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About This FAM
| Responsible Agency: | Office of the Comptroller General |
| Issued: | Jan 2010 |
| Last Updated: | Jan 2010 |
1. Introduction
Commitment s are an intrinsic part of the expenditure planning and the budgetary control processes. It is essential that Commitment controls are in place to: ensure compliance to Sections 32 and 46 of the Financial Administration Act (FAA) , which confirms the availability of funds before a contractual arrangement is entered into; record the Commitment s or obligations into the System for Accountability and Management (SAM).
Commitment accounting identifies and reserves funds for future payment obligations. The FAA in sub-sections 4(1)(c) and 12(2)(b) sets out the respective authorities and responsibilities for Commitment accounting by the Financial Management Board and the Comptroller General. In that regard, this policy sets out the Commitment accounting requirements for departments. FAM 1802 - Approval Authorities, provides for the approval requirements for Commitment authority responsibilities.
A Commitment can be recognized at any of the following stages:
- When goods or services are formally requisitioned internally, but no actual contractual obligation is made;
- When the actual contractual obligation is made; or
- When there is a need to reserve funds to fulfill a future obligation, eg. Grant or contribution payments.
Commitment s should be recorded as early in the process as possible.
Commitment accounting involves the recording of obligations to make some future payments at the time they are foreseen, not at the time services are rendered and billings are received. Such obligations may represent contractual liabilities of a department, as is the case when purchase orders or contracts for goods or services are issued. Alternatively, they may represent conditional liabilities, as is the case when an arrangement is made that may require the spending of funds if conditions specified in the arrangement are met.
The most common example of a Commitment is contracting for goods or services. Once the contract between the department and the supplier has been signed, there is a Commitment on the part of the department to perform its part of the contract, which, is generally to pay the supplier. The Commitment exists until the supplier has performed their part of the contract, (i.e., delivered goods or services of a specified nature and/or quality, etc). Once a department receives the goods or services, the Commitment ceases to exist and an obligation or liability commences to pay the supplier.
2. Definitions
|
“Commitment” |
an obligation arising from an existing contract, agreement or legislative enactment or regulation that will become an actual liability upon the fulfillment of specified conditions. 1 A purchase order typically initiates a Commitment . |
| “Continuing Commitments” | are those that will require a series of payments or settlement actions over an indeterminate period. An example is the obligation to make monthly payments for telephone service.2 |
| “Pre-encumbrance” |
to separate funds from the free balance of a budget in order to reserve the funds for the current fiscal year for a particular purpose. Typically, a Preencumbrance is initiated by a written requisition |
1 The Canadian Institute of Chartered Accountants, Terminology for Accountants , 4 th ed., s. v. "commitment Commitment ."
2 Treasury Brd. Cda
3. Policy
Deputy Ministers shall implement effective departmental Commitment accounting controls and ensure that sufficient balances are available in their appropriations or FMB approved allotment ceilings to discharge any Commitment s. All Preencumbrance s and Commitment s are to be entered into the SAM in accordance with the following Directives.
4. Directives
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4.1
|
Only designated expenditure and accounting officers may authorize Commitment s. No Commitment shall be made that would result in a greater expense than a department's current year's appropriation(s), a special purpose fund or a trust fund's available balance. These Commitment approvals must be in a form that allows for an adequate audit trail back to the originator. |
|
4.2 |
A Pre-encumbrance (i.e., through a Requisition in SAM) must be used to set aside funds for planned obligations that have yet to be linked with a contractual obligation. |
| 4.3 |
A Commitment (i.e., through a Purchase Order in SAM) must be used to set aside funds for planned obligations that relate to a contractual obligation. |
| 4.4 |
An accounting officer must certify a Commitment or Commitment adjustment made by an expenditure officer (see FAM 1802 - Approval Authorities). The accounting officer shall have a delegated monetary level of Commitment authority equal to or above the following: (in accordance with the Delegation of Authority Regulations sections 5(1)(b) and 5(2))
|
| 4.5 |
If the amount of a payment exceeds a Commitment created by a purchase order, the transaction must be rejected unless the excess is within tolerated levels as set by the Department (e.g. for change orders). Departments that use tolerated levels of deviation must set levels that are acceptable to their various programs and each approval must then indicate spending approval for set amount plus a minimum deviance in cost. |
| 4.6 |
A Commitment must be supported by a Request for Proposal, Request for Tender, Requisition, Contribution Agreement or other written statements of intent or documents, which initiate a Pre-encumbrance . |
| 4.7 |
Departments must not record Commitment s to a future year's expenditure as an encumbrance against a current year appropriation. Departments must record these as a first charge against the future year's appropriation. In the case of a special purpose or revolving fund, departments must control Commitment s so that the payments, when netted against receipts, will not exceed the drawdown authority. Intentions (compared to firm foreseeable events) to enter into arrangements at some future date must not be recorded or reported as Commitment s in SAM. Such intentions are made by a Pre-encumbrance . |
| 4.8 |
Multi-year Contracts |
| 4.8.1 | Multi-year contracts must clearly state the requirement for an appropriation in a subsequent fiscal year as required by the FAA section 44(2). |
| 4.8.2 |
Departments shall maintain adequate records for multi-year contracts to reveal related outstanding Commitment s at the end of a fiscal year. |
| 4.9 |
A department must record a Commitment in SAM at the most appropriate of the times below.
|
5. Guidelines
| 5.1 |
Departments should regularly review Commitment information to confirm the validity and the accuracy of the outstanding Commitment s and the amounts expected to be charged against the appropriation. |
| 5.2 |
The standards of completeness, accuracy, and authority applicable to all information in Commitment records are the same as those for recording expenses. Departments should document their control procedures. These should be accompanied by specific departmental policies on the recording of particular types of Commitment s, such as operating expenses, capital expenditures, multi-year Commitment s, expenditures out of imprest, or trust accounts, advances, and grants and contributions. |
| 5.3 |
Commitment s should be recorded at the value expected to be incurred in the current fiscal year as follows:
|
| 5.4 |
Within a special purpose or revolving fund, a Commitment should be approved only if a documented estimate indicates that net assets plus Commitment s minus draw-downs, will not exceed the authorized fund limit. |
6 . Authorities and References
- FAA sections 4(1)(c), 12(2)b, 32, 32.2(2), 44, 46, 49(2)
- Delegation of Authority Regulations section 5
- PSAB 3390
- FAM 1801; FAM 1802
7 . Consequences from Failure to Comply
Failure to comply with policies and directives of the Financial Administration Manual may result in actions under Part X of the Financial Administration Act. The Government of the Northwest Territories may seek legal remedy in the Territorial Courts.