Chapter 16
Federal Government Accounting
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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
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Unique Characteristics of the
Federal 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:
– Decentralized
– Each agency and department has its own
accounting system and prepares its own reports.
 3 Federal agencies responsible for financial
management:
– Department of the Treasury
– Office of Management and Budget
– Government Accountability Office
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Department of the Treasury
 Is responsible for broad range of financial functions.
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Managing the public debt
Collecting receipts and making disbursements
Minting coins and printing currency
Managing government’s gold supply
 Department’s divisions are:
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IRS
Office of the Comptroller of the Currency
Office of Thrift Supervision
U.S. Mint
Financial Management Service (FMS)
 FMS is the government’s central collection and disbursing
agent.
– 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:
– The federal agencies submit annual reports for independent
audit.
– OMB prepare an annual report regarding its
accomplishments and required improvements.
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Government Accountability Office
 GAO is the watchdog of Congress.
 Created by the Budget and Accounting Act.
 The act specified that GAO was to be:
– independent of the executive departments and
– Under the control of Comptroller General of the U.S.
 GAO’s responsibilities are:
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Handles legal services
Provides advice to Congress on legal issues
Assist in drafting legislation
Adjudicating claims
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.
– 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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Facts FYI—2006
• Comptroller General of U.S.: David M.
Walker
• Secretary of the Treasury: Henry M. Paulson,
Jr.
• Treasurer: Anna Escobedo Cabral
• Director of OMB: Rob Portman
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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 10 members:
– 2 from legislative branch: one from GAO and one from the
Congressional Budget Office
– 2 from the executive branch: one each from OMB and the
Treasury
– 6 “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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Federal Budget
 Federal operations are accounted for in 4 types of
funds:
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General fund
Special fund
Trust fund
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:
– National Wildlife Refuge Fund and
– 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 funds
– Ex: Hospital Insurance Trust Fund, Old-Age and Survivors
Insurance Fund, Supplementary Medical Insurance Fund.
 Revolving Funds:
– Comparable to municipality’s enterprise funds
– Accounts for federal government’s 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.
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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 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:
– Letter of transmittal and management’s discussion and
analysis
– Auditor’s report
– Six basic financial statements (stewardship
information on assets)
– Notes to the financial statements
– Supplemental information
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Government-Wide Statements (cont’d)
6 basic financial statements
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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 programs (beginning
with FY 2006)
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Financial Reports
 FASAB established three criteria for a component to
be considered a reporting entity:
– There is a management responsible for controlling
and deploying the component’s outputs and
outcomes and for executing it’s 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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Federal Entities
Dual system of accounts is used:
– Budget accounts and proprietary accounts
 Budget accounts:
– Ensure that entity complies with budgetary mandates
– Does 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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Federal Agencies
 FASAB reporting model for federal agencies is
similar to that of federal government.
 Basic financial statements of agencies are:
– Balance Sheet or Statement of Financial Position
– Statement of Net Cost
– Statement of Changes in Net Position
– Statement of Budgetary Resources
– Statement of Financing
– Statement of Custodial Activities
– Statement of Social Insurance (for FY 2006)
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Federal Agencies
 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.
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Federal Agencies (cont’d)
 Statement of Net cost:
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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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Federal Agencies (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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Federal Agencies (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.
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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:
– 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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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:
– Upon the expiration of the period during which the offender may
contest a court summon
– When the offender pays the fine before a court date
– 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:
– General
– Stewardship
 Stewardship assets are further classified into:
– Land:
– Heritage 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:
• Used to produce goods or services
• Used in business-type activities
• 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.
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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.
– 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.
– 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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Inventory
 Inventories can be valued at either:
– Historical cost or
– Latest 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 Expenses
 Government 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 due
• 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 nonexchange 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 values
– Long-range projection of ratio of contributors to
beneficiaries
– 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:
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Objective, measurable goals
Description of the process to meet the goals
Basis to compare actual results to the goals
Means of verifying and validating actual performance
 In addition, it must also submit a report that:
– Reviews achievement of prior year goals
– Evaluates the current year’s performance plan
– 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.
 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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International Standard-Setting Agency (cont’d)
 As per the standards:
– Plant, property, 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 expense as
incurred.
 PSC requires four basic financial statements:
– Statement of financial position
– Statement of financial performance
– Statement of change in net assts/equity
– Cash flow statement
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Summary
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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 IFAC PSC is working on harmonizing international standards.
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