Accounting and Reporting for the Federal Government

1. 12 Chapter Accounting and Reporting for the Federal Government

2. Learning Objectives • After studying Chapter 12, you should be able to: • Describe the financial management structure of the federal government. • Describe the process for establishing GAAP for federal agencies. • Explain the concepts underlying federal agency accounting and financial reporting. • Describe government-wide financial statements for the federal government.

3. Learning Objectives (Cont’d) • Identify the financial statements required of federal agencies. • Contrast and compare budgetary accounting with proprietary accounting. • Record budgetary and proprietary journal entries and prepare financial statements for federal agencies. • Contrast and compare accounting for state and local governments with federal agencies.

4. Federal Government • The U.S. federal government is the largest governmental entity in the world, comprised of • three branches of government (legislative, executive, judicial) • offices (e.g., Office of Management and Budget) • departments (e.g., Department of the Interior) • independent establishments and government corporations (e.g., U.S. Postal Services, SEC, CIA)

5. Federal GovernmentFinancial Management Several acts of Congress affect financial management in the U.S. government, e.g., • Chief Financial Officer Act of 1990 (CFO) • Government Performance and Results Act of 1993 (GPRA) • Government Management Reform Act of 1994 (GMRA) • Federal Financial Management Improvement Act of 1996 (FFMIA) • Reports Consolidation Act of 2000 • Accountability of Tax Dollars Act of 2002 (ATDA)

6. Federal Government Financial Management Structure • Federal Financial Management Improvement Act of 1996 (FFMIA) • Requires federal agencies to comply with established accounting and reporting standards. Twenty-four specific agencies are designated “Act” agencies by the GPRA of 1993 • Each agency must follow the U.S. Standard General Ledger

7. Federal Government Financial Management Structure • “Three principals” of the Joint Financial Management Improvement Program (JFMIP) Comptroller General Secretary of the Treasury Director of the OMB have joint responsibility under federal statutes for establishing and maintaining a sound financial management structure within the federal government

8. FASAB • In 1990, the three principals established the Federal Accounting Standards Advisory Board (FASAB) • In 2000, FASAB standards were recognized as “Federal GAAP” in SAS No. 91, amending No. 69 • To date the FASAB has issued: • 4 Statements of Federal Financial Accounting Concepts (SFFAC) • 30 Statements of Federal Financial Accounting Standards (SFFAS) • Several reports, technical releases, interpretations

9. SFFAC No. 1 — Objectives • SFFAC No. 1 identifies four objectives of federal financial reporting, based on the foundation of accountability, which are to assist report users in assessing • budgetary integrity • operating performance • stewardship • adequacy of systems and controls

10. SFFAC No. 2 — Entity and Display • Specifies the types of entities that should provide financial reports • Establishes the guidelines for defining each type of reporting entity • Identifies the types of financial statements each type of reporting entity should provide • Suggests the types of information each type of statement should convey

11. SFFAC No. 2 — Entity and Display (Cont’d) • The federal government can be viewed from three perspectives: • Organizational (collection of departments and agencies) • Budget (collection of expenditures or receipt budget accounts) • Program (aggregation of programs/functions or activities)

12. SFFAC No. 3 — MD&A • SFFAC No. 3 requires that an Management Discussion and Analysis (MD&A) to be included in the general purpose federal financial report (GPFFR) • Its purpose is to • communicate managers’ insights • increase understandability and usefulness of the GPFFR • provide accessible information about the entity

13. SFFAC No. 4 – Target Audience SFFAC No. 4 identifies five audiences for the consolidated financial report of the U.S. government: • Primary audiences: • Citizens • Citizen intermediaries • Other audiences: • Congress • Federal executives • Program managers

14. Funds Used in Federal Accounting • Derived from general taxing and revenue powers and from business operations • General fund (one for entire federal government) • Special funds (receipts earmarked for a specific purpose) • Revolving funds (similar to internal service funds) • Management funds (including working funds) • Held by the government as custodian or trustee • Trust funds (both expendable and nonexpendable) • Deposit funds (similar to agency funds)

