oversight

Financial Audit: Rural Electrification Administration's Financial Statements for 1988 and 1987

Published by the Government Accountability Office on 1990-06-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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*I If Il(’ IWO
                 FINANCIAL AUDIT
                 Rural Electrification
                 Administration’s
                 Financial Statements
                 for 1988 and 1987
                                    ,_
                                          26



                                HI
                                IIIlllllllla
                                 141569
      United States
GAO   General Accounting  Office
      Washington, D.C. 20648

      Accounting and Financial
      Management   Division

      B-231262

      June 13,199O

      The Honorable Clayton K. Yeutter
      The Secretary of Agriculture

      Dear Mr. Secretary:

      This report presents our opinion on the Rural Electrification Adminis-
      tration’s (HEX) financial statements for the fiscal year ended Septem-
      ber 30, 1988. Reports on REA'S internal accounting controls and on its
      compliance with laws and regulations are also provided.

      Under authority of the Rural Electrification   Act of 1936, as amended,
      REA makes direct loans and guarantees loans made by other qualified
      lenders to suppliers of electric and telephone service in rural areas. REA
      also makes grants and loans for the purpose of promoting rural eco-
      nomic development and job-creation projects.

      We contracted with an independent certified public accounting firm to
      conduct a financial and compliance audit of REA for the year ended Sep-
      tember 30, 1988. We determined the scope of the audit work; monitored
      its progress at all key points; reviewed the working papers of the certi-
      fied public accountants, KPMG Peat Marwick; and performed other pro-
      cedures as we deemed necessary. Our work also included a review of the
      loan loss exposure for approximately $3 billion of REA loans and $2 bil-
      lion of loan guarantees because of the sensitive nature of ongoing negoti-
      ations between REA and the borrowers. Our examinations were
      conducted in accordance with generally accepted government auditing
      standards.

      In our opinion, and consistent with the opinion of KPMG Peat Marwick,
      REA'S financial statements present fairly, in all material respects, its
      financial position as of September 30, 1988, and the results of its opera-
      tions and cash flows for the year then ended, in conformity with gener-
      ally accepted accounting principles,

      Several of REA's major electric program borrowers are experiencing
      severe financial difficulties due to their participation in the financing of
      large power plants, some of which are nuclear. REA is involved in litiga-
      tion with certain of these borrowers. Although REA'S financial state-
      ments include an estimate of probable future losses associated with
      these loans, REA is unable to predict their ultimate impact on its finan-
      cial position.


      Page1                              GAO/AFMD-90-73REA's1988FiiancialStatements
B.281262                                                                  ,




We audited the September 30, 1987, financial statements, which are
presented for comparative purposes. Our opinion on REA'S fiscal year
1987 statement of financial position was unqualified. However, because
1987 was the first year that REA'S financial statements had been
audited, scope limitations with respect to opening balances for net loans
receivable precluded us from expressing an opinion on the statements of
operations and cash flows.

The report by KPMG Peat Marwick on internal accounting controls, with
which we concur, discloses four reportable conditions which could
adversely affect the organization’s ability to record, process, summarize,
and report financial data consistent with the assertions of management
in the financial statements. The reportable conditions were that
(1) REA'S methodology for estimating its provision for losses on loans
and guarantees had not been updated, (2) adequate procedures were
lacking for transferring borrower monitoring responsibility from the
“workout team,” which resolves loan collection problems with finan-
cially troubled borrowers, to operations personnel, (3) REA was inappro-
priately continuing to recognize interest revenue on delinquent loans,
and (4) REA'S controls to monitor expenditures made through the U.S.
Department of Agriculture’s National Finance Center did not provide
conclusive assurance that purchase orders and invoices were properly
processed. KPMG Peat Marwick reported, and we concur, that the first
two conditions are material weaknesses.

KPMG Peat Marwick presented recommendations, with which we con-
cur, to correct the weaknesses discussed in its report on internal
accounting controls. REA has stated that it agrees with the findings and
that (1) it has revised the procedures used to estimate its provision for
losses on loans and guarantees it has made, (2) documented procedures
will be developed to ensure the proper transition of borrowers from the
“workout team” to operations personnel, (3) it now fully reserves inter-
est accrued on delinquent loans, and (4) steps have been taken to
improve controls over expenditures made through the National Finance
Center.

KPMG Peat Marwick’s report on compliance with laws and regulations,
with which we also concur, disclosed nothing to indicate that REA had
not complied with such applicable laws and regulations which could
have a material effect on the financial statements. However, KPMG Peat
Marwick noted two compliance items which should be highlighted. Spe-
cifically, REA did not meet the $933,075,000 minimum amount of rural
electric loan guarantee commitments authorized for fiscal year 1988 by


Page 2                            GAO/AFMD-90-73RJL4’s1988Financial Statements
.
    B231262




    Public Law 100-202. RElA guaranteed loans totalling $774,672,000, which
    was the total amount of loans applied for during the year. In addition,
    because the loan application and grant award process had not been
    finalized as of September 30,1988, REA did not make loans or grants
    from the rural economic development subaccount during fiscal year
    1988, as required by Public Law 100-203.

    During the course of its audit, KPMG Peat Marwick also identified sev-
    eral matters which, although not material to the financial statements,
    were communicated for REA'S consideration in a separate management
    letter.

    We are sending copies of this report to the Director of the Office of Man-
    agement and Budget, the Secretary of the Treasury, and interested con-
    gressional committees.

    Sincerely yours,




    Donald H. Chapin
    Assistant Comptroller General




    Page 3                            GAO/AFMD-99-78 REA’s 1988 Financial Statements
Contents


Letter
Auditors’ Opinion
Auditors’ Report on
Internal Accounting
Controls
Auditors’ Report on                                                                                    11
Compliance With
Laws and Regulations
Financial Statements                                                                                   13
                       Statements of Financial Position                                                13
                       Statements of Operations                                                        14
                       Statements of Changes in Equity                                                 16
                       Statements of Cash Flows                                                        18
                       Notes to Financial Statements                                                   20




           Y
                       Abbreviation

                       REA        Rural Electrification   Administration


                       Page 4                               GAO/AFMD-00-73 l&4’s l@sB FinmcSal Statements
Page 6   GAO/AFMD-90-73 REA’e 1988 Fhancial Statements
Auditors’ Opinion



        -Peat                                Marwick
                               Csrtiflrd   Public Accountant8

                               2001 M. Street. N.W.
                               Washington.   DC 20036




         The Comptroller  General
         U.S. General Accounting                     Office

         The Administrator
         Rural Electrification                   Administration:

         We have audited                    the accompanying                 statement          of financial            position         of Rural
         Electrification                Administration                 as of September                  30, 1988, and the related
         statementa           of operations,               changes in equity,                  and cash flows            for the year then
         ended.           There           financial             statements             are       the       responsibility              of      Rural
         Electrification               Adminietration’r                  management.           Our responsibility                is to express
        an opinion            on there financial                  statements           baaed on our audit.                 We did not audit
         the loan loss exposure                        of loans totaling                  $3,139,004,928             (9 percent           of total
        aerets)        which are included                      in loans receivable                   in the accompanying                financial
         statemente.              Additionally,              we did not audit                 the loss exposure                for guaranteed
         loans       totaling           $2,349,661,006                 (82 percent             of total           guarantees)           that      are
         included        in the guaranteed                    loane which are not reflected                          on the statement               of
        financial          position           in the accompanying                  financial          statements.        but are disclosed
        in note           l(d).          Accordingly,               the statement               of financial            position          includes
        $1,125,158,000                 of       loan      loee        allowances           and $346,842,000                 of accrual            for
        probable         losses         on guaranteed               loans that were audited                     by other         auditors.          In
        addition,           the statement               of operations              includes         $492.809.460           of provision           for
        losrer        on loans and 666,817,181                           of provision             for losses         on guaranteed             loans
        that      were audited                 by other          auditors.            The other           auditors’         report       has been
        furniehed            to us, and our opinion,                             insofar         as it        relates        to the amounts
        included          for       allowance           for      loan       lore      and accrual             for     probable        losses        on
        guaranteed            loans for the aforaentioned                             lending        arrangementa.           is based solely
        on the report               of other auditore.                    The statement             of financial          position        of Rural
        Electrification                Administration                ar of September 30, 1987, prior                           to restatement
        as described              in note 10, was audited                      by other auditors               whose report          dated June
        1, 1988 expreeeed                     an unqualified               opinion.          The other          auditors’         report       dated
        June 1, 1988 did not expreer                               an opinion           on the statements               of operations             and
        cash flows               for       the fircal             year       ended September                 30,     1987 since             certain
        information             with      reepect to valuation                     of net loans receivable                      at October          1,
        1986 was not readily                      available.            We also reviewed               the adjustments             described        in
        note       10 that            were applied                to rertate             the       September         30, 1987 financial
        statement..               In our opinion,                such adjustments                were appropriate               and have been
        properly        applied.




