FASAB Volume 1 Original Statements: Statements of Federal Financial Accounting Concepts and Standards

Published by the Government Accountability Office on 1997-03-01.

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


                                                 U&ted   States   General   Accounting   Office

               GAO                          ‘. :,Accounting            Standards


               Ma&h 1997
                                                FMAB VOLUME 1
                                                ORIGINAL STATEMENTS
                                                Statements.0f Federal .,
                                                Finkhal Accounting.
                                                Concepts aYldStandards ‘.

           GAO/AIMh21.1.1                          &y%(fJ!q                              .
        --. ...-..--.
                     .., ,_,_____...

    ’       .


Comptroller   General
of the United States
Wubjll(foa,   D.C. 20542


March 1997

                                                          ‘,   ,’
Accounting @&ipIes, ‘standards; &d related requirements for executive
agencieshave been $ibhshed in ‘I’$le,Z,,“Accountig:
                                           (,i         .of’the GeneraI
Accounting G@ze’s (GAO) w             Proce,for                G&ce      qf
w                 in accordance with 31 U.S.C. 3511. In December 1993,GAO
issued a memorandum explaining that the accounting principles, standards, and
related requirements adopted by the three principals (the Secret$ry of the’
Treasury, the Comptroller General, and the Director of the Office of
Management and Budget) as a’resuh of the mcial        Accounting Standards
Advisory Board (FASAB) recommendations would be published by GAO after a
sufkient number had been approved. Two accounting concept statements and
eight accounting standards have now been approved.

The attached Volume 1, “Original Statements,” Statemqnts of Federal w
                                     contains the two concept statements and
eight standards as approved and no& being issued as a single document. ,It
supersedesappendix I of Title 2, except for the following 13 areas in appendix I
of Title 2 which have not yet been addressedby FASAB. These 13 still may be
used as authoritative guidance:

        Standard C30, “CompensatedAbsences.”
        Standard ElO, “Entitlements.”
        Standard E20, “Equity of the US Government,” related to reversionary
                      interest in property and trust funds.
        Standard F30, “Foreign Currency.”
        Standard F40; “Fund Accounting,” related to deposit, trust, and fiduciary
        Standard GlO, “Grants and Cooperative Agreements.”
        Standard 110, “Imputed Interest,” related to the cost of capital.

                                   GAO/AIMD-21,l. 1 FASAB Original Statements


                    Standard 140, nlnvestmen&’
                    Standard LlO, “Leases,”where the agency is the lessor.’
                    Standard L40, “Long-term Contracts,” related to cost and expense
                    Standard P40, “Property, Plant, and Equipment,” related to reversionary
.                                 interest in property.
                    Standard R20, “Regulatory Accounting.”
                    St&dard R40, “Research and Development”

              The FASAB ‘ktak are also z~@dng on a;mond volume .whi&-+        contain the
              materials in the -approv&dconckpt stateniei& id eight Standaids arranged
              alphabeticaly  by subject m$@. As Mt$,Y$ve      ,1, that dQcp?pt will also be
              considered as ti~~ublkation of $mdkds suptrseding.‘IWe 2; except for the 13
              areis just &ted. VqlWe 1 is,available,@..ele:p+ fqrm* on ecenet,
              http#www.~~~net.gov/,        f&e& page, aq!our$ing &andards. For a hard
              copy, call the G&emnient @x&g O&k (202) 512-18(&k

        ,&og&&.                                              .‘;,
              of the..United S&es                                         L                   1’
                                                                                              4    I


              2                                GAOMMD-21.1.1 FASAB Original Statements
                                                   FOREWORD                                      ..,

