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Net debt in the Canadian public accounts: its emergence, evolution and entrenchment.

The issue of how the public accounts can best support good government decision-making and accountability to Parliament is of concern to departments of finance, government auditors, members of Parliament, the electorate, and public-sector accounting standard setters. One significant element of the public accounts is the indicator "net debt," which is considered to be an important measure of the financial strength of a government (Di Marco, Pirie, and Au-Yeung 2009).

As required by Canadian public-sector accounting standards, the Canadian federal government has presented the net debt indicator on its "statement of financial position" (1) for the last eight years. But in fact, the net debt indicator had been a Canadian innovation long before it was reintroduced in public-sector accounting standards, having been initially developed by Canada's first auditor general, John Langton. In this article, we trace the emergence, evolution and entrenchment of this financial indicator through a study of archival data from the Province of Canada and the Government of Canada. We interpret the data using Klaus Luder's contingency model of public-sector accounting innovations (Luder 1992).

Our study contributes to the literature on the history of public-sector financial reporting by providing an account of the introduction, persistence and entrenchment of an accounting innovation, and, by doing so, we also offer evidence of accounting change as a process that can occur over time rather than solely as a singular event.

The contingency model of governmental accounting innovations

In an effort to identify the causes and deciding factors for government changes in accounting practices, Luder (1992) developed an explanatory model for governmental accounting innovations. This model has evolved since its original introduction (see Chan, Jones, and Luder 1996) and has been used in other research in accounting history as a tool for interpreting and explaining changes in government accounting, most notably the adoption of accrual accounting (Caba-Perez, Lopez-Hernandez, and Ortiz-Rodriguez 2009; Christensen 2002). Contingency theory (upon which the model is based) informs accounting history research by providing an explanation for adaptations in accounting in response to changes in an organization's circumstances (McWatters 1995). From Luder's original model, three categories of contextual variables affecting government accounting innovations are considered: stimuli, structural variables, and implementation barriers (1992: 109).

Examples of stimuli that can begin the process of innovation are financial problems, financial scandal, the information needs of the capital market, the introduction of innovations by external standard-setting bodies, and the interests of professional bodies (i.e., professional accounting groups or public accounting firms) (Luder 1992). We add to this list of initiators, promoters of change (Christensen 2002) and arm's-length public organizations, which in the Canadian context is exemplified by the Office of the Auditor General for federal government accounting processes. Changes in basic attitudes can also provoke innovation. For our historical analysis, we identify the point at which an accounting practice is challenged as an event, whether the event emanates from exogenous factors, crisis or changes in attitude. The outcome of such an event can take one of three forms: the existing practice is replaced or modified (innovation), it is stopped (redundancy), or it survives the challenge and continues (persistence).

Luder (1994) identifies three categories of structural variables consisting of social and cultural factors that influence the basic attitudes of the users and the producers of information with respect to accounting. The first category comprises societal culture, the capital market, and organized pressure groups and relates to the expectations of the general public as users of information. The second category of structural variables relates to the expectations of political actors as both users and producers of information and includes the political culture, system and competition within the jurisdiction. Finally, Luder identifies administrative culture, staff, accounting policy-setting, and organizational characteristics relevant to the accounting function as structural variables relating to administrators responsible for the production of accounting information.

It is possible that even with favourable conditions for innovation at the structural level an innovation could fail due to the presence of implementation barriers. Implementation barriers are factors that inhibit a change process and include highly decentralized responsibility for government accounting practices, an inflexible legal system, a poorly qualified accounting staff, and the large size of a jurisdiction (Luder 1992). When the jurisdiction's situation with respect to these factors is unfavourable, a constraining influence on innovation occurs and may cause the innovation to fail.

The model was employed by Luder to explain the adoption of accrual accounting methods and standards by government organizations, a one-time accounting change event. For our purposes, we employ this model to interpret the introduction and evolution of an accounting tool, "net debt." Through this approach, our study adds another dimension to the literature on innovations in government accounting by providing an account of "how particular innovations are generated and implemented" (Chan, Jones, and Luder 1996: 11). This study presents a history and interpretation of an accounting innovation that occurred over time and took numerous forms before finally becoming an entrenched and legitimate practice. The dimension of time and multiple innovation events are added to the interpretive process. Rather than viewing an innovation as a one-time event, this study illustrates how an accounting innovation can be a multi-event process, continually subject to approval (required for its ongoing use), and how, at certain intervals, a significant change in the innovation adoption process takes place. Our study identifies specific points in history where the latter has occurred. It is to these events that we apply Luder's model to further our understanding of the emergence, evolution, and entrenchment of net debt.