                                           Page 0                                                             GAO/AFMD-90-73 REA’s 1988 Financial Statements
                                 Auditora’    Opinion                                                               I




    We conducted          our      audit      in    accordance       with      generally       accepted        auditing
    standards      end -                                                isrued    by the Comptroller             General
    of the United         Staten.        Those standard8         reqkre       that we plan and perform                 the
    audit    to obtain       rearonable         aeeurance      about whether         the financial          statements
    are free       of material        mimetatement.           An audit      includes       examining,       on a test
    balia,      evidence      eupporting         the amount6        and dieclosures             in the financial
    statements.         An audit      also includes         aaseesing       the accounting         principles        used
    and significant           ertimetee        made by management,              ar well       a8 evaluating           the
    overall     financial      atatement        presentation.        We believe         that our audit          and the
    report    of other auditors           provide    a rearonable       basis for our opinion.

    In our opinion,       baaed on our audit            and the report              of other      auditors,      the
    financial     statements     referred       to above        present        fairly,       in all       material
    reepects,    the financial       porition      of Rural      Electrification           Administration          at
    September 30, 1988, and the rerulte               of ite operationr              and ite cash flows          for
    the     year   then   ended     in     conformity      with      generally          accepted       accounting
    principle6    a8 defined    in Title      2 of the General Accounting                Office’s      Policy    and
    Procedure8    Manual for Guidance of Federal Agencies.

    Ae diecureed      in note l(c),          esveral      of REA’e major electric             program borrowers
    are experiencing      severe financial           difficultiee         relating      to their     participation
    in the financing        of large        power plants,          some of which are nuclear.                   RFA is
    involved    in substantial          litigation          with    certain       of these       borrowers.         The
    financial    statement8      include       an ertimate        of probable       future    losses      associated
    with there loana.         Eowevar,       REA in unable to predict               their   ultimate       impact on
    REA’e financial      position.

    In addition          to  this    report       on our     audit     of      the Rural         Electrification
    Administration’s         September        30,    1988 financial            etatemants,         we are          also
    reporting       on our study       and evaluation         of internal           accounting       controls       and
    compliance       with laws and regulationa.             During our audit,           we identified          matters
    that    do not affect         the fair      presentation       of the financial             statements,         but
    nonetheleer       warrant management’s attention.                We are reporting           them separately
    to the General Accounting           Office     and the Rural      Electrification          Administration.




    June 30,     1989




Y




                                Page 7                                                   GAO/AFMLHBO-73          REA’s 1988 Financial   Statementa
Auditors’ Report on Internd
Accounting Controls

                                                                                                                                                         1
        M                  Peat Marwick
                           Cortlfied PublicAccountant1

                           2001 M. Street. N.W.
                           Washington.   DC 20036




         The Comptroller  General
         U.S. General Accounting              Office

         The Administrator
         Rural Electrification             Administration:

         We    have     audited       the financial   statements of   Rural   Electrification
         Administration      (RIM) a# of and for the year ended September 30, 1988, and have
         iaaued our report       thereon dated June 30, 1989.

         We conducted       our      audit      in    accordance      with      generally     accepted    auditing
         atandardr     and Oovarnmant                                     iesued by the Comptroller        General
         of the United      Staten.        Those etandards        reluire      that we plan and perform           the
         audit    to obtain      reasonable       assurance     about whether         the financial    statement6
         are free    of material      q ieatatement.
         In planning      and performing    our audit      of the financial     statements      of RRA for
         the year      ended Eeptember     30, 1988, we performed           a study     of the internal
         control    rtructure     in order      to determine      our auditing      procedures     for the
         purpore    of exprerring      our opinion     on the financial        statementr      and not to
         provide   armtrance    on the internal    control    structure.

         The management           of RIM is responsible                   for     establishing       and maintaining           an
         internal      control      rtructure.          In fulfilling          thiB responribility.           estimates      and
         judgmenta       by management are required                      to aaaeaa          the expected       benefit0      and
         related      coata     of internal           control       structure        policies      and procedures.           The
         objectiver       of an internal             control       structure       are to provide         management with
         rearonable,        but not abrolute,             assurance         that aacletr        are rafeguarded         against
         form from unauthorized               use or dirporition            , and that traneactione             are executed
         in accordance         with management’r             authorization         and recorded       properly      to permit
         the preparation          of financial         statements         in accordance         with generally        accepted
         accounting        principlee.            Becauee       of     inherent       limitations       in any internal
         control     structure,        errore      or irregulsritiee            may nevertheless         occur and not be
         detected.        Aleo,       projection        of any evaluation               of the structure           to future
         periods     is subject         to the rick          that procedures          may become inadequate             because
         of changem in conditiona                or that the effectivenemo                 of the design and operation
         of policiee       and procedure@ may deteriorate.




                                      Page 8                                                   GAO/APMD-8C-73          PEA’s 1988 Pimamcial Statementa
                                          Auditora’ Report on Internal
                                          Accounting Controls




    For     the purpose    of this    report,      we have classified       the significant          internal
    control     structure    policies     and procedures       in the following        categories:         loan
    receipt*,       loan dirbursements,        treasury,    and financial       reporting.         Our study
    included     all    of the control      categories    listed    above and it war more limited
    then would         be necearary      to exprere      an opinion        on the       internal       control
    l tructure     taken ae a whole or on any of the control             categories.

    We noted      certain      matters       involving        the    internal        control       structure        and its
    operation      that     we consider           to be reportable                conditions          under      standards
    ertablished       by the         American        Institute         of    Certified          Public       Accountants.
    Reportable      condition@         involve      matter0       coming to our attention                    relating        to
    rignificant      deficioncier          in the decign          or operation           of the internal             control
    structure     that,      in our judgment,             could     adverrely         affect      the organization’s
    ability     to record,        procers,      stamnarica,        and report         financial        data consistent
    with the arrertionr           of management in the financial                    rtatements.          The reportable
    conditions     we noted are ae follows:

                   .   RIIA hao not updated ita methodology                         for ertimating            the provision
                       for 108s on loans and guaranteed                         loans since           the early       1970’s.
                       The method presently               uoed does not conaider                    prevailing       economic
                       conditione,        the quality          and quantity           of loans in the portfolio,
                       or other       relevant       factors.          In addition,           REA relies         on limited
                       financial       analysis      and unaudited           financial         information       for annual
                       evaluation8        of borrowers’          financial        statur.         Furthermore,        RlIA has
                       not      developed       specific          procedures           to     monitor        and     evaluate
                       electric          borrowerr            involved            in        significant            long-term
                       construction;        electric        borrowers       who cannot.           by law, pledge         their
                       anmet       aa loan        security;          or cable          television         borrowers.          We
                       recoaunend that RI&A revise               its method for evaluating                    the financial
                       condition      of its borrowers              and the adequacy of the provision                       for
                       losseo on loans and guaranteed                    loane.

               .       Formal     procedures       do not exist      for      the tranrition     of borrower
                       monitoring       reoponoibility        from the workout         team, that      resolves
                       loan collection         problems     with financially       troubled   borrowera,        to
                       the operation@        personnel,      once a settlement       has been reached on a
                       troubled       loan.         We    recnrmend      that     important       information
                       concerning       events       that   occurred    during     the workout       phase be
                       formally     documented and communicated              to the operationa       personnel
                       who are reoponeible           for monitoring    the loan.

           .           RRA continuer      to accrue   intereet    on delinquent     loans receivable.
                       Accrued interest      over which collectibility        ie queetionable    should
                       be reoerved.       We recommend that      RRA establish     a policy   to fully
                       reoerve   interant    on loans delinquent       for more than 90 days.