             This volume is the first of a two volume set referred to as the “Codification.! It
      containsthe original text that currentlyconstitutesthe body‘of accountingconceptstid
      standardsfor thiU.S. Government.’Sbecifkally, the volume incorporatesthe following
      documents‘published.  through February28, 1997:                                    .:
                  ”       1’                 .,     ‘.
              - Statementsof FederalFinancialAccountingConce$s 1 & 2, ‘and.
              - ‘Statementiof FederalFinancialAccountingStandards1-S.’ ”                                               :                ’
                .3                                                                                                            ! j:

     o&-s      .o~&~..Sia*em~~~i.                    ,:’ .       ,,I:          .’ ,         ;                         ,,_
                       ,>”                                              ,,                 ,,   T’ ,,.,’                                 i
            .?, ~~ co~~~~ts and,~d~&         presen;ccl in me tulro- volume sit resulted .frb;~.,:the join*                          IL ,,‘,
     effoiis df.6.   De$&ibt      of *e.i’r&&&$l.(y.suryX.       *i &c&.of      Mhagitisnt       hd,Blidg’.&:                         a’/

     (OMB),‘and the GeneralAccountingOffice (GAO). Thesethree centralagencies,refer&to ..
     collectively as the “princiuals”,,,establishedthe FederalAccountingStandardsAdvisory Board
     (FASAB) in 1990. FASA& was createdto consider.‘and        recommend‘accountingstandardsand
     princi@s.2 The principalsultimatelydecide-upon.the princifiles,andstandards.          ”
                                                                   _’             ..
            The Codification includesonly those~principlesand~standards’agreed  to by the’
     principals.:.FASAB is publishingthe Codification‘.asa comprehensive   basisof accounting,for
     Federalre&uting entities. It is expectedthat FASAB will continueto recommendstatements
     on specializedtopics. As new’statementsand interpretationsare adopted;theCodification
      . be updated. ..                       ./*

     Purpose of the Codification

            The Codification of Federalaccountingconceptsand standardsis a two volume set
     with extensivecross4eferencingand indexing: The volumesare designedto meet the needs
     of users‘for referencesto original statements(Volume I) andto standardsalphabetized,by
     topic (Volume II). Both .volumesserve‘asauthoritativereferencesto the standardsand

             ‘Statement  of Fed@ Financial Accounting Standards No. 8. Supplementary Stewardship Reporting,
     has been approved by the Board’s principals but may not be implemented until it has undergone a 45-day &view
     by Congres+ The review was not completed at the time thig Volume was published. SFFAS No. 8 is provided
     her&i foi’ your konvlnience and future, us& ‘.’&I announcement wijl be ma& id the’ Fe&I Registir tihen the
     fit+&   hrur be6 compl&d     id   f&AS   No..8 .ca:b-&plemen&&          : 1      i.’            ..- ,I’   :-:   ‘::. .

              2For a more extensive description of FASAB’s role, refer to Stategent of Federal Financial &counting
     Concepts No. 1, Objectives of Fedeml Fitiancial Repomirg, Paras. 23-29.

c1                                                 Volume ‘I. V&ion 1.O
                                                     February 28, 1997

Volume I

        This volume, Volume.1--FederalFinancialAccountiirgConceptsand &?@hfS-
 Otiginal St+ements,is a ,compilationof the documentsproducedby the FederalAccounting
 StandardsAdvisory Board and adoptedby the principals:,the Secretaryof the Treas&y, the
Director of OMB, and the Comptroller Genera of the United States. Once adopted,the,
.documentsare referred to as Statementsof FederalFinancialAccounting,Concepts(SFFAC or
 Concepts)and Statementsof FederalFinancial.AccountingStandards(SFFAS,or Standards)

        This volume,presentsthe Conceptsin’their entirety. Conceptsdo not establishFederal
financial accountingstandards;rather they describethe concepts.usedby .FASABas a
framework as it considei$and recommendsaccountingprinciples
                                                          .:      for the Federal,government.
Conceptsare meant:to guide othersinvolved in Federalfinancial reporting such’as preparers ’
and auditors.
                                                                >                     ,.
        This volume ,extractsthe authoritativeportions of the St&d&ls originally publishedin
individual statementsas well as the explanatorytext containedin any appendices.It doesnot
reprint the summariesor all introductory andbackgroundmaterial sincethesesectionsare not
always essentialto applyingthe&ndards or understandingthe Board’sconclusions.The
Basisfor. the.Boar$‘s Conclusionsfor eachstandardis,included‘sinceit servesto explainthe
specific provisionsIof the standards.                                       _,
      The glossariesoriginally publishedwith eachstatementhavebeencodified in a single.
glossary. This glossaryis presenteda~the last appendixto the volume.