Net debt

Net debt is calculated as the difference between total liabilities and total financial assets. (2) While a government's total liabilities (gross debt) is an important measure, the concept of net debt is valuable because it represents the amount of debt remaining after consideration of assets that would be available to settle that debt. It has been described as "a representation of 'dead-weight debt'--debt that could not be repaid from the normal realization of assets" (Canada, Study of the Accounts of Canada Steering Committee 1976: 87). This excess amount of debt represents a burden on the future in the sense that, ultimately, the only way to reduce this remaining debt (i.e., the net debt) would be to generate government revenues in excess of expenditures for services. The application of revenues to reduce net debt represents future tax dollars that will not be available to provide future services. The Canadian Institute of Chartered Accountants' Public Sector Accounting Handbook describes it this way: "A net debt position represents a 'lien' on the ability of the government to apply financial resources and future revenues to provide services" and this measure highlights "the financial affordability of future government service provision" (2011: 1100[7]). Net debt is often looked at in relation to a jurisdiction's gross domestic product (GDP) or its gross national product (GNP) (net debt to GDP ratio or net debt to GNP ratio). The net debt to GDP ratio was identified by the Canadian Institute of Chartered Accountants' research study, Indicators of Government Financial Condition (1997), as an important financial indicator.

The concept of net debt as a financial statement item has close ties to the modified accrual basis of accounting, (3) where the "bottom line" of the statement of revenue and expenditure is equivalent to the change in net debt and where net debt itself is the balancing amount on the balance sheet (Luder 2000: 126). Net debt can also be used quite naturally in conjunction with the modified cash basis, albeit involving a smaller base of liabilities.

Over the history of Canada's public accounts, the disclosure of net debt has undergone significant change. In this article, we look at the use of net debt in the public accounts of Canada over five periods. Beginning prior to Confederation, each of these periods is demarcated by an important discontinuity in the mode of presentation. The beginning of each of these periods is identified by an event affecting the net debt indicator as an accounting innovation from its first appearance in accounting reports to each new stage in its evolution to the present day.

The period before 1870

Prior to 1870, no measure of net debt appeared formally as part of the public accounts. However, it was during this period that the concept of net debt (referred to at that time as "net liabilities") made its first appearance, as part of the Board of Audit's report for the 1862 public accounts of the Province of Canada (Province of Canada, Finance Department 1863). This report presented net liabilities as one of three alternative approaches to measuring the government's debt position. Net liabilities was calculated as liabilities minus "available assets," available assets comprising all assets that would be available to settle the liabilities. The total increase in net liabilities of $20,403,298.07 from 1855 to 1862 was described as "the true increase of the liabilities of the Province during the last seven years" (1863: x) and represented a fifty-per-cent increase over the period. With the significant increase in liabilities, the stimulus initiating the accounting innovation of reporting net liabilities for the Province of Canada appears to be need as perceived by the producers of information. The 1863 Board of Audit report identifies this need explicitly as the lack of means for showing the province's true state of indebtedness. The "statement of affairs" at the time was not an apt device to communicate indebtedness, particularly with respect to identifying assets that might be available to pay liabilities--in fact, it would be nearly impossible for the uninitiated to sort out which of the eighty-plus line items included under "assets" would be available to pay off liabilities. While three alternative representations of indebtedness were offered, it was the third alternative--net liabilities--that was the preferred choice of the Board of Audit.

Given auditor John Langton's usual practice of authoring the Board of Audit's annual report and submitting it for approval to the remaining two board members (Province of Canada, Board of Audit 1861, 1862a, and 1864a), it is likely that it was he who developed the three alternative presentations of indebtedness. Additionally, it appears that there were no Board of Audit meetings during the year 1863, as the minute book shows that the 2 December 1862 meeting was followed directly by the meeting of 1 June 1864 (Province of Canada, Board of Audit 1862b, 1864b). The lack of any officially recorded input from the other members of the Board of Audit also suggests John Langton's authorship. Despite Canada's close connection to Great Britain, the development of the net debt measure appears to have occurred independently, as Britain reported national debt as gross liabilities at the time and did not adopt a net debt reporting measure until the introduction of the public-sector net debt measure in 1986 (United Kingdom, National Statistics n.d.).