           .           RRA maintains        a log of purchase            orders      sent to NFC but does not
                       receive      reports     from NFC indicating               that     such purchase       orders
                       have been processed.             Furthermore,        copies of invoices         sent to the
                       National      Finance     Center     (NFC) for payment are not maintained                     by
                       REA. Finally,         REA does not reconcile              reports     of invoices      paid by
                       NFC to REA’e purchase                 order      log     to enable         RIM to monitor
                       outstanding        purchase      order-r.       We recommend that             REA maintain
                       copieo    of all documentation              rent to NFC for procersing               and that
                       monthly     reporte     concerning        procereing       activity     be raquerted       from
                       NFC and be reconciled            to REA’e recordr.               In addition.     the report
                       of invoices       paid by NFC should be used to update RJ!.A’s purchase
                       order log.
Y




                                          Page 9                                                     GAO/AFMD-90-78           REA’s 1988 Financial   Statements
                                                                                                                                        r
                               Auditors       on Internal
                                          Report
                               Accounthg Controls




A material      weakness in a reportable          condition    in which the design or operation
of the specific         internal      control     structure    elements       does not reduce    to a
relatively      low level      the risk     that errors     or irregularities         in amounts that
would be material         in relation       to the financial       statements      being audited   may
occur      and not be detected       within     a timely    period    by employees      in the normal
course of performing         their  asoigned     functions.

Our      coneideration         of
                                the internal        control      structure          would   not necessarily
dieclore         all    matter0   in   the    internal       control         structure       that      might     be
reportable          conditions  and, accordingly,           would not          necessarily       disclose      all
reportable     conditionr      that are alro         considered       to     be material       weaknesses        as
defined    above.       We believe      the first       two conditions             reported     in the sixth
paragraph     are material         weaknesses      as defined          in     the inmediately           previous
paragraph.

We also   noted other  mattero    involving   the internal                   control structure          and its
operation   that we have reported      to the management                of    REA in a separate           letter
dated June 30, 1989.

This report     is intended  for the information                of RIM and the General              Accounting
Office.     Thio reotriction    io not intended               to limit   the distribution              of this
report,  which is a matter of public      record.




June 30,       1989




                                Page 10                                             GAO/APMD-SO-73         PEA’s 1988 FXnancM   Statements
Auditors’ Repop~rt
                on Compliance With Laws
and Regulations


       m                   Peat Marwick
                           Cwtlflad Public Accountant8

                           2001 M. Street. NW.
                           Washington.    DC 20038




       The Comptroller  General
       U.8. General Accounting                  Office

       The Administrator
       Rural Electrification                 Administration:

       We have        audited     the   financial    statements of the Rural  Electrification
       Administration        (REA) as of and for the year ended September 30, 1988, and have
       issued our report        thereon    dated June 30, 1989.

       We    conducted     our     audit      in      accordance      with      generally     accepted    auditing
       standards     and -                                                issued by the Comptroller         General
       of the United       8tatea.        Those standards         reiuire      that we plan and perform           the
       audit    to obtain      reasonable         assurance     about whether         the financial    statements
       are free of material         mirrtatement.

       Compliance     with          lawn
                                    and regulations         applicable        to RRA is the responsibility
       of WA’s management.           Ao part     of obtaining        reasonable        assurance     about whether
       the financial     rtatements     are free of material            miclotatement,        we performed    teats
       of REA’r compliance        with   certain      provisions       of the Rural Electrification              Act
       of 1936, ar amended (7 U.S.C. 901-95Ob),                   aa amended; the Anti-Deficiency                Act
       (31 U.S.C.    1341, 1342, 1511-15171,             and the Continuing             Appropriations     Act for
       fiscal   year 1988 (Public          Law 100-202).           Bowever,       our objective        was not to
       provide   an opinion    on overall       compliance     with such laws.

       The results         of our teats
                                    indicate     that,    with respect        to the items tested,         REA
       complied,      in      all
                           material      respects,      with     certain       provisions     of the laws
       referred  to in the preceding        paragraph     of this       report,      and with    respect    to
       items not tested,  nothing    came to our attention           that caused us to believe           that
       RRA had not complied,    in all material        respects,      with those lawr.          Bowever,    we
       noted two item we believe      should be highlighted.

             l   The continuing        resolution        for      fircal       year     1988 (Public             Law
                 100-202)     provided       RM      cosrsit       to     guarantee         not      less      than
                 $933,075,000      nor    more than          $2,100,615,000           in     rural      electric
                 guarantee     commitments       during       fiscal       year     1988.       Sowever,         RRA
                 granted   guarantees      of only $774,672,000              during      fiscal      year 1988.
                 Our audit      tests     determined         that      of    the     amount       of    electric




                                           Page 11                                         GAO/APMD-90-73 REA’s 1988 Financial Statementa
                      Auditors’ Report on Compliance With Laws
                      and Regulations




           guaranteed   loano applied   for during    fiscal    year 1988, no amounts
           were denied.      Thus, RRA was not able          to obligate   the minimum
           amount available    to it for electric    guarantee     commitments because
           demand for ouch guarantees     fell  short of the minimum requirement.

      l    Public   Law loo-203  requires      that zero interest        loans and grants
           shall  be made during     each fiscal      year to the full       extent    of the
           amounts held by the rural         economic     development      subaccount.     RIM
           made no loans      or grants     from    the rural      economic     development
           oubeccount   during   fiscal     year     1988 because       the    grant     award
           process had not been finalired        as of September 30, 1988.

This report    is intended  for the information             of     RICA and the General      Accounting
Office.     The rartriction    io not intended         to        limit    the distribution      of thie
roport,  which is a mattor of public     record.




June 30,    1989




                      Page 12                                              GAO/AFMD-9G-79      REA’s 1988 Financial   Statements
l!?inacid Statements


Statwnontr of Flnsncial Position

                                                                September        30,     1988 and 1987

                                                                     (Dollars      in Thousands)



                                                                                                                              (as %ated)

                        Loans receivable,       net of allowance    for loan
                            loaser   of $1,791,972,000      and $990.400,000
                            at September 30, 1988 and 1987, respectively
                            (notes 2, 3 and 4)                                                            $ 34.497.412        36.390.302
                        Accrued interest      receivable                                                             62,299       130,299
                        Funda with    U.8. Treasury                                                              198,731           83,677
                        Accountr   receivable                                                                                       6,351
                        Other arrets                                                                        -..-A-

                                                                                                          s-34.612.994



                        Liabilities:
                             Intragovernmental       debt (notes 3 and 4)                                   31,992,200        34,085,806
                            Notea payable      (note 51                                                          568,778             -
                            Accrual     for probable     lorsoe on guaranteed                    loans           367,756          291,841
                            Accrued interest       payable                                                       26,918            20,918
                            Other liabilities        (note 6)                                               4.0492.922

                                          Total   liabilities                                               32.959.70134.401.487
                       Equity:
                           Investment    of otherr r
                              Clam B stock,       $1 par value (note 7)                                          181,403         165,320
                              Class C atock,      $1,000 par value (note                    7)                        6,787         2,949
                              Rortricted   capital     (note 91                                                      98,268       76,781
                              Patronage   capital     earned                                                36.81033.Q20

                                          Total   investment           of other@                            -278.970

                           Equity of the U.S. governmentr
                             Unexpended appropriations        - undelivered                      orders            2,758            1,038
                             Invested   capital                                                                    1,565            1,559
                             Donated capital      (note 8)                                                      505,950          477,240
                             Cumulative   results     of operations    (note                  10)           968.121-..uuaa
                                          Total   equity        of    the U.S.         government           t.478.394-

                                          Total   equity                                                     1,801.662         2,211,507

                       Coreritmentr     and contingencies             (notes     lc and 2)


                                                                                                          s-36.612.994
                       See accompanying       notes   to financial              statements.




