitments and forecast expenditures to year's end.

1. Commitment information should be related to the relevant limits. It should be reported from the lowest responsibility centre level and aggregated at each successively higher level.
2. Intentions to enter into arrangements at some future date should not be recorded or reported as commitments.

1. All undischarged commitments should be entered in the financial reporting system. The commitment accounting system may be independent of the departmental accounting system, but period-end data on commitments should be input for purposes of financial control. Detailed commitment records should be available to managers on request.
2. For departments using the departmental financial reporting services of Public Works and Government Services, commitment totals can be input to the Departmental Reporting System and automatically reversed in the following month. Commitment information can then be included or excluded from any departmental reports, as specified by each department.
3. The standards of completeness, accuracy, and authority applicable to all information in commitment records are the same as those for any accounting system. Control procedures should be documented in the departmental financial manual. These should be accompanied by specific departmental policies on the timing and methods of recording particular types of commitments, such as operating expenses, salaries, capital expenditures, multi-year commitments, expenditures out of imprest accounts, advances, and grants and contributions.
4. When commitments are recorded centrally, the responsibility to discharge a commitment should be assigned to the organizational units that have also been assigned payment authority under section 33. When commitment recording is decentralized to each responsibility centre, the total of undischarged commitments at month's end should be reported to officers who exercise authority under section 33. More regular reporting may be required towards year end if the free balances in the appropriations are reduced to levels where day-to-day control must be exercised.

1. Future-year commitments should only be entered into when they are considered essential to the achievement of currently approved goals, or when the transaction is of such a kind that it is neither possible nor economically justifiable to enter into a contractual arrangement that will be concluded at the end of the current fiscal year.
2. Departments may wish to include departmentally-imposed limits that are lower than those discussed above in their future-year commitment control system. In this way, commitments will not jeopardize the activities of future years.

Commitment authority limits are as follows:

• for the current fiscal year, the commitment authority limits are the relevant Treasury Board-approved allotment within an appropriation and/or an item in an Estimate before Parliament (taking into consideration vote-netting revenue) plus any supplement obtained from centrally controlled appropriations, such as Treasury Board Vote 5;
• for each future fiscal year, the commitment authority limits are those portions of the most recently approved Annual Reference Level Update (ARLU) reference levels, as determined by the input factors for planning elements within a program. These reference levels must be adjusted for any reductions or additional resources approved by Treasury Board for the ARLU period or any period thereafter; and
• for a revolving fund, the applicable limit is the drawdown authority.

The project to cancel the Guide on Financial Administration (GFA) has been approved. The purpose of cancelling the Guide is to create a single source of reference for all financial management policies.

This section of the Comptrollership Volume consists of parts of the old Guide on Financial Administration. At the earliest opportunity, these policies will be re-written in the new Treasury Board Secretariat (TBS) policy format.

1. For a budgetary control system to be effective, managers should be provided with financial reports comparing their own and their subordinates' operations to date with approved plans. If operations are going as planned, no further action may be required. If there are deviations, their significance should be analyzed and explained, and alternative courses of corrective action identified.
2. Variance reports are a responsibility centre manager's own reports. Financial staff can help managers in preparing them, but they should not attempt to assume full responsibility for reaching conclusions on the significance of variances or for initiating proposals for corrective action.
3. Variance reports should be considered as a positive means of informing higher levels of management of changing situations that, if ignored, may have serious effects on the attainment of responsibility centre and program objectives.
4. Appendix D provides procedures and forms for a variance reporting system.
5. There are three main factors that will cause variances:
   • changes in volume of output;
   • changes in quantity of input; and
   • changes in price of input.

1.1 Changes in volume of output

A comparison of the actual volume of output in relation to planned output provides managers with probably their most significant variance information. In order to determine and report the effect of changes in the volume of output, units of measurement must be defined, identified, and reported on an accurate and consistent basis for each reporting period. If planned output is not realized and financial resource consumption does not vary on a comparable basis, managers are alerted to the fact that their plans for meeting public needs may not be achieved within their budgets. Thus, they must reconsider their plans or take alternative courses of action.