For the following seven years, however, net liabilities (net debt) did not appear as a standard component of the public accounts or the Board of Audit report on the public accounts. (4) Thus, while there was willingness on the part of the producers of information to promote this innovation, change was not initially successful.

The Province of Canada's auditor John Langton became chair of an enlarged Board of Audit in 1864 as a result of a change in legislation (Province of Canada, Statutes 27 & 28 Vict., c.VI). He continued on as auditor of the Dominion of Canada and as chair of the Board of Audit after Confederation. So one might not be surprised to find the pre-Confederation notion of net liabilities (net debt) appearing again once the accounting chaos from the Confederation event subsided.

1870 to 1919

In the 1870 public accounts (Canada, Finance Department 1871), the concept of net debt reappeared--this time as a component of a report prefixed to the public accounts. The submittal report for the 1870 public accounts included a progress report on the financial affairs of the new Dominion of Canada. By this time, the only name at the bottom of the Board of Audit submittal reports for the public accounts was that of John Langton, auditor, rather than the entire board. The report included "three statements from which the financial progress of the country, since confederation, may be judged ..." (Canada, Finance Department 1871: ii). In Statement II of this set of statements, the concept of net debt re-emerged. It was entitled the "Comparative Statement of the Debt of the Dominion from July 1, 1867, to July 1, 1870, according to the rate of interest it bears" (vii).

The comparative statement listed each available asset and each liability and computed the difference, "net debt," for 1 July 1867, 1868, 1869 and 1870. Available assets included cash, bank accounts, investments, sinking funds, loans receivable from provinces and other miscellaneous loans receivable.

The auditor's submission letter for the public accounts that year included further analysis involving net debt, particularly with respect to the increase in net debt of approximately $2.5 million since Confederation. This amount was compared to the expenditures for physical assets over the same period--public works, intercolonial railway, and the acquisition of the North West Territory--which totalled about $4.8 million. From this comparison, Langton concluded that over $2 million of capital expenditures had been paid from income rather than by assuming debt during this period. This conceptualization of the relationship between net debt and physical assets did not differ a great deal from the way the relationship would be looked at today. For example, the Government of Canada's 2010 "Statement of Change in Net Debt" shows the increase in net debt over the year as comprising income for the year (annual surplus and other comprehensive income) plus changes in tangible assets (Canada, Receiver General 2010).

In the 1871 public accounts, the "Comparative Statement of the Debt of the Dominion, from 1st July, 1867 to July 1st, 1871, according to the rate of interest it bears" was prefixed to the public accounts, as had been done in the previous year (Canada, Finance Department 1872). The practice of preparing a schedule of net debt for each year since Confederation continued with each new set of public accounts, adding one additional year to the schedule. This schedule took the form of a prefix to the public accounts (or suffix to the submittal report) until the production of the 1886 public accounts, at which point the table of net debt (for each year since Confederation) moved into the public accounts proper--but as a supplementary table, not as part of the balance sheet (Canada, Finance Department 1887).

The fact that it was John Langton as auditor of the Province of Canada who, on behalf of the Board of Audit, first introduced net debt in 1863 and who, as auditor for the newly formed Dominion of Canada, reintroduced it into the public accounts (albeit as a schedule prefixed to the public accounts) suggests his role in this innovation was that of a promoter of change. Promoters of change are individuals who "promote recognition of a problem and promulgate a solution" (Christensen 2002:100).

We have some evidence of acceptance of the net debt indicator during this period as a useful measure by users of the public accounts. The 19 February 1878 Montreal Gazette reported on and analysed information contained in the 1877 version of this same schedule (now reporting net debt each year from 1 July 1867 to 1877):

Deducting the assets, the increase in the net debt of the Dominion was from $75,728,641 in 1867 to $99,848,461 in 1873, and from that sum to $133,208,699 in 1877; that is an increase during the six years of the late administration of $24,119,820; and during the present administration of $33,360,238, or an annual average increase of the net debt of the Dominion during the Administration of Sir John A. Macdonald of $4,019,970 and during the Administration of Mr. Mackenzie of $8,340,059. These figures are a tolerably satisfactory answer to the charge that we hear so often that the late Government was an extravagant Government, involving the Dominion in a debt from which nothing but disaster could follow (5) (Montreal Gazette 1878: 18.8).