Volume II

       Volume II of this set, A User’sGuide to FederalFinancial Accounting,Stan&?@,is ,a
codification of the standards. Volume II presentsthe st,andards  alphabetizedby topic, pulls
together all referencesto a particular topic in one section,and integratesillustrative material
from both the SFFASsand the original ExposuresDrafts whereverpossible.


       The missionof FASA@is to recommendaccountingconceptsand standardsthat result
in federal agencies’financial reports including,understandable,  relevant, and,reliable
information about the financial position, activities, and resultsof operationsof the United
Statesgovernmentand its componentunits. In addition,the standardsshouldfoster the

                                     Volume I, Version 1.0                                        i>

                                       February 28, 1997                                           w

improvementof accountingsystemsand.internal   .. controlsthat will help provide reasonable
assuranceto users that governmentactivitieshavebeenconducted.       economically,‘efficientlyi ‘:
and effectively,‘atidin ‘complianceivith applicable,laws and-regulations.-Therefore,FASAB
believesthat federalf+nci’al accounting‘ionce@ and standardssh&Mbe consideredin
establishingsystemsand in maintainingday-to-dayfmancia;lrecordsas well as being applied
to generalpw$ose fin&i&l repoits’cf U. S. Governmentreportingentities. This belief is
consisten@viththe requirementsof .the’E’cderalFinancialManagementImprovement:Act of
1996which statesthat “each agencyshall implementandmaintainfinancial.management:
systemsthat comply substantiallywith Federalfinancialmanagementsystemsrequirements,
applicableFederal,accountingstandards;and the United StatesGovernmentStandardGeneral
Ledg& &::ge &,&&           lev&“’           ’           .+’ ;\, ,,,         ,
                                                      -...,.<        ,’
        The specific applicabilityof the standardsto componentsof the Federal’government
was considered&ring ‘the developmentof StatementofFederal FinancialAccounting
ConceptsHo: 2’.(&AC Nb. 2). Eniity dnd”Display.”‘SFFACNo. “2 lists criteria for including
componentsin Federalreporting entities(see.pp. 7.5-77)andprovidesthe following guidance
with regardto componentsrequiredby law or policy to issuefinancial statementspreparedin
aci%rdat&i. with accountingstandardsother than thoseconstitutingFederalGAAP. For
example,%omecomponentsare requiredto applyaccountingstandardsissuedby the Financial
AccountingStandardsBoard or a regulatoryagency. Thosecomponentsshouldcontinueto
apply the%andardsrequiredby law or policy for their financialstatements.The reporting
entitiesof%&ich ‘thecomponents’area part, .however,needto be,sensitiveto differencesthat
may arise,from the different ‘accountingstandards./If thesedifferencesare material, the
standardsconstitutingFederalGAAP shouldbe appliedfor purposesof including the
componentsin entity-wide statements.In suchcases,the componentsmay needto provide
additionaldisclosuresor different measurements   requiredto comply with FederalGAAP.
       The standardsneednot be appliedto immaterialitems.

Hierarchy of Federal Generally AcceptedAccounting .Principles                                                        1
        The,hierarchyof generallyacceptedaccountingprinciples’(GAAP) governswhat                                      1
constitutesGAAP for all U.S. governmentreporting,.entities.
                                                          CMB publishesthe hierarchyin                               .r:
its bulletin entitledForm and Contentof AgencyFinancialStatemtints.It lists the priority
sequenceof sourcesthat an entity shouldlook to ‘for accountingand reporting guidance.

         %le   VIII-Federal   Financial Aanagemcnt Improvement Act of 1996, bet. 803(a).       ’

         ‘~Accounting  principles” are those conventions, rules, and procedures necessary to define acceptable
accounting practice at h particular time.

                                            Volume 1, Version 1.0
                                              February 28, 1997
4    .