1.2 Changes in quantity of input

There are two factors that can cause changes in the quantity of input to operations. The first directly relates to changes in the quantity of output and should not cause concern. The second relates to variations resulting from changes in efficiency, with more or fewer resources being required for a given volume of output. In this situation, it is critical that management know the reason. It may be because of changes in the quality of resources (both human and materiel), in productive methods, or in supervision. If the variances are unfavourable, corrective action should be initiated. It is easier to determine what action should be taken if standards based on careful study have been developed.

1.3 Changes in price of input

1. Changes in the total dollar cost of input can be affected by an increase or decrease in the volume of either output or input, and by changes in the unit costs of input.
2. Management may or may not be able to take corrective action in this area. Many price changes are beyond the control of an individual responsibility centre manager. Nevertheless, in drawing up the original plans, the manager may have adopted a least-cost option that no longer applies, and it may be possible to achieve the program goals with a different resource mix. When the price change is more widespread, it may be possible for those managers who are responsible for resource acquisition to take alternative action to lower the cost of resources. Often the cost increases should result in a change in plans to reduce the volume or quality of output, to increase efficiency, or to relax the dollar constraints imposed by the original budget.

1.4 Multi-variables

In most situations, no single factor will account for the variances, and there will be a combination of influences that interact. However, through the process of analysis, the various components can be determined and exposed so that appropriate corrective action can be taken on each component.

Budgetary control systems on a responsibility centre basis should provide for the following:

• budgets prepared on a periodic basis;
• periodic reporting of actual performance in a manner consistent with the basis on which budgets are prepared; and
• prompt analysis and reporting of variances in terms of output volumes, input quantities, and input prices.

Such systems can take a variety of forms, but all must embody the following features:

• a system of highlighting exceptional circumstances that require managerial attention;
• a system for determining the factors that give rise to the exceptional circumstances; and
• a means of communicating the results of the analysis to the person who must make the decision.

The reporting system should be designed to highlight variances so that the attention of a manager will be directed only to pertinent matters. This may take a number of forms:

• project identification by colour code where, for example, red indicates a serious situation, yellow a questionable one, and green a situation in which everything is proceeding as planned;
• percentages may be used either in place of or in addition to dollar variances; and
• the computer can be programmed so that only variances exceeding a minimum percentage, related either to plan to date or to annual plan, or those resulting from failure to achieve predetermined standards are printed.

1. Analysis should normally be in terms of the following three causes of variances:
   • changes in volume of output;
   • changes in quantity of input; and
   • changes in price of input.
2. A form illustrating this type of analysis is shown in Exhibit A.
3. It should be noted that meaningful analysis is virtually impossible without an adequate plan that is prepared periodically. Unless quantities of input and output are identified and priced, analysis becomes very subjective and tends to explain what has happened, rather than what was the cause of the deviation from the plan. Analysis in whatever form should clearly project the year-end outlook based on existing and anticipated variances.

Systems for reporting on variance analysis can be designed in a variety of ways:

• reporting may result from a specific request or may be required automatically on the basis of prescribed acceptable limits of variances between results and plans;
• reporting may be based on objects of expenditure or on activity elements;
• reports originating at lower level responsibility centres may be aggregated through the established responsibility levels or forwarded directly to a central analysis group that would produce a summary of problems for distribution to all managers; and
• reports should distinguish between those variances which are caused by new or changed conditions not included in the original budget, such as the implementation of unforeseen government or departmental policy, and those which result from goals not being achieved according to plan, for which responsibility centre managers are more directly accountable.

Exhibit A
Variance Analysis Form

Responsibility Centre ______________________ As at__________________

Note:

On the basis of simple budget analysis, the manager saved $1,000. However, this is not the whole story. The manager's output was 500 units less than budget; the time (or other resource input) per unit of output increased by 50 per cent; and the cost per unit increased by 20 per cent. As a result, there are three situations that must be investigated to explain why unit costs increased by $8.00 or 80 per cent; volume saving $5,000, loss of efficiency ($2,500), and higher prices ($1,500), for a net variance of $1,000.