                                                  Page 13                                                     GAO/AFMD-88-73         REA’s 1988 Financial   Statements
                                                 Financial       Statements




Statement8 of Operations


                                                 Years       ended September

                                                                 (Dollars
                                                                                      30,

                                                                               in Thouoands)
                                                                                               1988 and 1987                                                             1
                                                                                                               u&a              lsz
                                                                                                                         (unaudited      -
                                                                                                                         as restated)

                      Interest      income:
                           Intereet     on loans                                                       $ 2.320.264         2.673.089
                           Interest     earned on Funds with            U.S.   Treasury                  27.4757.467

                                         Total   intereot        income                                  2,347,739         2.680.556

                      Interest   expense     - intereot       on borrowings                             (2.236.414)       cLa.2&m)

                                         Net interest        income                                      111.325155.828

                      Provision    for losses on:
                          Insured    loans (note 2)                                                         (801,572)        (563,070)
                          Guaranteed     loans                                                           -.-uuu)           (291.841)

                                         Total   provision        for    losses                          (877.487)         (854.911)

                                         Net interest  income after                provision
                                            for loseeo                                                   -.faklm           -1

                      Other income (expenses):
                          Appropriations    realized                                                           27,555           25,983
                          Prepayment penalty      income                                                           268           1,442
                          Other income
                          Other expenses                                                                    (28.g662)        (26,l::)
                          Loas on diacounted      loan prepayments                (note     11)                           (299.015)

                                         Net other      income     (expenses)                           (1.041)            (297.706)

                                         Net lose                                                     $(747.203)          (996.789)



                      See accompanying      note8    to financial           otatsmente.




                                                 Page 14                                                   GAO/AFMD90-73REA's                1988 Financial Statementa
Financial Statement.9




Page 16                 GAO/AFMD-90-73 RJU’s 1988 Financial Statements
                                                    Nnsndal      Statements




$tatementr of Chanaeo in Eauitv

                                                                                                Years ended September 30, 1988 and 1987

                                                                                                          (Dollars   in Thousands)



                                                                                                                           Restricted
                                                                                                       Restricted           capital    -
                                                                                                         capital   -       reserve for
                                                                                                     designated    for   interest     rate
                                                                                Class    B   Class C contingencies       fluctuations
                                                                                 stock        stock      (note 9)           (note 9L

                Pimcal year 1987 balances and transactions
                   (unaudited)     :
                      Balance. September 30. 1986                             9 149,452       1,730        64,707
                      Net income ior the year ended
                         September 30, 1987 (as restated      -
                         note LO)
                      1987 appropriations      for RTB Stock
                      1987 appropriations      for interest
                         subeidiaa   and losses
                      Cash dividends     on Class A stock
                      heuanco of Class B stock
                         (net of reaciraions)                                     2,777
                      Stock dividends on Class B stock                           13,091
                      Cash dividends    on Class C stock
                         ($85 per *hare)
                      Iosuanca of Claoe C stock                                               1.219
                      Amount designated for contingencies                                                  12,074
                      Change in unliquidated      obligetions
                      Other
                             Balance, Soptsmber       30, 1987
                                 (as restated)                                  165.320       2,949        76.781

               liacal     year 1988 balances and transactions:
                    Ret income for the year ended
                       September 30, 1988
                    1988 appropriations        for RTB stock
                    1988 appropriations        for interest
                       rubridioa     and losses
                    Tranafor     to reaervo for interoat        rate
                       fluctuationa,     Jenuary 1. 1988                                                  (98,256)           98,256
                    Cash dividends paid on Class A stock
                    Iaeunnce of Claea B rtock
                       (net of rescissions)                                       4,800
                    Stock dividenda on Class B stock                             11,295
                    Lmuance of Clase C rtock                                                 3,838
                    Cash dividends      on Class C rtock
                       (g85 per share)
                    Clams C rtock cash dividends
                       declared but not pafd ($85 per ehare)
                    Amount dosignatod       for contingencioe                                              21,475
                    Adjuatmont to Clara B stock dividends                           (12)
                    Chengo in unliquidatod         appropriations
                   Other

                            Balance,    September    30, 1988                 $181.403
               See eccompanying     notes   to financial      statements,
                    Y




                                                  Page 16                                             GAO/AF’MD-90-73 REA’s 1988 Financial Statements
                Flnandal Statements




Patronagc                                            Cumulative
 capital      Unexpanded     Invested     Donated    results    of
 earned     appropriations    capital     capital    operations        Total


 25,313            298         1,409      448.530    2.471.216       3.162.655

 42,410                                             (1.039.207)       (996,789)
                                           28,710                        28,710

                                                         21,591         21,591
 (9,399)                                                                (9.399)
                                                                          2,777
(13,091)

   (147)                                                                   (147)
                                                                          1,219
(12,074)
                   740                                                         740
                                  150                                          150

 33,020          1,038         1,559      477,240    1.453.600       2,211,507


 47,260                                               (814,463)       (767,203)
                                           28,710                        28,710
                                                       328,984         328,984


 (9,873)                                                                (9,873)

                                                                          4.800
(11,295)
                                                                          3,838

    (251)                                                                  (251)
    (576)                                                                  (576)
(21.475)

                1,720                                                     1,720
                                      6                                        6




               Page 17                                        GAO/AFMD-90-73 REA's 1988 Financial Statements
                                                   Financial Statements




Statements of Cash Flows


                                                     Yearr    ended September           30, 1988 and 1987

                                                                  (Dollars      in Thourands)


                                                                                                         u84                lsz
                                                                                                                       (unaudited    -
                                                                                                                        ae restated)

                      Funds from operating            activitier;
                           Interert      received                                                   $ 2,415,739          2,368,479
                           Intereet      paid                                                        (2,230,414)        (2,518,322)
                           Appropriationr         received        for operations                          29,275             26,723
                           Appropriationa         expended for operations                                (27,555)           (25,983)
                           Adminirtrative         expenrer       paid and other,        net                 3.m                1.6X

                                            Net fundr provided       from       (ured     by)
                                               operating  activitier                                     19o.m          (147.427)
                      Fundr from investing   activitier:
                         Collectione  on loanr                                                        2,805,850         1,798,503
                           Advancer on loanr                                                         (1,712,896)       (1.390,438)
                           Overpaymente  by borrowere,      net of refund8                                      96               85
                           Purchase of property    and equipment,     net                                        (6)            407
                           Proceeda from maturing     invertmentr                                                               128

                                            Net fund6 provided           from   inventing
                                               activities                                                                  408 a

                      Fundr from financing        activitier:
                         Appropriationr       for RTB rtock                                              28,710             28,710
                         Repaymente on Federal           Financing      Bank borrowinga             (2,363,320)        (1,502,582)
                         Borrowinga      from Federal        Financing     Bank                         269,714         19225,041
                         Proceeds from irruance            of notee payable                             568,778
                         Paymente on U.8. trearury              borrowingr                                                (32;,773)
                         Borrowings      from U.8. treasury                                                                319,774
                         Proceedr     from ieruance        of stock                                         8,638            28.808
                         Appropriations      for intereet          eubeidiea    and
                            108ree                                                                      328,984              21,591
                         Dividendr      paid                                                         (10.124)           (9.546)

                                            Net fundr     provided       from   (used     by)
                                               financing      actfvitiee                            aa.lauQ)            (213.977)

                                            Net increaee      in Funds with        U.8.
                                               Treasury                                                 115,054             47.281

                     Funde with      U.S.     Treaaury,      beginning       of year                     83.m               36a

                     Funds with      U.8.     Trearury,      end of year                           $198,731                 83gU

                                                                                                                       (Continued)




                                                  Page 18                                             GAO/AFMD-W73           REA’s 1988 Financial   Statements
                             Financial Statements




                                         (Dollars     in Thousands)



                                                                                l23B              l.9.8.2
                                                                                             (unaudited    -
                                                                                              as restated)

Reconciliation        of net lose to net funds provided
   from (used by) operating               activities:
      Net lore                                                             S(767.203)          (996.789)
      Adjuetments         to reconcile       net lose to net funds
         provided       from (used by) operating           activitiee:
            Provision       for loaner on insured          loans                801,572           563,070
            Provirion       for loerrcs on guaranteed            loans           75,915           291,841
            Lore on diecounted loan prepayments                                                   299,015
            Changer in arsete end liabilities:
               Decreare        (increaee)      in accrued interest
                  receivable                                                     68,000         (306,220)
               (Increase)         decrease     in accounts    receivable           6,326              (325)
               (Increase)         decrease     in other assets                       (530)          2,609
               Increare       (dkcreaae)       in other liabilities                1,127           (1,119)
               Increase       in accrued interest         payable                  6,000               491
            Dividends       declared      but not paid                       (577)

                  Total    adjuetmente                                       -849.362

                  Net funds provided       from        (used by)
                     operating  activitiee                                 $190.630           (147.427)




See accompanying notee          to financial        statements.




