Chapter 17Federal Government Accounting

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Thought to Ponder

“Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new. Let’s invest in our people without leaving them a mountain of debt. Let’s meet our responsibility to the citizens who sent us here. Let’s try common sense.”

President Barack Obama

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Learning Objectives

• Understand the unique characteristics of federal government

• Roles of the main agencies responsible for federal accounting and reporting

• Key objectives of federal financial reporting• Concept of a unified budget• Types of accounts maintained by federal government• Federal Reporting Entity• Form and content of government-wide and agency

financial reports• Main accounting issues addressed by FASAB• Key International trends in governmental accounting

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Unique Characteristics of theFederal Government

• Range of its activities for ex., defense, social security• Diversity of its resources for ex., military hardware,

national parks• Nature of its obligations for ex., social security

benefits• Extent of its powers for ex., print currency, regulate

commerce

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Federal Accounting and Reporting

• Federal accounting is:oDecentralizedoEach agency and department has its own

accounting system and prepares its own reports.• 3 Federal agencies responsible for financial

management:oDepartment of the TreasuryoOffice of Management and BudgetoGovernment Accountability Office

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Department of the Treasury

• Is responsible for broad range of financial functions.o Managing the public debto Collecting receipts and making disbursementso Minting coins and printing currencyo Managing government’s gold supply

• Department’s divisions are: o IRSo Office of the Comptroller of the Currencyo Office of Thrift Supervisiono U.S. Mint o Financial Management Service (FMS)

• FMS is the government’s central collection and disbursing agent. o Responsible for taking in revenue from IRS and writing checks.

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Office of Management and Budget

OMB: One of the most powerful agencies in federal government. • Assists in preparing federal budget• Supervises executive branch agencies in

implementing• Has authority to make budgetary

recommendations• Reviews each federal agency’s spending plans

and evaluates the effectiveness of its programs.• Oversees and coordinates financial management,

information, and regulatory policies. • Has responsibility of apportioning federal

appropriations

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Office of Management and Budget (cont’d)

• OMB’s responsibilities for fiscal management were expanded by the CFO Act.

• It established a new position of CFO of the United States and the corresponding CFO positions within each federal agency and department.

• The CFO is the officially designated ‘Deputy Director for Management’ and reports to the head of the OMB.

• The CFO Act mandated that:o The federal agencies submit annual reports for independent

audit.o OMB prepare an annual report regarding its accomplishments

and required improvements.

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Government Accountability Office

• GAO is the watchdog (audit, evaluation and investigative) arm of the US Congress (located

in the legislative branch of the US govt.)• Created by the Budget and Accounting Act of 1921 • The act specified that GAO was to be:o independent of the executive departments ando Under the control of Comptroller General of the U.S.( a

professional and non-partisan position in the U.S. government).• GAO’s responsibilities are: o Handles legal serviceso Provides advice to Congress on legal issueso Assist in drafting legislationo Adjudicating claims o Conducting special investigations into criminal and civil

misconduct

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Government Accountability Office (cont’d)

• GAO also deals with accounting and information management policy.

• It ensures that the Congress has current, accurate, and complete financial management data.o GAO participates with OMB and Treasury in prescribing

accounting principles.o Advises other federal agencies on fiscal and related

policies.o Prescribes standards for auditing and evaluating

government programs.

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Federal Accounting Standards Advisory Board

• FASAB is responsible for promulgating federal accounting standards.

• Mission is to establish accounting standards after considering the financial and budgetary information needs.

• FASAB is composed of 9 members:o 1 from legislative branch: one from GAO or one from the

Congressional Budget Officeo 2 from the executive branch: one each from OMB and the

Treasuryo 6 “public members,” including the chair (not employees of the

Federal Govt.) • It must submit each proposed standard for review to

the Treasury, the GAO, and OMB. o If objected, the standard is returned back to the Board for

reconsideration.

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Federal Budget

• Federal operations are accounted for in 4 types of funds:o General fundo Special fundo Trust fundo Revolving fund

• The general fund includes both capital and operating expenditures.

• Special fund: maintained to account for resources designated for specific programs or activities. Examples: o National Wildlife Refuge Fund o Land and Water Conservation Fund

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Federal Budget

• Trust Funds: o Used to account for resources restricted for specific

purposes.o Similar to special revenue fundso Ex: Hospital Insurance Trust Fund, Old-Age and Survivors

Insurance Fund, Supplementary Medical Insurance Fund.

• Revolving Funds: o Comparable to municipality’s enterprise fundso Accounts for federal government’s business-type activities.o Generate their own receipts and hence, the sponsoring

agencies are expected to expend their resources without annual Congressional appropriation.

o Ex: U.S. Postal Service.

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Unified Budget

• Objective: To capture in a single tabulation the impact of federal activities on national economy.

• It encompasses all four types of funds• Intended to provide a comprehensive measure of

cost of the government’s programs.