        ‘:In 1.996,through the joint efforts of the Treasury,OMB, and,GAO, a body of,
 generallyacceptedaccounting,principles(GAAP) ‘coveringmost transactionswas promulgated
 for t&Federal government .However,agenciesmay engagein.transactionsthat are not                       3
 addressedby thesestandards. In that event,agenciesshouldview the hierarchy d providing                     ’
 sourcesof. GAAP ,for the FederalGovernment. While many of the standardscomprking
-;FederalGAAP have alreadybeen,madeeffective,’three of thosestandardswill not be
 effective ,.until,fiscal year -199%The,following.hierarchy’determinesGAAP for U.S.
 govemmentre&ting entitiesbeginning,infiscal year 1998:

            1.’     Ituiivid~ standardsagreedto by .thepirector of GMB,. the Con&roller           ’
                    Gene& and the Secretaryof the.Treasuryand published,by ‘GI& and the
                    GeneralAccountingOffice.                       ‘.
      ,,,                                                                  ,‘,   _’

            2.      Interpretauons.re&d’ to. the SFFASsissuedby Oh& in accordancek&h, the
                    proceduresoutlinedin OMB Circular A-134, Fipancial Ac~~unti~g,Pr&&les ”
                    and&dads.       ;

        3.          Requirementscontainedin OMB’s Form ,&d ContentBulletin in effect for the
                    period coveredby,the,financial statements. .

        4.          .Accounting,principles,published,by .authoritativestandardsetting bodiesand
                    other authoritativesources(a) in the absenceof other guidancein the first ‘three
                    parts of this hierarchy,.& (b) if .theuseof suchaccountingprinciples
                    improvesthe meaningfulnessof the financial statements. .

      ,The abovehierarchymay be implementedearlierthau fiscal year J998 with approval
from OMB. Until the abovehierarchyis effective, U.S. governmentreporting entities will
continue to follow the hierarchyestablished6
                                           for an “Other Coypyehensiv~Basis:oJ .
Accounting” (OCBOA) and presentedbelow:

            1.      Individual statementsagreedto and publishedby the JFMIP principals.

        2.          Form and contentrequirementsincludedin OMB Bulletin 93-02, datedOctober
                    22, 1992,and subsequentissuances.                                  ‘.

        3.          Accouuting standardscontainedin agencyaccountingpolicy, procedures
                    manuals,and/or relatedguidanc’e8s of March 29, 1991,so long‘as they are
            5’I’bc hierarchy was published in OMB Bulletin 97-01 dated October 16. 1996.

            ‘The hierarchy was published & Oh4B Bulletin 94-01 dated November 16, 1993.

                                              Volume I, Version 1.0                                    3
                                                February 28.1997

              prevalentpractices.                           ,.I                        ,. .,
                           /         .,               ., ‘,
       4.     Accountingprinciplespublishedby authoritativestandardsettingbodiesand
              other authoritativesources(1,) in the ‘absence    of other guidancein’the first three
              parts of this hierarchy,and (2) if the useof such accountingstandardsimprove
              the ,meaningfulness  of the ,finandialstatements.              :
Sourcefir Interpretations                                     I,,.
                                                   ,),    _,:
        O&IB Circular A-134’describesthe<Roliciesfor seeking.‘andproviding-interpretations
and otheradvice relatedto the standards..An interpretation’isza.documentof narrow scope
that provides‘&rifications of originalmeariing,‘:additional,
                                                         definitions,or other:guidanct
pertainingto anexisting SFFAS. Requespfor interpretationsshouldbe directedto OMB’s
Office of FederalFinancialManagement‘or to the ‘Executive-   Director, ‘FASAB.     )‘.
                                       .”           .;‘,     .’
        OMB aud EASAB till- respondto the requestfor guidanceby providing technical
assistanceunlessthey determinethat the responseshouldbe an Interpretation. In that event,
FASAB staff will provide written copiesof the requestto the ‘Boardmembers. FASAB staff
will examine,‘asappropriate,applicableliteratureand consultwith knowledgeablepersonsand
draft an Interpretationof FederalFinancialAccountingStandards.FAST, will considerthe
draft int<&etation at an openmeeting. After a majority agreesandthe representatives   of the
three pri~!ipals (Treasury,GAO, and‘OMB) approveand sign the interpretation;the
interpret&on will be published,by OMB and GAG.                           ,’

Organization 6f the Codificatiori        L

      Volume I presentsthe text of the origin+l statementsas describedabove. Each
statementis Rresented’as a separatechapter. The issuedate and effective dateof each                   ,.,
statementare presentedfirst; Neq, referencesto relevantsectionswithin Volume I and to
Volume II’ are provided. Any interpretationsthat relate to the statementsare also identified.