                             Page 19                                           GAO/AFMD-90-73 REA’s 1988 Financial Statements
                                                     Financial    Stntementa




Note8 to Financial Statement8



                           (a)    Witx

                                  The Rural        Electrification          Administration (RF.A) is a credit agency of
                                  the     U.8.        Department         of     Agriculture         establirhed        by      the     Rural
                                 Electrification             Act of 1936 to assist                    in financing        electric       and
                                 telephone             organizations             serving        rural        areas.          The       Rural
                                 Electrification             Administration          maintains      one general        fund and three
                                 revolving          funde,       including        a revolving          fund    known ae the Rural
                                 Telephone        Bank, a governnrent             corporation,        which is combined in these
                                 financial        rtatementr.           The financial        statements       include    all     funds for
                                 which REA I# rerponeible                   and are presented             on the accrual          baoie of
                                 accounting          as    required       by Title        2 of the U.S. General                Accounting
                                 Office’e        (GAO)      Policy     and Procedures          Manual for        Guidance     of Federal
                                 Agencier . All significant                  intra-agency        balances      and transactions         have
                                 been eliminated.



                                 WA financer            ite      loan progreme        through      available      receipts      and, when
                                 necerlary,         by        long-term          and   interim       borrowings       from       the    U.S.
                                 Department        of the Treasury                and Federal       Financing      Bank (FFB).          (See
                                 also note 4.)             Revolving         fundo were established           in the early         19706 to
                                 maintain       the rural          electric       and telephone       programs with        the intention
                                 of     making        them         aelf-sustaining.            However,      R8A receives            annual
                                 appropriationo             for     administrative          expenditures        ae described         below;
                                 cable     televieion           progrem loeser;          and interest        euboidies       and losses,
                                 which,     by law, are not considered                    incurred     for the rural        electric     and
                                 telephone       programs.

                                 Appropriationr          are provided        by the Congress on an annual basis to fund
                                 capital      expenditures,          loan lorrer        and such administrative            expenditure6
                                 se personnel          compensation         and fringe        benefite,     rents,     connnunicatione
                                 and utilitier.             The budgetary            procarr     doer not distinguish             between
                                 operating       and capital          expenditures.          For budgetary      purposes,        both are
                                 recognized        ae a use of budgetary                  resources;     however,       for    financial
                                 reporting        purpoees,       under accrual           accounting,      operating      expenditures
                                 are     recognilced       currently       while      expenditures      for    capital       assets      are
                                 capitalized        and recognized as expenreo when they are consuned in REA’s
                                 operationr.          Financing        sources      for there      expenses,      which derive         from
                                 both current-          and prior-        year appropriations,            are recognized          on this
                                 same basis.




                                                                                                                            (Continued)




                                                   Page 20                                                  GAO/AFMD-90-73REA’s 1988Financial Statements
                  Financial Statements




                                                2




Interest    income on loans    is               accrued      at    the   contractual         rate     on the
outstanding     principal amount.



REA maker inrurcd       and guaranteed     loans from the Rural Electrification
and Telephone     Revolving     Fund (RETRF). the Rural Telephone                Bank (RTB),
and the Rural       Comnnu&zations       Development          Fund (RCDF).         The RETRF
insured    loan program       authorizes    the Administrator             of REA to grant
loans   to rural     electric      and telephone       utilities.           These loans    are
repaid   over 35 years with principal          amortization          generally   beginning    3
yeare after    the date of the note.         Origination         fees are not charged.

The interest       rate on loans made prior    to May 11, 1973, was 2 percent.
However,     since     1973. the interest  rate has been 5 percent,    although
some loanr      may still    be made at 2 percent   in casea involving   extreme
financial     hardship.

REA makes certain             loans through         financing        provided       by FFB.        Al though
loana       are      executed        between        the      borrower          and      FFB with           RM
unconditionally             guaranteeing         repayment , REA makes                    all     decisions
concerning         loan origination               and bears           ultimate         risk      for     loan
collection.            Therefore,         loans       made      through         FFB      financing         are
considered       to be assets           of REA.        Interest       rates      on these        loans are
determined       at the time funds                are advanced and are based upon the
average      U.S. Treasury         rate,     plur 0.125 percent.                FFB loans mature            at
varying periods between 2 and 7 years, or at 35 years.                                        Loans which
mature in 2 to 7 years generally                     may be extended            for 8 maximum of 35
years.       Loans made through                FFB financing             are    reflected         as loans
receivable          in      the     accompanying           financial           statement8          with       a
corresponding         intergovernmental          debt liability.

RTB’e insured   loan program wae ertablirhed   as a supplemental                                source      of
financing   for the growing capital needs of rural    telephone                                utilities.
RTB lends at rates approximately   equal to its cost of money.

RCDF insured    or guaranteed     loans   to both                    cooperative        and commercial
borrowera   for   community   antenna   televioion                     services        and facilities.
RCDF has not made any new loans since 1981.

Loans      are    carried      at     the    principal        amount        outstanding       less an
allowance      to reflect         their    ultimate       collectibility.             REA bases its
loan loes eotimatee           on delinquency         rates,     current      economic conditions,
borrowera’      credit    histories,      and borrowers’          financial       conditions.



                                                                                              (Continued)




                  Page 21                                                    GAO/AFMD-90-73REA’s 1988Financial Statements
                                                                                                                                .
                   Financial Statements




                                                     3




 Since       1984, several                 of RIM’s major             electric        program        borrowers         are
 experiencing           severe          financial       difficulties           due to their            participation
 in the financing                 of large          power plants,            some of which are nuclear.
During construction                    of a number of projects,                    cost overruns and delays
 in operation             have occurred.                 In addition,            load growth            and economic
conditions           have         substantially               changed        since       IlEA’s       initial        loan
review.         Where states               do not allow construction                  work-in-progress              costs
to be considered                 for the determination                   of electric          rates,        the owners
cannot        obtain       rate        increasea         to meet revenue              requirements            and debt
acrvice        payments          until         the plants          become operational.                   Furthermore,
nuclear        power has created                  unrest      among consumers,             causing        substantial
difficulty          for      owners          in obtaining            a license         for     the operation            of
nuclear         plants.            In some cases,                 nuclear        plants       sit      idle     or are
abandoned.            Until         the plants          become operational,                 no revenue           can be
generated          and,       therefore,            some borrowers              have not met their                   debt
service        requirements.                 A few borrowers            have filed          for bankruptcy             due
to      their       severe           financial         distress.            IlEA is         also        involved        in
substantial           litigation              with     a few borrowers                who are experiencing
severe financial               difficulties.

MA’s practice          of restructuring          the debt of its troubled                borrowers        was
 considered         in      developing        allowances           for       loan       losses.           REA
 restructuring        agreements        often  incorporate          the issuance         of additional
guarantees        as well      as the issuance             of contingent           notes,     for which
repayment       is contingent           upon future        events,      such as sustained               load
growth.        Because       of the troubled             borrower       situations,         significant
uncertainties          exist      relating       to     the    ultimate         recovery       of    RtIA’s
outstanding        exposure        in these        lending      arrangements.             The ultimate
financial      effect      of the resolution           of these matters             cannot presently
be determined.

In fiscal       years   1988 and 1987, RIM increased             the allowance        for loan
losses      to more adequately         reflect      the     downward     trend    in market
conditions.          In 1987,   the increase       pertaining       to fiscal      year     1987
could     not be distinguished       from amounts pertaining               to prior      years.
Therefore,       the full   amount of the adjustment           was recognized       in fiscal
year     1987.      As of September      30, 1988 and 1987,            the allowance         for
losses        account     amounted     to      $1,791.972,000         and      $990,400,000,
respectively.

Additionally,   accrued   interest   on potential    problem   loans is excluded
from     income with   an offsetting     increase    in a specific       allowance
account when management determines      such exclusion     is warranted.




                                                                                                       (Continued)




                   Page 22                                                          GAO/AFMD-90-73 WA’s 1988 Financial Statements
4



                             Financial Statements




                                                           4




     (d)   Cuarantard

           As of September       30, 1988 and 1987, R8A is contingently                liable    for
           $2,868,266,000     and $1,478,357,000    in guaranteed       loans,     respectively.
           These guaranteed      loans   are not included      in loans     receivable        on the
           accompanying   statement    of financial  position.