1920 to 1978

In 1920, arguably the most significant change in the public accounts since Confederation occurred. According to the deputy minister of finance report on the 1920 public accounts, a new policy of making the balance sheet "simple and illustrative" had been implemented (Canada, Finance Department 1921: vii). The government had enlisted the aid of George Edwards, FCA, CBE, of the accounting firm, Edwards, Morgan & Co., Chartered Accountants. The report noted that the balance sheet format was "revised and set up in a manner more in conformity with those of banks, railway corporations and other financial institutions" and that "the revised balance sheet will undoubtedly be favourably received by outside business concerns" (vii). Thus, it appears that members of the Finance Department believed that they would achieve more legitimacy with the business community if the country's balance sheet appeared more similar in format to that of a business.

The balance sheet in the 1920 public accounts had an entirely different appearance from those of 1919 and earlier. Much of the detail had been removed and was reported in supplementary schedules so that the entire balance sheet could be fit on two pages.

In concert with the move to simplify and clarify the government financial statements was the incorporation of net debt into the balance sheet. It replaced the account "consolidated fund," which had been, up until this point, the balancing amount on the Government of Canada's balance sheet, similar to how we might think of "equity" in a private-sector balance sheet. (6)

The 1920 replacement of consolidated fund by net debt as the balancing figure was achieved by removing all non-financial assets from the set of assets that were balanced against total liabilities. This included all physical assets--the public works, military property and stores, territorial accounts, and railway accounts. The remaining assets were financial assets (here referred to as "active" assets). The difference between total liabilities and these assets was net debt. Therefore net debt could be added to the asset side of the balance sheet to balance off total liabilities (Canada, Finance Department 1921: 2).

The balance sheet also contained, below the balanced totals of assets and of liabilities, a reconciliation of net debt to consolidated fund. This reconciliation brought in the remaining balance sheet assets (the non-active assets) that had not been listed in the upper part of the balance sheet. Net debt was equal to the non-active assets plus consolidated fund (Canada, Finance Department 1921: 2-3). In this way, it was possible to essentially force net debt into the balance sheet without removing the physical asset accounts from the ledger.

The 1920 innovation to the balance sheet suggests a change occurring among the users of information and a desire on the part of producers of information to respond. Clearly seeking a more useful financial report through the simplification of the balance sheet, the user community accepted the net debt measure as well. The desire to make the public accounts have a more similar "look" to those of the private sector may suggest a "professional interest" motivation for the change as well. Luder (1992: 105) indicates that government accounting changes may occur "in order to signal a certain level of professionalism." Government preparers may have been seeking legitimacy in the eyes of professional peers in the private sector. The fact that advice was sought from a private-sector accounting firm for the reorganization of the financial statements supports this view.

Over the course of the period between 1920 and 1978, the non-financial assets were removed from the accounts entirely, and, at that point, the net debt line item became equivalent to the country's accumulated deficit.

In 1976, the Government of Canada published a study of the public accounts, Report on the Study of the Accounts of Canada, October 7, 1975 (Canada, Study of the Accounts of Canada Steering Committee 1976). Among the report's forty-one recommendations was that Canada move to the modified accrual basis of accounting. What was not included in the recommendations, but rather was part of an illustrative "statement of assets and liabilities" (i.e., the balance sheet), was the discontinuance of net debt as a named line item. In its place was "excess of recorded liabilities over net recorded assets" (116). The public accounts of 1977 and 1978 adopted this terminology but continued to refer to and describe the concept of net debt in the supplementary information relating to the public debt. Under the heading "net debt," the 1977 and 1978 public accounts indicated that "[t]he net debt of Canada is represented by the excess of recorded liabilities over net recorded assets" and went on to discuss details of net debt, net debt per capita and net debt as a percentage of GNP (Canada, Receiver General 1977: 9.6, 1978: 7.6). This would be the last explicit mention of the concept of net debt for the next two decades.

1979 to 2002

In 1979, a different approach was taken to the presentation of the public accounts. Rather than describe the balancing amount on the statement of assets and liabilities as the difference between assets and liabilities, this difference was described as the "accumulated deficit" (Canada, Receiver General 1979). This number was identical to net debt. However, the words "net debt" were no longer used and were no longer described in other schedules and notes within the public accounts. An advantage of this presentation would be to highlight the articulation between the statement of revenues and expenditures and the statement of assets and liabilities. It allowed one to trace the annual surplus/deficit on the statement of revenues and expenditures to the accumulated deficit on the statement of assets and liabilities.

