Chapter 17
Granof & Khumawala-6e Chapter 17
Federal Government Accounting
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“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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Thought to Ponder
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• 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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Learning Objectives
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• 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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Unique Characteristics of the
Federal Government
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• Federal accounting is:
o Decentralized
o Each agency and department has its own
accounting system and prepares its own reports.
• 3 Federal agencies responsible for financial
management:
o Department of the Treasury
o Office of Management and Budget
o Government Accountability Office
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Federal Accounting and Reporting
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Department of the Treasury
o Managing the public debt
o Collecting receipts and making disbursements
o Minting coins and printing currency
o Managing government’s gold supply
• Department’s divisions are:
o IRS
o Office of the Comptroller of the Currency
o Office of Thrift Supervision
o 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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• Is responsible for broad range of financial functions.
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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
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• 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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Office of Management and Budget (cont’d)
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• 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 and
o 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 services
o Provides advice to Congress on legal issues
o Assist in drafting legislation
o Adjudicating claims
o Conducting special investigations into criminal and civil
misconduct
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Government Accountability Office
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Government Accountability Office (cont’d)
• 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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• GAO also deals with accounting and information
management policy.
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• 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 Office
o 2 from the executive branch: one each from OMB and the
Treasury
o 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 Accounting Standards Advisory Board
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Federal Budget
o General fund
o Special fund
o Trust fund
o 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 operations are accounted for in 4 types of
funds:
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Federal Budget
o Used to account for resources restricted for specific
purposes.
o Similar to special revenue funds
o Ex: Hospital Insurance Trust Fund, Old-Age and Survivors
Insurance Fund, Supplementary Medical Insurance Fund.
• Revolving Funds:
o Comparable to municipality’s enterprise funds
o 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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• Trust Funds:
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• 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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Unified Budget
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• 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:
o Letter of transmittal and management’s discussion
and analysis
o Auditor’s report
o Six basic financial statements (stewardship
information on assets)
o Notes to the financial statements
o Supplemental information
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Government-Wide Federal Statements
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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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Government-Wide Statements (cont’d)
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Financial Reports
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.
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FASAB established three criteria for
a component to be considered a
reporting entity:
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Federal Entities
Dual system of accounts is used:
--Budget accounts and proprietary accounts
o Ensure that entity complies with budgetary mandates
o 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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• Budget accounts:
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• 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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Federal Agencies
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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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Financial Statements
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Financial Statements (cont’d)
•
•
•
•
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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Statement of Net cost:
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Financial Statements (cont’d)
Statement of Budgetary Resources:
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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• Prepared on budgetary basis
• Reports on amounts available from both current and prior year
appropriations and entity’s cash outlays, newly incurred
obligations
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Financial Statements (cont’d)
• 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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Statement of Custodial Activities:
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FASAB Model
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 deals with recognition of revenue and
expenses and correspondingly with the valuation of
assets and liabilities.
• FASAB distinguishes between two types of revenues:
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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)
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• 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 summon
o When the offender pays the fine before a court date
o 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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FASAB Model (cont’d)
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• FASAB groups assets into two categories:
o General
o Stewardship
• Stewardship assets are further classified into:
o Land:
o Heritage Assets
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Accounting for Plant and Equipment
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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 services
o Used in business-type activities
o 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)
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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)
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• 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 Plant and Equipment (cont’d)
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• 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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Accounting for Human Capital
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• Inventories can be valued at either:
o Historical cost or
o 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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Inventory
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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:
o Nonexchange transactions when due
o Government-acknowledged events when the financial
responsibility is acknowledged and the amount is due and
payable as a result.
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Chapter 17
Liabilities and Expenses
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• 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 values
o Long-range projection of ratio of contributors to
beneficiaries
o Long-range cash flow projections in nominal dollars
and a percentage of both payroll and Gross domestic
product.
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Social Insurance Programs
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Direct Loans
• 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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• Federal entities make low-interest direct loans and
guarantee loans made by banks and other institutions.
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Fiscal Management
Steps to improve fiscal management:
o Objective, measurable goals
o Description of the process to meet the goals
o Basis to compare actual results to the goals
o Means of verifying and validating actual performance
• In addition, it must also submit a report that:
o Reviews achievement of prior year goals
o Evaluates the current year’s performance plan
o Explain any deviations
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• Each agency must prepare a performance plan
that includes:
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• 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
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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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International Standard-Setting Agency (cont’d)
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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
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