            Estimated       losses       on anticipated              defaults       of guaranteed         loans      are
            recognized       as expenses and a corresponding                     accrual     for probable       losses
            is established.              This     liability          represents        the estimated         cost      of
           defaults      for those guaranteed                loans which will           not be repaid       based on
            (1) prior       delinquency         experience          and (2) management’s            assessment         of
            the borrower’s           financial         condition.           R&A provided         an accrual          for
           probable      losses on guaranteed                loans in fiscal          years 1988 and 1987 due
           to the downward trend               in market          conditions.         (See note l(c)         above.)
            In 1987. the amount of the increase                             in the accrual          pertaining         to
           fiscal    year 1987 could not be distinguished                         from amount8 pertaining              to
           prior    years,      and the full          amount of the adjustment                 was recognized          in
           fiscal year 1987. As of Eeptember 30, 1988 and 1987, the accrual                                          for
           probable       losses       on guaranteed             loans      amounted       to $367,756,000          and
           $291,841,000,         respectively.              The change in the accrual                for     probable
           losses     during     fiscal      year 1988 represents               a $75,915,000       provision       for
           losses as reflected            in the accompanying              statement      of operations.

    (e)    Csrfificatsr        of BsnaficialOmrarshiD

           Certificatea    of Beneficial      Ownership   (CBOs) are RRA-backed securities
           which represent      FFB’s participation     in a pool of R8A’s insured      loans
           receivable.     The issuance     of a CBO is recorded    as a borrowing and the
           corresponding    interest    is expensed.

    (f)    Vearnsdn                                                                     the U.S.      Treasurv

           Each of the revolving    funds earns interest       on its    cash held in thb
           U.S. Treasury    if the fund has outstanding       borrowings     with  the U.S.
           Treasury   and owes interest    on those      borrowings.        The amount of
           interest  earned per month is limited      to the interest         owed on U.S.
           Treasury borrowings.



           R&A’s financial       activities       interact   with and are dependent        upon those
           of      the federal       government        as a whole.        Thus,     REA’s     financial
           rtatementr     do not reflect         the results     of all   financial    decisions        and
           activities    applicable         to REA’s operations,     as if it were a stand-alone
           entity.

                                                                                                       (Continued)




                            Page 23                                                    GAO/AFMD-90-73 REA’s 1988 Financial Statements
                                                                                                                                                    .
                                  Pinancial   Statements




                                                              5




                 RIM’s     financial       rtatements      are not intended           to report     the agency’s
                 proportionate         share of the federal            deficit      or of public       borrowing,
                 including        interest       thereon.       Financing      for      budget    appropriations
                 reported      on REA’s statements           of operations       and changes in cash flows
                 could     derive      from tax revenues           or public        borrowing     or both;       the
                 ultimate       source     of this      financing,      whether      it   be tax revenues         or
                 public    borrowing,       has not been specifically           allocated      to REA.

             During       fiscal     year     1988 and 1987, the majority               of REA’s employees
             participated          in     the    contributory        Civil    Service     Retirement      System
             (CSRS) or Federal              Employees       Retirement     System (FERS),        to which REA
             made matching            contributions.           Such contributions        are recognized        as
             expenres         in the statements             of operations.         Bowever,     REA does not
             report       CSRE and FER8 assets,               accumulated    plan benefits,         or unfunded
             liabilities,        if any, applicable              to its    employees    since     this  data is
             only reported         in total      by the Office       of Personnel     Management.



             REA is          an instrumentality        of     the   United      States      and,    as such,       is     not
             subject          to income taxes.



             Certain          amounts for      1987    have       been    reclassified         to    conform       to     the
             current         year presentation.



     As     of     Beptembar      30, 1988 and 1987, loans receivable                      and the     allowance          for
     loan         losses     amounted to (dollars in thousands);

                                                  1988                                                 1987
                                   Loan                         Net              Loan                                      Net
                                tlllmmLAllDnancsrsceivablaamount:Bllonanceraceivebla

RETRF:
    Insured                $ 15.638.295          572,117      15.066.178      14,741,580             109,246            14,632,334
   FFB                       19.219,423       1,209.619       18.009,804      21,173,537             874,359            20,299,178
RTB                            1.413,411           5,512       1,407,899       1.446.603               5,295             1,441,308
RCDF                         -4.724                           13.531-1.50017.482

          Total            8 36.289.384       L.791.972-37.380.702p9o.4oo36.390.302
     Because RM does not maintain    amortization                          tables        on loans receivable,  the
     amount of loans receivable   scheduled     for                      collection         in each of the next 5
     years is not available.

                                                                                                          (Continued1




                                  Page 24                                                   GAO/AFMD-30-73          REA’s 1933 Financial   Statements
    .
*


                                        FInanclal     Statements




                                                                        6




             The activity  in the allowance  for loan losses      for                         the fiscal     years             ended
             September 36, 1988 and 1987, is as follows   (dollars                           in thousands-):


                                                                   iiiis%s                        BTBBCPE

        Beginning      balance      October         1, 1986    $       35,926     385,000     4,904      2,205                 428,035

           Loans written     off, net                                                                       (694)               (694)
           Provisions    for loan losses                               73,320     489,359          391                      563,070
           Recoveries                                              A                          A          -ill)           (11)

        Ending   balance         September     30, 1987            109,246        874,359     5,295      1.500                 990,400

           Loan0 written     off, net
           Provisions    for loan lorrer                           462,871        335,260          217   3,224                801,572
           Recoverier                                              L                          2:

        Ending   balancr         Beptamber     30,     1988    $ 572.117        AJ.aQuuuu
            As   of 8eptembrr             30, 1988,       loans   that have         been    authorised           but    not      yet
            disbursed   conrirt            of (dollars      in thousands):

                                RETRF                                                         $ 7,205,861
                                RTB                                                                688,174
                                RCDF

                                                                                             $2.895.394
            The following       preoents     a rummclry of loans receivable        on which                       the     accrual
            of      interest     has     been      discontinued       because circumstances                             indicate
            collection       is doubtful    (dollars      in thourands):



                    Aggregate       nonaccruing        loans                                $2.564.642                    -
                    Grow intorest      income that would have been
                        recorded  during the year on nonaccrual
                        loans                                                               $213.080                      -




                                                                                                                  (Continued)




                                        Page 26                                               GAO/AF’MD-90-73                 REA’s 1988 Financial   Statement8
                        FlnancLal   Statements




                                                     7




 The following      prerente     a runmary of loano receivable                        on which   the loan
 tarme    have been rertructurrd             to provide       a reduction                or deferral    of
 interert    and/or    principal       because    of a deterioration                   in the financial
 position   of the borrower       (dollars     in thousands):



       Outrtanding       balance of restructured           loana               $2.440.5682.393.416
       Crorr interert         income that would have been
            recorded     during the year if the
            reetructurad        loanr had been current         in
            accordance       with their     original    termo                  S-154.370
       Interest      actunlly      recorded    on rsetructursd
            loana during        the year                                       $112.207123.913
Cormnitmentr for additional                fund8 to borrowers     with  restructured                 loans    at
September 30, 1988 amounted                to approximately   $3,4139,000.



REA originate0        certain     electric      and telephone           loans at 2 percent              and 5
percent.       There rtated     rate8 were below the U.S. Treasury                     rates,     the rates
at which REA could borrow               money when the lonnr               were originated            (market
interest      reten).      In addition,        reveral       loans      receivable       have undergone
troubled      debt rertructuringr          which      rerulted        in restructured           loans    with
interert     retea below the market             interest       rates.       To offeet       the costs of
lending    at below-market       interart     ratea,      REA has certain          noninterest-bearing
borrowingr      from the U.S. Trerrury.

Federal       accounting       principlea        governing        the recording          of interest        rate
rubridirr       and diacountr           on below market             interest       rate    receivables       and
liabilitirr        are undergoing           reexamination          by the Congress,            the Executive
Branch,      and the GAO. The prermt                  interpretation          of these matters           by GAO
ir thet dirclorure           of the effectr         of interest         rate rubeidiee          and discounts
on below market interert                rate receivableo           and liabilities          is required      but
need not be recorded               in the financial           l tatemente.          Accordingly,        REA has
not recognized         the tort        of interest       rate rubsidier           or discounts        on loan8
receivable           originated             at      below-market               interest           rates        or
noninterert-bearing           borrowings       in the accompanying            financial       etatements.