The result was to obscure net debt as having meaning in its own right. Sophisticated financial statement users would understand that the accumulated deficit and net debt were one and the same thing. But over time, this fact may have become increasingly obscure to less knowledgeable users, such as members of Parliament without a background in government accounting.

The following year, 1980, the accounts were presented for the first time on the modified accrual basis. This meant that "accumulated deficit" (and, implicitly, net debt) began to be measured in a slightly different way--all accrued liabilities would be included as liabilities in computing the net debt measure rather than the subset of accrued liabilities that had been included under the modified cash basis. The modified accrual basis was used up to and including the fiscal year ended 31 March 2002 and the use of "accumulated deficit" to represent net debt continued to that point as well.

2003 to present

In 2003, a significant change occurred in the public accounts of Canada--the adoption of accrual accounting. First announced in 1995, the move to accrual accounting by federal government departments has been described as the one of the biggest changes to government accounting in Canada (Wiersema 2004). Prior to this change, the government had been using the modified accrual basis of accounting that did not incorporate the full cost of service provision, since some of these costs, such as the depreciation of long-term assets, were not included.

The implication of this change was that the accumulated deficit would no longer be exactly equal to net debt. Even though the term net debt had been absent from the public accounts for some time, the accumulated deficit was understood to be equivalent under modified accrual accounting. Without intervention, the implementation of full accrual accounting could have resulted in the disappearance of the net debt measure, implicitly present as accumulated deficit.

Full accrual accounting was prescribed for governments by the Public Sector Accounting Board (PSAB) (Canadian Institute of Chartered Accountants, 2011). Even though net debt is not a natural output of the full accrual basis of accounting, the format recommended by the PSAB for the statement of financial position was one that reintroduced the net debt indicator to government financial statements (allowing for both net debt and the accumulated deficit to be presented).

In accordance with the PSAB's recommended format, the federal government's statement of financial position currently first presents all liabilities and then financial assets; the difference between these two totals is described as net debt; the non-financial assets are added to net debt to arrive at the accumulated deficit (Canada, Receiver General 2010). This reconciliation has similarities to the one that appeared on early balance sheets from 1920 onwards.

It would appear that the external standard setter, the PSAB, provided the necessary stimulus for the federal government's re-establishment of net debt in the government balance sheet, just as it had in the federal government's eventual adoption of full accrual accounting. However an earlier influence can also be observed. In 1986, a joint initiative between the Auditor General of Canada and the Comptroller General of the United States resulted in a publication entitled, Federal Government Reporting Study (Office of the Auditor General of Canada and United States General Accounting Office 1986). The study involved interviews with six sets of government financial statement users: legislators, government planners and managers, citizens, corporations, media, and analysts. Representatives of these groups were interviewed in depth about their use of financial information about federal government activities with the purpose of improving government financial reporting. The result was the production (within the report) of an "Illustrative Annual Financial Report" in a format that would best satisfy the information needs of the user groups interviewed. The Illustrative Annual Financial Report was prepared on the full accrual accounting basis and included a statement of financial position that reported both net debt and accumulated deficit in exactly the way the PSAB mandated, and the Government of Canada changed its financial model nearly twenty years later. It would therefore be appropriate to include the publication of this work as a stimulus for the reintroduction of net debt into the balance sheet of the Government of Canada and identifying a means of doing this while using full accrual accounting.

The Public Sector Accounting Board's later consideration of the work in the Federal Government Reporting Study in promulgating standards that required full accrual financial statements with the net debt indicator demonstrates the board's attention to the needs of users of government financial information and the importance of congruence between the production of financial information and its use.