15. Government-wide Statements • The Government Performance and Results Act of 1993 expanded the requirements of the Chief Financial Officers Act of 1990 and required 24 federal agencies to be audited and comprehensive government-wide financial statements be prepared • The Financial Report of the United States Government has been produced by the Department of Treasury and audited by the GAO since FY1997. Prototype consolidated statements were produced much earlier (in 1980), but not audited

16. Government-wide Statements (Cont’d) • Although the financial statements of federal agencies are prepared following Federal GAAP, the Comptroller General of the GAO issued a disclaimer of opinion on the U. S. Government financial report in FY1997-FY2004 citing difficulties in accounting for • Capital asset inventories in the Dept of Defense • Environmental liabilities • Intragovernmental activity and balances • Each year more of the 24 “Act” agencies receive unqualified opinions on their individual statements within the targeted 45 days of the end of the fiscal year

17. Required Financial Statements • OMB Bulletin 01-09 requires a: • Balance sheet (see Ill. 12-4) • Statement of net cost (see Ill. 12-5) • Statement of changes in net position (see Ill. 12-6) • Statement of budgetary resources (see Ill. 12-7) • Statement of financing (see Ill. 12-8) • Statement of custodial activity (see Ill. 12-9) • Required supplemental information • Summary information on stewardship property, plant, and equipment

18. Assets Entity Assets Nonentity Assets Intra- Governmental Govern-mental Intra- Governmental Govern-mental Balance Sheet: Asset Classification

19. Balance Sheet: Asset Classification • Entity assets are those the entity has authority to use for its own operations • Nonentity assets are held by the entity, but cannot be used for operations (example, income taxes held by the IRS) • Intragovernmental assets and liabilities arise from transactions between the entity and another federal entity • Governmental assets and liabilities arise from transactions between the entity and nonfederal entities

20. Balance Sheet: Asset Classification • Most federal entities do not havetheir own cash • They draw against their “Fund Balance with Treasury” account • Checks are sent by the Department of Treasury to pay the entity’s obligations

21. Balance Sheet —Property Plant and Equipment (PP&E) • General PP&E are used to provide general government goods and services, military weapon systems and space exploration equipment • Heritage asset PP&E include multi-use heritage assets (e.g., the Lincoln Memorial and Statute of Liberty) that possess educational and cultural characteristics, and stewardship land, such as, Yellowstone National Park.

22. Balance Sheet: Liabilities • FASAB standards provide criteria for recognition of liabilities, including: • Accrual basis recognition for most liabilities, including amortization of premiums/discounts on federal debt and pensions • Note disclosure for contingencies, except for government-acknowledged events (e.g., those arising from natural disaster) • Similar treatment to that of for-profit and governmental entities for capital lease obligations

23. Balance Sheet: Net Position • Components of net position are: • Unexpended appropriations (budget authority still remaining) • Cumulative results of operations (net cumulative difference between expenses/losses and financing sources, including appropriations, revenues, and gains)

24. Statement of Net Cost • Shows the components of the net cost of the reporting entity’s operations • Reports for the entity as a whole and for each of its responsibility centers or segments • The “bottom line” is termed Net Cost of Operations

25. Statement of Changes of Net Position • Purpose: to communicate all changes in the reporting entity’s net position: • Cumulative results of operations and unexpended appropriations • Net costs of operations includes gross costs less exchange (earned) revenues, as well as: • Prior-period adjustments • Change in cumulative results of operations • Unexpended appropriations

26. Statement of Budgetary Resources This statement presents the budgetary equation: Availability of = Status of budgetary budgetary resources resources

27. Statement of Financing • Reconciles the • budget-based financial information reported in the statement of budgetary resources to • the accrual-basis net cost of operations statement • Essentially • resources and costs that do not fund accrual-basis costs (or costs that do not require resources) are • added/subtracted (as appropriate) to • reconcile total budgetary obligations and nonbudgetary resources to net cost of operations

28. Statement of Custodial Activity • Required only by agencies (such as the IRS) that collect nonexchange revenue for • the General Fund, • a trust fund, or • recipient agencies to report sources and dispositions of such revenues