                                                                                                (Continued)




                       Page 20                                                  GAO/AFMLMW73            RJZA’s 1988 Financial   Statements
                          Flnenclel Statements




                                                  s




The eetinated        effect     of recognizing         the interart          rate     subsidies    end
dircounta         on   below-market        intereot        rete        loans       receivable      end
noninterest-beering         borrowing0       on RlU’o        financial         atetemente       as of
September      30, 1988, aaeuming borrower          repayment      according        to the terms of
the loen, would be aa follow;          (dollars     in*thoueende)r

                                                t of v



Loana, iseued           et market rates                                             t 18.709.254
Loenm, iaeued           et 2%, 5%. or which      have been
    rertructured

                         Loene receivable,   81 preseutly         recorded,
                            net of allowance   for loan         loeees                34,497,412

Interest       rate     rubridy    discount                                           -1

                         Loene receivable,      net of allowance     for
                             loan losaea,     no edjurted   for interest
                             rete aubridy                                             29.978.303

Accrued intereat             receivable,    Fundr with   U.S.   Treasury,
    eccounte          receivable     end other aerate                                      263a

                         Tote1 eeeete.    8~ adjusted     for    interert
                             rate rubsidy                                           $30.242.254




                                                                                           (Continued)




                         Page 27                                              GAO/AFMD-80-73 REA’s 1988 Financial Statements
                     FinemAd         Statements




                                                         9




Liabilitteo:
     Intragovexnmental         debt:
         FPB                                                                                $ 23,344,091
         RETRP Treerury     borrowings                                                         7,864,743
         Other Treasury     borrowings

                    Intragovernmentsl                 debt                                    31,992,200

      Discount    on U.S.       Trearury            borrowingo                                L3.648.187)

                    Intregovemmental                  debt,      net   of discount            28,344.013

   Notee payebla.       accrual for probable                     loseea on
     guarenteed      loene, accrued interert                       payable end
     other liabilitiee                                                                            967.m

                    Total      liebilitier,             net   of discount
Equity:
    Invertment    of other-9                                                                     323368

   Equity of the U.S. government,           81 prerently    recorded                           1,478,394
   Prior    period     effect  of recording   interert   rate
      rubridy     dircount    and discount   on U.S. Treasury
      borrowing@                                                                                (885,172)
   Current    yeer impect of recording        interert   rate
      rubridy     dircount    end dircount   on U.S. Trearury
      borrowingr                                                                                   14.25Q

                   Equity of the U.S.                  government,        net    of
                       diecounte                                                                 607.&Q

                   Total     equity,          net     of dircount                                930&Q

                   Tote1 liebilitier                  end equity,       net     of
                       dircount                                                            $30.242.254




                                                                                                 (Continued)




                    Page 28                                                           GAO/AFMD-90-73 BEA’s 1988 FInancid Statements
                    Financial Statements




                                                10




Net loss,     es presently     recorded                                            $ cLcaz!Z)
Interest    income - emortization       of interest    rate
     subsidy discount                                                                 194,078
Interest    expense - amortization        of discount   on
     U.S. Treasury    borrowings                                                     (143,657)
Interest    rete subsidy     to borrowers    - issuance     of
    new loena in 1988                                                                 (36.121)

                   Net increase      in income        due to imputed
                      interest

                   Net loss,      es adjusted        for   imputed   interest     $ G!zGw

 If   the     $4,519,109,000       unamortized     interest      rate      subsidy   on   loans
receivable      were reported     on the statement       of financial      position,  then the
ellowance      for losses on loans would be established             based on the discounted
loenr    receivable.      It is estimeted      that the allowance        for losses would be
reduced by en ismaterial          amount, end, therefore,        has not been reflected       in
the effects      on the financial     statements    showo above.




                                                                                      (Continued)




                   Pa@ 29                                                 GAO/AFMD-90-73 REA’s 1988 Financial Statements
                           Financial Statements




                                                   11




(4)    Intrapovernmantal

      As of September 30, 1988 and 1987,             REA borrowings     consist   of   the    following
      (dollars in thousands):



            FFB Borrowings:
               Direct     loans   made through    FFB financing       $ 19,204,884       21,196,490
               Certificetes       of Beneficial    Ownership
                  (CBOe)                                                4.139.2074.241.207

                                                                        23.344.09125.437.697

           Treasury     borrowings:
               RETRF, due 613011993 - 12/31/2016,
                  noninterest       bearing                              7,864,743           7,064,743
               RTB, due 613012024 - 673072036.
                  interest     accrues et 7.25
                  percent     - 14.625 percent                              758,762            758,762
               RCDF, due 973072016 - 973072021,
                  interest     eccrues et 10.5
                  percent     - 15.14 percent                                                   24.6&

                                                                                             8.64u



      REA borrows      funds from FFB to finance    certain       loans.    These loans serve es
      collateral     for the FFB borrowingr.      FFB borrowinga         beer interest   et rater
      ranging    from 6.197 percent      to 15.128 percent          end meture es the related
      loans receivable       become due, through   2023.       Interest    rates   on the related
      loans receivable      are equal to the interest      rate8 on FFB borrowings.

      Because FFB borrowings        mature as the related    loans receivable    become due,
      end amortization     tables    on loans receivable  ere not qeinteined,      the amount
      of intergovernmental        debt payable    in each of the next        5 years   is not
      available.

      In 1987,       the method      of recording        CBOs was changed       to conform   with
      generally      accepted     accounting    principles     for  federal      agencies,  which
      requires      the    issuance     of   CBOs to be recorded         as a borrowing        end
      corresponding      interest    to be expenred.        R8A has CBOs with maturity      dates
      rsnging    from December 31, 1988 to March 31, 2016.             Interest     rates on CBOs
      very from 7.664 percent         to 15.325 percent.


                                                                                        (Continued)




                           Page 30                                        GAO/APMD-88.73             REA’s 1888 Plnftnclal   Statement8
    .


Y




                                         Financial Statements




                                                                       12




         (5)    N.o..Pavsble

               In conjunction        with   the restructuring     of several       loans                       receivable     during
               fiscal   year      1988, RRA assumed notes        payable     totaling                          $568,778,000     with
               interest     rater     which    range     from 8.1775     percent       to                       10.7825    percent,
               maturing   through the yeer 2017.

               Principal        payments      on notes       payable     are    due as follows           (in     thousands):

                      Yeer ending        September       30;
                          1989                                                                     $      2,451
                          1990                                                                            3,819
                          1991                                                                            4,553
                          1992                                                                            5,061
                          1993                                                                            5,643
                         Thereafter                                                                    547.251
                                              Total                                                $558.778

        (6)    &

                Included      in other       liabilities           at September 30, 1988 is $403,991                        relating
                to    the     rural       economic         development           subaccount,             This     subaccount        was
               established        by R8A under the authority                     of Public         Law loo-203        Section      1403
                (December 22, 1987) end is credited                          on e monthly           basis with e portion              of
               the interest           IlEA eerns on cushion                of credit          payments made to REA after
               October       1, 1987.         REA is authorieed                to provide          grants       or zero interest
               loans      to borrowers           under       this     Act for         the purpose           of promoting         rural
               economic        development          end job creation                projects,          including      funding       for
               project      feasibility         studies,        etart-up      costs,       incubator        projects,     end other
               reasonable        exponseo for the purpooe of fostering                              rural      development.         The
               law further        requires        that such loene end grants                     shell      be made during        each
               fiscal      year to the full              extent      of the amounts held by the rural                       economic
               development          subaccount,           subject        only      to    limitations           as may be from
               time-to-time           imposed by law.                As of September                30, 1988, RRA has not
               extended      any loans or granta under this program because the grant-awarding
               process has not been finalized.

        (7)    -a                               - cia&dBack                 - Rural

               Class     B stock    is issued    only   to loan customers        of RTB and is voting
               stock.     Each customer     is required     to purchase    such stock in the amount of
               5 percent     of the approved     loan amount for construction        purposes.      RTB may
               not pey cash dividends          on Class     B stock,    but holders    are entitled      to
               patronage    refunds    in the form of Class B stock dividends            calculated    at a
               specified    percentage    of interest     income on loans to Class B stockholders,
               approved    each year by the RTB Board (10 percent             in 1988 and 12 percent       in
               1987).