Synthesis

Five significant events have been identified with respect to the use of net debt in government accounting in Canada. The first event occurred in 1863, with the proposal by the Board of Audit for its adoption as a measure of the Province of Canada's financial condition. As author of Board of Audit submittal reports to the public accounts, auditor John Langton can be credited for leadership on this innovation, and, in fact, Langton played a strong role in the development of the public accounts throughout his tenure as auditor (see, for example, Langton 1926 and Hodgetts 1956 for commentary on the control Langton exercised over all aspects of the preparation of the public accounts, both pre- and post-Confederation). While the situation in the Province of Canada does not appear to have reached the level of "financial stress," as defined by Luder (1992: 112), the growth in debt did trigger the need to accurately track it. The need was identified by the providers of information, but there does not appear to be evidence of demand for this information on the part of the users of public accounts at the rime. The apparent disagreement between the information needs as perceived by the producers and those of the users may have contributed to this innovation's failure to reappear in the subsequent public accounts of the Province of Canada. It may be the case that in situations where providers of accounting information initiate a change in response to their perception of need, a rime lag occurs as users come to understand the value of the innovation and how it can be interpreted and used. It should also be noted that, while early Canada demonstrated only minimal potential implementation barriers of the type identified by Luder (1992), the jurisdiction was in the midst of tumultuous circumstances surrounding the formation of the Dominion of Canada from the Province of Canada and two other British North American provinces. These events provided a distraction to the producers of the public accounts which may have contributed to the stalling of this innovation for a time.

The second event was the reappearance of net debt in a report prefixed to the 1870 public accounts. The continuation of John Langton as the auditor (from the Province of Canada to the Dominion of Canada) suggests his role was that of a promoter of change. Under his leadership, the Board of Audit first recommended the use of net debt for the Province of Canada, and it was Langton who later reintroduced it in the prefix to the public accounts for the Dominion of Canada. Developing the accounts for the new country may have provided him, as he saw it, with the opportunity to use net debt again. Net debt, however, remained out of the official balance sheet of the new federal government. The accounts kept by the federal government of the day did not lend themselves to a natural insertion of the net debt value on the balance sheet, and in this respect the accounts themselves represented a barrier to a balance sheet presentation of the net debt measure. While it could be argued that Langton's significant influence as the auditor for Canada could explain the re-emergence of net debt, its continued use as an attachment up to 1919 (long after he departed as auditor) indicates a growing acceptance of its value by users of information. The 1878 Montreal Gazette article excerpt above is an example of user acceptance of the measure.

The third event was the inclusion of net debt in the balance sheet in 1920 and signifies the innovation's acceptance by both providers and users (internal and external) and in particular demonstrates a keen desire on the part of political actors to be responsive to outside users of government financial information (i.e., the business community). Even though the type of accounts kept by the Dominion at the time continued to represent a barrier to the inclusion of net debt in the balance sheet, by this time the measure was considered sufficiently important that it was injected into this financial statement in spite of the awkwardness that it created for the balance sheet's articulation with the other statements.

A fourth event was triggered by a government study of the public accounts and a suggested balance sheet format that did not explicitly use the term net debt but rather used the term accumulated deficit, which allowed for a closer tie in to the country's statement of revenue and expenditures. Knowledgeable users of the public accounts would understand that accumulated deficit and net debt were one and the same.

The fifth and final event was the adoption of full accrual accounting by the federal government. This is identified as an event for the net debt accounting innovation because rhetoric surrounding full accrual accounting promoted private-sector accounting practices, of which net debt is not a part. The change to full accrual accounting, therefore, represented a threat to its continuance. The change to full accrual accounting required an explicit consideration of the value of this measure. The value to users would have been a key consideration. The needs of users were explicitly taken into account by the 1986 joint Canada--U.S. publication, Federal Government Reporting Study, which identified net debt as an important item of financial information, even under a full accrual accounting model. This study and the financial reporting format that it identified to support user needs represents a movement towards enhanced symmetry of perspective between providers and the users of government financial information. Ultimately, the PSAB responded to this user focus by including the requirement for Canadian government public accounts to report net debt on the statement of financial position. This responsiveness to the users of government financial information was ultimately the force that allowed net debt to survive the change to full accrual accounting and to become firmly entrenched in the Government of Canada's statement of financial position. In summary, net debt originated from a perceived need for financial information to be presented in a certain way. This need did not arise from users, however, but from providers. Furthermore, initially the perception of this need was not shared between the two groups. The lack of congruence between these groups, together with distractions presented by the events surrounding Confederation, may have contributed to its initial failure to take hold. It re-emerged, however, likely as a result of having a promoter of change, John Langton. Through its continued appearance as an attachment to the public accounts, acceptance among users grew until it became an integral part of the public accounts themselves. And there it has remained (albeit only implicitly for a time) despite a significant change in the government accounting model.