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Government-Wide Federal Statements

• Financial report is based on full accrual basis.• The annual report presents budgetary results and

focuses on cash, monetary assets and liabilities. • Annual financial report is divided into 6 sections:oLetter of transmittal and management’s discussion

and analysisoAuditor’s reportoSix basic financial statements (stewardship

information on assets)oNotes to the financial statementsoSupplemental information

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Government-Wide Statements (cont’d)

7 basic financial statements• Statement of operations and changes in net position• Statement of net cost• Balance Sheet• Statement reconciling the net operating revenue or

cost with unified budget surplus or deficit • Statement reconciling the change in government’s cash

position with the unified budget surplus or deficit• Statement providing certain actuarial information

pertaining to social insurance program obligations• Statement that indicates the changes in social

insurance obligations during the year

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Financial Reports

FASAB established three criteria for a component to be considered a reporting entity:

1. There is a management responsible for controlling and deploying the component’s outputs and outcomes and for executing it’s budget.

2. The Component is of sufficient size and significance.

3. Users are interested in the information to be reported in financial statements and could use it to make resource allocation and related decisions. G

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Federal Entities

Dual system of accounts is used:--Budget accounts and proprietary accounts

• Budget accounts: o Ensure that entity complies with budgetary mandateso Does not overspend. o And is able to fulfill uniform budgetary reporting requirements.

• Proprietary accounts: o Provide information for financial statements based on FASAB

standards.

o Intended to provide an economic, rather than a budgetary, measure of operations and resources.

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Federal Agencies

• FASAB reporting model for federal agencies is similar to that of federal government.

• Seven Basic financial statements of agencies are:

1. Balance Sheet or Statement of Financial Position

2. Statement of Net Cost

3. Statement of Operations and Changes in Net Position

4. Statement of Budgetary Resources

5. Statement of Financing

6. Statement of Custodial Activities

7. Statement of Social Insurance

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Financial Statements

Statement of Financial Position: • Shows entity’s assets, liabilities, and net position.• It is presented on a full accrual basis• All long-lived assets are reported on this statement

except• Parklands, historic sites, national monuments

(Stewardship assets). • These assets are reported in the

supplements of the basic

financial statements. Gra

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Financial Statements (cont’d) Statement of Net cost:

• Most significant of the six statements• Is presented on a full accrual basis• Reports on program operating costs and revenues.• Provides decision makers a basis on which to assess agency

performance

Statement of Changes in Net Position: • Summarizes all entity transactions other than those reported

in statement of net cost• Explains how entity financed its net cost• It also includes prior period adjustments and amounts

received from appropriations

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Financial Statements (cont’d)Statement of Budgetary Resources:

• Prepared on budgetary basis • Reports on amounts available from both current and prior year

appropriations and entity’s cash outlays, newly incurred obligations

Statement of Financing: • Links the statement of budgetary resources to the statement of

net cost.• Reconciles agency’s obligations incurred on budgetary basis

with net cost of operations on a full accrual basis.• Ex: On a budgetary basis plant and equipment are recognized

as expenses when acquired; on a full accrual basis they are recognized as expenses over their useful lives.

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Financial Statements (cont’d)

Statement of Custodial Activities:• Similar to that of agency fund• Is required only of an entity whose primary mission is to collect

funds to be turned over to the Treasury or other organizations. Ex: IRS

• It shows amounts transferred to other agencies and amounts

not yet transferred.

Statement of Social Insurance:• Required only of few agencies charges with administering the

government’s major social insurance programs.• Example: Dept. of Labor, Black Lung Disability program

Dept. of HHS, Medicare program

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FASAB Model

• FASAB deals with recognition of revenue and expenses and correspondingly with the valuation of assets and liabilities.

• FASAB distinguishes between two types of revenues:o Exchange (earned): arise from sales transactions where both

parties benefit.o Nonexchange: government commands resources but gives

nothing (directly) in exchange. Ex: Taxes and fines.

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FASAB Model (cont’d)

FASAB asserts that:• Revenues from services should be

recognized when the service is actually performed.

• Revenues from long-term contracts are recognized on percentage of completion basis.

• Revenues from sale of goods should be recognized upon delivery of the goods to customers.

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FASAB Model (cont’d)

• According to FASAB: a federal entity should accrue revenues ‘when a specifically identifiable, legally enforceable claim to resources arises, to the extent that collection is probable and measurable.

• Income taxes should be recognized when assessed by the taxpayer.

• Fines and penalties may be accrued:o Upon the expiration of the period during which the offender

may contest a court summono When the offender pays the fine before a court dateo When the court imposes a fine.

• Donations are recognized when the entity has a legally enforceable claim to the donated resources and the amount is measurable.

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Accounting for Plant and Equipment

• FASAB groups assets into two categories:oGeneraloStewardship

• Stewardship assets are further classified into: oLand: oHeritage Assets

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Accounting for Plant and Equipment (cont’d)General Assets:

• Comparable to those of business.• They are capitalized and depreciated over useful lives. Exception: Land• Includes assets that are:o Used to produce goods or serviceso Used in business-type activitieso Used in activities where costs can compared with other

entities.

Military Assets: include aircraft, ships, vehicles, tanks etc.

• Their useful lives become shorter than and less certain during times of war.