                                                                                                                      (Continued)




                                        Page 31                                                        GAO/AFMD-90-73 REA’s 1988 Fincial   Statements
                                                                                                                                   I.




                          Financial   Statements




                                                     13




     Class B stock        is nontransferable,        except in connection       with the assumption
     by the transferee           with   the approval     of the Rural Telephone        Bank Governor
     of all      or part       of the transferor’s         loan from RTB.          A borrower,       upon
     retiring      debt with        RTB, may exchange       Clase B stock      for   Class C stock.
     Otherwise,      the borrower       retains  possession.       Class B stock can be redeemed
     only after      all sharer of Class A stock,           which ia nonvoting       RTB stock owned
     by the government,          have been redeemed and retired.           Class A stock is to be
     redeemed and retired             by RTB as soon as practicable           after    September        30,
     1995,     but not       to the extent        that     RTB’s    Board   determines      that     such
     retirement      will   impair operations       of RTB.      (See note 8 for further         details
     on Class A stock.)

    Subscriptions         receivable        for    Class     B stock     are not         reflected     in the
    accompanying       financial       statements.        When RTB makes the first              advance under
    each loan,      it issues        the stock       applicable     to the total           loan and charges
    loans receivable          for the full        amount of the Class B stock.                   In the event
    of rescission        of part of the loan commitment subsequent                      to issuance     of the
    stock,     RTB rescinds        the applicable          portion   of Class B stock              and reduces
    loans    receivable.         Subscriptions         receivable      amounted       to $18,036,000        and
    $26.456.000      for the fiscal           years ended September          30. 1988 and 1987.             The
    number of shares of Class B stock issued and outstanding                                at September 30,
    1988 and 1987 was 181,403.OOO and 165,320,000,                      respectively.

    Class     C stock     is issued         only  to RTB borrowers,   or to corporations        and
    public     entities    eligible       to borrow from RTB under Section        408 of the Act,
    or by organizations           controlled     by such borrowers,  corporations,      and public
    entities,        and is voting        stock.    RTB may pay dividends      on Class C stock
    (8.5 percent        in 1988 and 1987).           The number of share8 of Class C stock
    issued     and outstanding         as of September     30, 1988 and 1987 was 6,787 and
    2,949, respectively.

(8) Dclnatcd
    Public    Laws 92-12 and 97-98 authorize            the Congress,    beginning   in fiscal
    year   1971 through    1991, to appropriate         no more than $30 million       per year
    to R8A for the purchase         of RTB Class A stock.         The laws contemplate      that
    the Congress will         continue     to annually      appropriate     funds  until    such
    purchases    equal $600,000,000.         During each of fiscal      years 1988 and 1987,
    RSA received    $28,710,000      in donated capital.       As of September 30, 1988 and
    1987 donated capital       amounted to $505,950,000        and $477,240,000.     RTB Class
    A stock has been eliminated         in combination.




                                                                                               (Continued)




                          Page 32                                               GAO/AFMD-80-73        REA’s 1988 Financial   Statements
                            Flnanclal Statements




                                                        14




  (9) Rssfrictsd                   - Rural
       Prior to the passage of the Omnibus Reconciliation              Act of 1987, passed on
       December 22, 1987, not less than 10 percent             of the patronage       capital   of
       RTB for each f ircal       year,  as determined    by the RTB Board of Directors,
       was designated     to be placed        in a contingency        reserve.     The new law
       required    that the contingency        reserve be transferred          to a reserve   for
       interert   rate fluctuations.       At September     30, 1988 and 1987, restricted
       capital  was $98.268.000      and $76,781,000,   respectively.

(10)   Priar

       RM restructured        several      loans with         effective         restructuring        dates prior
       to September       30, 1987.       Certain     activity         relating       to these restructured
       loans     was improperly       recorded      in the prior              period.        RFA has recorded
       adjustments      to reflect       the proper          loan receivable              balances     for   these
       loans as of September 30, 1987.                 The net result              of these adjustments          on
       the accompanying financial            statements        was a $40,488,000             decrease    of loans
       receivable      and a corresponding                decrease           of    cumulative        results     of
       operations    as of September 30, 1987.

(11)   Loss on -

       Public    Law 99-509 allowed      borrowers  of RETRF insured      loans to prepay such
       loans during       fiscal   year 1987 at the lesser      of the outstanding      principal
       balance     due on the loan or the loan’s        present    value discounted       from the
       face    value     at maturity    at the rate      oet by the Administrator.                REA
       sustained      losses     on the prepayments   of these      loans   during  fiscal     year
       1987 of $299,015,000.



       Section     1401 of the Cmnibus Reconciliation                      Act     of 1987 (Public           Law
       100-203)    and 8ection        1011 of the Omnibus Reconciliation                   Act of 1986 (7
       U.S.C     936(a))       required       RBA to         accept      certain       FFB-financed        loan
       prepayments       at book value           without     prepayment       penalties       during   fiscal
       year8 1988 and 1987.            Likewise,      RBA was allowed        to prepay FFB borrowings,
       used to finance          these loans,        without     prepayment       penalty.      Total   waived
       prepayment        penal tie6       amounted        to     approximately          $450,000,000         and
       $161,000,000       in fiscal      yearn 1988 and 1987. respectively.                   The amount of
       prepaid    FFB loanr        approximated        $2,000,000,000        and $580,000,000        in 1988
       and 1987, respectively.




                                                                                                  (Continued)




                            Page 33                                                GAO/AFMD-8873          REA’s 1988 Financial Statements
                                         Financial       Statements




                                                                        15



            (13)   Subssausnt

                   On March 30, 1989, the RTB Board ‘of Directors                        amended the Bylaws of the
                   RTB regarding        the allocation        of patronage       capital      for fiscal      years after
                   1987.       Any amounts         in    the     reserve     for     interest      rate     fluctuations
                   clasrif   ied   as restricted            capital       on the       accompanying       statement      of
                   financial      position      (see note         9).    in excess        of $10,000,000         shall   be
                   allocated     ao Class B stock          dividends       to those borrowers          holding     Class B
                   stock during      the fiscal       year the amounts were earned.

           (14)    Bn                        to Bw

                   The following    schedule    reconciles     total    expense    as reported      in the
                   accompanying   Combined Statements      of Operations,     with negative    outlays     as
                   reported   in the Office of Management and Budget Report,             SF-133,    “Report
                   on Budget &ecution,”      for the year ended September 30, 1988 (dollars                in
                   thousands ) :



           Total expensesr
               Interest  expense                                                    $ 2.236.414
               Provision   for loeses                                                    877,487
               Other expenses                                                         S$3.142.267
           Budgetary    outlays        not    included      as expensea:
              Loans made                                                               1,712,896
              Dividends      paid                                                          10,124
              Other                                                                    530                 1.723.950
           Items    not    requiring     outlays:
               Provirion        for lorees                                               (877,487)
               Decrease       in accounta receivable                                        (6,326)
               Increase       in accounts     payable and other
                  liabilities                                                                (1,127)
               Excess of interest          accrued on borrowing6
                  over interest       paid                                                   (6,000)
               Other                                                                   ..(1.509)           -1

           Offsetting      collections      credited:
               Interest     received                                                  (2.415.739)
               Loan collections                                                       “my;
               Proceeds from issuance           of stock                                       ,
               Appropriations         for interest     subsidies   and
                   losses                                                               (328.984)
               Proceedr     from note payable                                           (568,778)
               Prepayment premiums received
               Other income                                                                    ‘2i82;
               Overpayments        by borrowers,      net of refunds                             (96)     &i&hXd)

                                Net receipts         (negative        outlays)                          $ GLu4.487)




(017108)                                 Page 34                                             GAO/AFMD-90-73 REA’s 1988 Financial Statements
                                                                                                                                 .----     ~.--.-
l_l,   ._.___-_-_____-__.   -_---.-_   ._.--..__.-   -..-.--.--   “.   .^   ..-.-..-----   ____.-I-..   ---




                                                                       ‘I’ht~rt~ is a 25”~ discorrnl, on orders for 100 or more copiw    mailtd     to a
                                                                       singha acldrt*ss.