Conclusion

This study has examined the emergence, evolution and entrenchment of net debt as a component of the public accounts of Canada. This important indicator got its start as a suggested measure of the indebtedness of the Province of Canada and, some sixty years later, found a place on the balance sheet of the Dominion of Canada. We attribute its emergence to a perceived need by the providers of information prompted by the increase in size of public debt of the Province of Canada and the actions of a strong promoter of change within that group. As the form of the balance sheet evolved over time, so did the presentation of the net debt measure, which for some years was reflected only implicitly. The re-establishment and entrenchment of net debt as a line item on the Government of Canada's balance sheet in 2003 is attributed to the growing symmetry between users of government financial information and the providers of that information brought about by the work of the Office of the Auditor General of Canada and the Public Sector Accounting Board.

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--. --. 1864a. "Minutes of a meeting of the Board of Audit held December 12, 1864. Board of Audit Minute Book, 1 May 1858 to 9 February 1865." Ottawa: Library and Archives Canada RG 58, B, Vol. 10.

--. --. 1864b. "Minutes of a meeting of the Board of Audit held June 1, 1864. Board of Audit Minute Book, 1 May 1858 to 9 February 1865." Ottawa: Library and Archives Canada RG 58, B, Vol. 10.

--. Finance Department. 1863. "Public Accounts of the Province of Canada for the Year 1862." Quebec City: Province of Canada.

Public Sector Accounting Board. 2011. Public Sector Accounting Handbook. Toronto: Canadian Institute of Chartered Accountants.

United Kingdom. National Statistics. n.d. Government and Public Sector Debt Measures. London: UK Statistics Authority. Available at: http://www.statistics.gov.uk/about/methodology by_ theme/public_sector_accounts/downloads/debt_history.pdf.

Wiersema, John. 2004. "Full accrual accounting." In The 2003 Federal Budget: Conflicting Tensions, edited by Charles M. Beach and Thomas A. Wilson. Montreal and Kingston: McGill-Queen's University Press.

Notes

(1) The balance sheet of the Government of Canada has been given several different titles over the years: "statement of affairs," "balance sheet," "statement of assets and liabilities," and "statement of financial position." We use the term "balance sheet" when discussing this statement in a generic context and use the title specified in the public accounts of the day when referring to the balance sheet of a particular year.

(2) Financial assets are defined as "assets that could be used to discharge existing liabilities or finance future operations and are not for consumption in the normal course of operations" (Public Sector Accounting Board 2011: 1000.39).

(3) There are four basic types of accounting for government accounts: 1) The cash basis of accounting recognizes transactions on the statement of revenues and expenditures only when cash is actually paid or received in the fiscal period. 2) Modified cash accounting recognizes those transactions that occurred within the fiscal period but with some adjustments, such as for expenditures occurring within thirty days of the close of the fiscal year. 3) Modified accrual accounting recognizes financial assets and liabilities on the balance sheet (and the revenue and expenditure consequences on the statement of revenues and expenditures) regardless of when cash is actually exchanged but records amounts paid for physical assets, such as capital assets and inventory, as expenditures rather than as assets. 4) Full accrual accounting (or, simply, accrual accounting) is the method of accounting used in most industries of the private sector and an increasing number of governments, where transactions are recorded when they occur regardless of the timing of exchange of cash, and physical assets are reported as such on the balance sheet and then expensed at the time of use.

(4) An exception to this was the first public accounts after Confederation, which contained a schedule that itemized what accounts of the Province of Canada were and were not transferred to the Dominion of Canada. The term net debt was used to describe the amount of the Province of Canada's liabilities that were assumed by the Dominion of Canada at Confederation, net of cash, bank accounts, investments and sinking funds that were transferred to the Dominion of Canada at that time.

(5) This article also provided analysis of the change in gross debt and government expenditures. It also commented on the average interest rates that had been a part of the net debt schedule since its inception and found average interest rates to be "misleading."

(6) J. Courtney explains the concept of consolidated fund in his report to the 1885 public accounts: "The 'Consolidated Fund' consists of the ordinary income and expenditure of the Dominion and is the account to which this income and expenditure are transferred, and is, in fact, the difference between the two sides [i.e., asset and liabilities] of the balance sheet" (cited in Canada, Finance Department 1886: xi).

Ron Baker is assistant professor, Department of Business, University of Guelph. Morina Rennie is professor, Faculty of Business Administration, University of Regina. The authors are listed in alphabetical order. The authors gratefully acknowledge helpful comments and suggestions from reviewers and participants at the annual conference of the Administrative Sciences Association of Canada, University of Regina, 22-25 May 2010, and from the journal's anonymous reviewers.
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