29. Required Supplemental Information Disclosures are also required about: • Stewardship PP&E to highlight their long-term benefit nature • Deferred maintenance for both general and stewardship PP&E • Stewardship investments—beneficial investments of the government in such items as: • Nonfederal physical property • Human capital • Research and development

30. Social Insurance • SFFAS Nos. 17, 25, 26, and 28 present accounting standards for Social Security, Medicare and Supplementary Medical Insurance (Part B), Railroad Retirement benefits, Black Lung benefits, and Unemployment Insurance • The social insurance liability project is complex and ongoing. Issues to be resolved include determining the obligating event of a social insurance liability, as well as measurement and display issues

31. Dual-Track Accounting System • Federal agencies are required to comply both with budgetary accounting requirements and accrual basis proprietary accounting requirements • Many transactions require an entry to record the budgetary effect and a separate entry to record the proprietary effect (i.e., the effect on net position of the entity) • Illustration 12-10 presents a comparison of the kinds of transactions and events that affect each track’s accounting requirements

32. Budgetary resources Status of resources Unapportioned authority Other appropriations realized Apportionments Allotments Commitments Undelivered orders Expended authority Flow of Budgetary Authority Through Budgetary Accounts

33. Illustrative Transactions for a Hypothetical Federal Agency The agency is notified its appropriation for the new fiscal year is $1,000,000. It would make the following general journal entries: Budgetary: Dr.Cr. Other Appropriations Realized 1,000,000 Unapportioned Authority 1,000,000 Proprietary: Fund Balance with Treasury 1,000,000 Unexpended Appropriations 1,000,000

34. Illustrative Transactions (Cont’d) OMB approved four equal quarterly apportionments to the agency. The agency head, in turn, allotted the full amount to subunits within the agency: Budgetary: Dr. Cr. Unapportioned Authority 1,000,000 Apportionments 1,000,000 Apportionments 1,000,000 Allotments 1,000,000

35. Illustrative Transactions (Cont’d) Commitments were recorded in the amount of $700,000 for goods and services expected to be ordered during the year (note: these are not yet obligations). Purchase orders for goods were issued in the amount of $650,000. Budgetary: Dr.Cr. Allotments 700,000 Commitments 700,000 Commitments 650,000 Undelivered Orders 650,000

36. Illustrative Transactions (Cont’d) Goods were received at an actual cost of $640,000 for which purchase orders had been issued for estimated amounts of $620,000. Budgetary:Dr.Cr. Undelivered Orders 620,000 Commitments 20,000 Expended Authority 640,000 Proprietary: Operating Materials & Supplies 640,000 Accounts Payable 640,000 Unexpended Appropriations 640,000 Appropriations Used 640,000

37. Illustrative Transactions (Cont’d) Payrolls were paid in the amount of $100,000. The agency does not record commitments for payroll. Budgetary: Dr. Cr. Allotments 100,000 Expended Authority 100,000 Proprietary: Operating/Program Expenses 100,000 Disbursements in Transit 100,000 Unexpended Appropriations 100,000 Appropriations Used 100,000

38. Illustrative Transactions (Cont’d) In the preceding proprietary JE, Disbursements in Transit is a current liability account signifying the agency has requested payment from the Treasury. Assume, that payment has also been requested for the Accounts Payable to vendors for goods received (see previous transaction). Proprietary: Dr.Cr. Accounts Payable 640,000 Disbursements in Transit 640,000

39. Illustrative Transactions (Cont’d) The agency received notification that all disbursements in transit had been paid. Proprietary: Dr.Cr. Disbursements in Transit 740,000 Fund Balance with Treasury 740,000

40. Concluding Comments • Much progress had been made in improving the quality of federal financial management, accounting, and reporting through federal initiatives and dedicated federal accountants. • The three principals of the Joint Financial Management and Improvement Program (the Comptroller General, Secretary of Treasury, and Director of the OMB) created the FASAB, whose statements become GAAP upon approval by the principals. • A variety of unique financial statements are required of federal agencies, including both budgetary and proprietary accounting requirements; thus, they practice a dual-track system of accounting. END