• They are accounted for as general assets.

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Accounting for Plant and Equipment (cont’d)

Space Assets: Assets used in the government’s space program and are accounted for as general assets.

Stewardship Assets:

Land: Includes national forests, national parks etc.• Neither used in government operations nor held for

sale.• It is not capitalized and not reported

on the balance sheet. • It is expensed as acquired. G

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Accounting for Plant and Equipment (cont’d)

• Heritage Assets: Has historical, natural, cultural, educational, or artistic significance.

• Examples: Museums, monuments, and historical sites.

• Some assets might have characteristics of both operational and true heritage assets.

• FASAB rules that all multi-use heritage assets be capitalized as general property, plant, and equipment and depreciated over their useful lives.

• Assets with only historical value will be treated as stewardship assets.o They will not be capitalized and should be reported in the

stewardship report.

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Accounting for Human Capital

• Investments in human capital are intended to increase the nation’s productive capacity.

• The costs of educational and training programs should be capitalized as incurred and amortized over the periods to be benefited.

• The reported expenses for physical assets will be reported over the life of the assets.o Those of human assets would have to be recognized as the

costs were incurred.

• FASAB rejects the notion of capitalizing investments in human capital due to the practical difficulties. o It mandates supplemental disclosure of such investments in

the financial report.

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Inventory

• Inventories can be valued at either:oHistorical cost oroLatest acquisition cost

• Other types of inventories, such as operating materials and supplies and stockpile materials are valued at historical cost.

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Liabilities and ExpensesGovernment related events:

• accidents for which government is responsible and required to reimburse for the damages.

• Liability and related expense are recognized as soon as the event occurs and the anticipated outflows are probable and measurable.

Government-acknowledged events: • occurrences for which government is not responsible but

provides relief to the victims. Ex: Natural disasters.• FASAB requires liabilities to be recognized for:

o Nonexchange transactions when dueo Government-acknowledged events when the financial

responsibility is acknowledged and the amount is due and payable as a result.

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Social Insurance Programs

• FASAB specifies that social insurance costs should be accounted for as non exchange transactions.

• Reporting entities should recognize a liability and related expenditure only when the payments are actually due.

• FASAB also requires extensive disclosure of information:o Statement presenting actuarial present valueso Long-range projection of ratio of contributors to

beneficiarieso Long-range cash flow projections in nominal dollars

and a percentage of both payroll and Gross domestic product.

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Direct Loans

• Federal entities make low-interest direct loans and guarantee loans made by banks and other institutions.

• FASAB directs that when a subsidized direct loan is made, the government should recognize as an asset the present value of its estimated net cash receipts, including both the interest and repayment of principal.

• The government should report an expense equal to the difference between the face value of loan and the present value of the estimated net cash receipts.

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Fiscal Management

Steps to improve fiscal management:

• Each agency must prepare a performance plan that includes:o Objective, measurable goalso Description of the process to meet the goalso Basis to compare actual results to the goalso Means of verifying and validating actual performance

• In addition, it must also submit a report that:o Reviews achievement of prior year goalso Evaluates the current year’s performance plan o Explain any deviations

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International Standard-Setting Agency• Governmental accounting standards are highly influenced by

the institutional characteristics of individual countries.• No standard setting organization has the authority to establish

accounting standards for governments other than those within its own country.

• Given the global crisis, as of June 2012, the International Public Sector Accounting Standards Board (IPSASB) has issued 47 standards intended to improve both the quality and

comparability of financial reporting for governments at all levels. • IPSASB makes clear that public sector accounting should be on

a full accrual basis, not a cash basis.• IPSASB cannot require individual countries to adopt its standards, it merely encourages.• By 2012, over 100 countries and organizations like OECD, NATO, UNDP and others have adopted IPSAS for their financial statements.

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International Standard-Setting Agency (cont’d)

As per the standards:• Property, plant, and equipment should be

capitalized and depreciated• Revenue from exchange transactions should be

recognized when measurable and probable• Inventories for sale should be recognized as

expenses in the period in which related revenues are recognized.

• Borrowing costs should be recognized as an expense when incurred.

IPSASB requires four basic financial statements: • Statement of financial position• Statement of financial performance• Statement of changes in net assets/equity• Cash flow statement

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• The Federal Government is unique due to its size and complexity.

• The three federal agencies with oversight responsibilities for Federal Financial Management are the Department of Treasury, the Office of Management and Budget and the Government Accountability Office.

• The Federal Accounting Standards Advisory Board is responsible for promulgating accounting standards for the federal government.

• The federal government’s unified budget is intended to show the impact of federal activities on the national economy.

• Budgetary accounts ensure that a federal entity complies with budgetary mandates.

• The FASAB established three criteria for a component to be considered a reporting entity.

• The FASAB’s comprehensive reporting model helps ensure that the financial statements of the federal government focus on all economic resources and are on a full accrual basis.

• The Government Performance and Results Act is intended to further improve federal accounting and fiscal management.

• The IPSASB has issued standards for governments at all levels intending to improve both the quality and comparability of financial reporting.

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Summary