Chapter 17Granof-5e*Chapter 17Federal Government Accounting

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Chapter 17Granof-5e*Learning ObjectivesUnderstand the unique characteristics of federal governmentRoles of the main agencies responsible for federal accounting and reportingKey objectives of federal financial reportingConcept of a unified budgetTypes of accounts maintained by federal governmentFederal Reporting EntityForm and content of government-wide and agency financial reportsMain accounting issues addressed by FASAB

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Chapter 17Granof-5e*Unique Characteristics of the Federal GovernmentRange of its activities for ex., defense, social securityDiversity of its resources for ex., military hardware, national parksNature of its obligations for ex., social security benefitsExtent of its powers for ex., print currency, regulate commerce

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Chapter 17Granof-5e*Federal Accounting and ReportingFederal accounting is:DecentralizedEach agency and department has its own accounting system and prepares its own reports.3 Federal agencies responsible for financial management:Department of the TreasuryOffice of Management and BudgetGovernment Accountability Office

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Chapter 17Granof-5e*Department of the TreasuryIs responsible for broad range of financial functions.Managing the public debtCollecting receipts and making disbursementsMinting coins and printing currencyManaging governments gold supplyDepartments divisions are: IRSOffice of the Comptroller of the CurrencyOffice of Thrift SupervisionU.S. Mint Financial Management Service (FMS)FMS is the governments central collection and disbursing agent. Responsible for taking in revenue from IRS and writing checks.

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Granof-5e*Office of Management and BudgetOMB: One of the most powerful agencies in federal government. Assists in preparing federal budgetSupervises executive branch agencies in implementingHas authority to make budgetary recommendationsReviews each federal agencys spending plans and evaluates the effectiveness of its programs.Oversees and coordinates financial management, information, and regulatory policies. Has responsibility of apportioning federal appropriations

Chapter 17

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Chapter 17Granof-5e*Office of Management and Budget (contd)OMBs 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:The federal agencies submit annual reports for independent audit.OMB prepare an annual report regarding its accomplishments and required improvements.

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Chapter 17Granof-5e*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:independent of the executive departments andUnder the control of Comptroller General of the U.S.( a professional and non-partisan position in the U.S. government).GAOs responsibilities are: Handles legal servicesProvides advice to Congress on legal issuesAssist in drafting legislationAdjudicating claims Conducting special investigations into criminal and civil misconduct

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Chapter 17Granof-5e*Government Accountability Office (contd) GAO also deals with accounting and information management policy. It ensures that the Congress has current, accurate, and complete financial management data.GAO participates with OMB and Treasury in prescribing accounting principles.Advises other federal agencies on fiscal and related policies.Prescribes standards for auditing and evaluating government programs.

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Chapter 17Granof-5e*Facts FYI2010Acting Comptroller General of U.S.: Gene L. Dodaro, as of March 13, 2008 (heads the GAO)Secretary of the Treasury: Timothy F. GeithnerTreasurer: Anna Escobedo Cabral Director of OMB: Peter Orszag (Deputy Director Rob Nabors), www.whitehouse.gov/omb

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Chapter 17Granof-5e*Federal Accounting Standards Advisory BoardFASAB 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 10 members:2 from legislative branch: one from GAO and one from the Congressional Budget Office2 from the executive branch: one each from OMB and the Treasury6 public members (not employees of the fed. Govt.) It must submit each proposed standard for review to the Treasury, the GAO, and OMB. If objected, the standard is returned back to the Board for reconsideration.

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Chapter 17Granof-5e*Federal BudgetFederal operations are accounted for in 4 types of funds:General fundSpecial fundTrust fundRevolving fundThe general fund includes both capital and operating expenditures. Special fund: maintained to account for resources designated for specific programs or activities. Examples: National Wildlife Refuge Fund Land and Water Conservation Fund

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*Federal Budget Trust Funds: Used to account for resources restricted for specific purposes.Similar to special revenue fundsEx: Hospital Insurance Trust Fund, Old-Age and Survivors Insurance Fund, Supplementary Medical Insurance Fund.Revolving Funds: Comparable to municipalitys enterprise fundsAccounts for federal governments business-type activities.Generate their own receipts and hence, the sponsoring agencies are expected to expend their resources without annual Congressional appropriation. Ex: U.S. Postal Service. Chapter 17Granof-5e

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Chapter 17Granof-5e*Unified BudgetObjective: To capture in a single tabulation the impact of federal activities on national economy.It encompasses all four types of fundsIntended to provide a comprehensive measure of cost of the governments programs.

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Chapter 17Granof-5e*Government-Wide StatementsFinancial 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:Letter of transmittal and managements discussion and analysisAuditors reportSix basic financial statements (stewardship information on assets)Notes to the financial statementsSupplemental information

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Chapter 17Granof-5e*Government-Wide Statements (contd) 6 basic financial statementsStatement of operations and changes in net positionStatement of net costBalance SheetStatement reconciling the net operating revenue or cost with unified budget surplus or deficit Statement reconciling the change in governments cash position with the unified budget surplus or deficitStatement providing certain actuarial information pertaining to social insurance programs (beginning with FY 2006)

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Granof-5e*Financial ReportsFASAB established three criteria for a component to be considered a reporting entity: There is a management responsible for controlling and deploying the components outputs and outcomes and for executing its budget. The Component is of sufficient size and significance.Users are interested in the information to be reported in financial statements and could use it to make resource allocation and related decisions.

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Chapter 17Granof-5e*Federal EntitiesDual system of accounts is used:Budget accounts and proprietary accountsBudget accounts: Ensure that entity complies with budgetary mandatesDoes not overspend. And is able to fulfill uniform budgetary reporting requirements.Proprietary accounts: Provide information for financial statements based on FASAB standards.Intended to provide an economic, rather than a budgetary, measure of operations and resources.

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Chapter 17Granof-5e*Federal AgenciesFASAB reporting model for federal agencies is similar to that of federal government. Basic financial statements of agencies are:Balance Sheet or Statement of Financial PositionStatement of Net CostStatement of Changes in Net PositionStatement of Budgetary ResourcesStatement of FinancingStatement of Custodial ActivitiesStatement of Social Insurance (became effective with FY 2006)

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Chapter 17Granof-5e*Financial StatementsStatement of Financial Position: Shows entitys assets, liabilities, and net position.It is presented on a full accrual basisAll long-lived assets are reported on this statement exceptParklands, historic sites, national monuments (Stewardship assets). These assets are reported in the supplements of the basic financial statements.

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Chapter 17Granof-5e*Financial Statements (contd) Statement of Net cost: Most significant of the six statementsIs presented on a full accrual basisReports on program operating costs and revenues.Provides decision makers a basis on which to assess agency performanceStatement of Changes in Net Position: Summarizes all entity transactions other than those reported in statement of net costExplains how entity financed its net costIt also includes prior period adjustments and amounts received from appropriations

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Chapter 17Granof-5e* Financial Statements (contd)Statement of Budgetary resources:Prepared on budgetary basis Reports on amounts available from both current and prior year appropriations and entitys cash outlays, newly incurred obligationsStatement of Financing: Links the statement of budgetary resources to the statement of net cost.Reconciles agencys 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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Chapter 17Granof-5e*Financial Statements (contd)Statement of Custodial Activities:Similar to that of agency fundIs required only of an entity whose primary mission is to collect funds to be turned over to the Treasury or other organizations. Ex: IRSIt shows amounts transferred to other agencies and amounts not yet transferred.

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Chapter 17Granof-5e*FASAB ModelFASAB deals with recognition of revenue and expenses and correspondingly with the valuation of assets and liabilities.FASAB distinguishes between two types of revenues:Exchange (earned): arise from sales transactions where both parties benefit.Nonexchange: government commands resources but gives nothing (directly) in exchange. Ex: Taxes and fines.

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Chapter 17Granof-5e*FASAB Model (contd)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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Chapter 17Granof-5e*FASAB Model (contd)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:Upon the expiration of the period during which the offender may contest a court summonWhen the offender pays the fine before a court dateWhen 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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Chapter 17Granof-5e*Accounting for Plant and EquipmentFASAB groups assets into two categories:GeneralStewardshipStewardship assets are further classified into: Land: Heritage Assets

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Chapter 17Granof-5e*Accounting for Plant and Equipment (contd)General Assets:Comparable to those of business.They are capitalized and depreciated over useful lives. Exception: LandIncludes assets that are:Used to produce goods or servicesUsed in business-type activitiesUsed 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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Chapter 17Granof-5e*Accounting for Plant and Equipment (contd)Space Assets:Assets used in the governments 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.

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Chapter 17Granof-5e*Accounting for Plant and Equipment (contd)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.They will not be capitalized and should be reported in the stewardship report.

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Chapter 17Granof-5e*Accounting for Human CapitalInvestments in human capital are intended to increase the nations 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.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. It mandates supplemental disclosure of such investments in the financial report.

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Chapter 17Granof-5e*InventoryInventories can be valued at either:Historical cost orLatest acquisition costOther types of inventories, such as operating materials and supplies and stockpile materials are valued at historical cost.

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Chapter 17Granof-5e*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:Nonexchange transactions when dueGovernment-acknowledged events when the financial responsibility is acknowledged and the amount is due and payable as a result.

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Chapter 17Granof-5e*Social Insurance ProgramsFASAB 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:Statement presenting actuarial present valuesLong-range projection of ratio of contributors to beneficiariesLong-range cash flow projections in nominal dollars and a percentage of both payroll and Gross domestic product.

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Chapter 17Granof-5e*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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Chapter 17Granof-5e*Fiscal ManagementSteps to improve fiscal management:Each agency must prepare a performance plan that includes:Objective, measurable goalsDescription of the process to meet the goalsBasis to compare actual results to the goalsMeans of verifying and validating actual performanceIn addition, it must also submit a report that:Reviews achievement of prior year goalsEvaluates the current years performance plan Explain any deviations

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Chapter 17Granof-5e*International Standard-Setting AgencyGovernmental 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. The Public Sector Committee (PSC) is developing a set of standards to improve both the quality and comparability of financial reporting.

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Chapter 17Granof-5e*International Standard-Setting Agency (contd)As per the standards:Property, plant, and equipment should be capitalized and depreciatedRevenue from exchange transactions should be recognized when measurable and probableInventories for sale should be recognized as expenses in the period in which related revenues are recognized. Borrowing costs should be recognized as expense when incurred.PSC requires four basic financial statements: Statement of financial positionStatement of financial performanceStatement of changes in net assets/equityCash flow statement

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Chapter 17Granof-5e*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 governments 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 FASABs 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 IFAC PSC is working on harmonizing international standards. Summary

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