        In somecases,’the statementshavebeenaffectedby later statementsor affect earlier
statements. Rkfeiencesdirect the-readerto .the affectedparagiaphsand indicate&e sourceof
the change. Within the text of the statements,provisionsdeletedas a resultof other
statementsare marked with strikeoutsand provisionsaffectedby other statementsare double-
underlined. Double-underlinedtext remainsas originaIly published The double-underlining
is intendedto dert the readerto the fact that it has beenmodified or affectedby a later

                                     Volume I, Version 1.0
                                       Febnrary 28, 1997

      A brief summaryof the statementis presented.A table of contentsreferencedto both
pageand paragraphnumbersfollows the summary. Note that the paragraphnumbers(UC
thoseoriginally expressedin the individualstatementsdespitethe omissionof some                3
paragraphs.Any omitted paragraphsare indicatedin the table of contents.

      Volume I also presentsthe following appendices:

      Appendix A:             TopicalIndex
      Appendix B:             Effective Datesof Statements
      AppendixC:              Listing of InterpretationsPublishedby. OMB
      AppendixD:              TopicsNot Yet Addressed
      AppendixE:              ConsolidatedGlossary
        Volume II is under developmentat this time and will be organizedalphabeticallyby
topic. Topicswill be specific’furancialstatementitems. Eachtopical sectionwill be
identified by an alpha-numericcode(for example,PlO for “Pensions”),
                                                                I      with numbersselected
to allow addition of future topics.

      Paragraphswithin eachsectionwill be numberedconsecutively. The.following
numeric.format has beenproposed:

       Paragraphs.lOO - .599: StandardsandPotentialNote Disclosures                            _-.
       Paragraphs.600 - .699: InterpretationsPublishedby OMB                                  6iL
       Paragraphs.700 - .799: NonauthoritativeDiscussion& Illustrations

       Sourcereferenceswill be provided in paragraphs.lOO- .599 to indicatethe original
statementfrom which material was drawn. The referenceswill appearin bracketsat the end
of eachparagraphor illustration. For example,the reference[SFPAS7, para. 81:]refers to
Statementof FederalFinancialAccountingStandardsNo. 7, Accountingfor Revenueand
Other Financing Sourcesand Conceptsfor ReconcilingBudgetaryand Financial Accounting,
paragraph8I. Sourcereferenceswill be providedin the nonauthoritativeparagraphsas
footnotesto permit more descriptiveidentificationof the sources.

       Volume II will presentthe following appendicesand may presentothers:

       -   Topical Index
       -   FASAB Active. and Future Projects
 I     -   Topics Not Yet Addressed
       -   ConsolidatedGlossary

                                    Volume I, Version 1.0                                            )
                                      Febmuy 28, 1997

                                   TABLE’OF                  CONTENTS
    J-l-_.   &CtiOW

             Statements of Fcderai Financiai Accounting Concepts              9

               1      Objectivesof FederalFinancialReporting                 11

               2      Entity and Display                                     63

             Strtcmehts of Federai Financial Accounting Standards

               1      Accountingfor SelectedAssetsand Liabilities           203
               2      Accountingfor Direct Loansand Loan Guarantees         233

               3      Accounting for Inventory andRelatedProperty           297

               4      &nagerial Cost AccountingConceptsand Standards        331

               5      Accounting
                      .:,,’      for Liabilities of the FederalGovernment   395
              6       Accounting for Property,Plant, and Equipment          455

              7       Accounting for Revenueand Other FinancingSources      509

              8       SupplementaryStewardshipReporting                     605    ,

             Appendix A: Topicai Index                                      661

             Appendix B: Effective Dates of Statements                      675        i

             Appendix C: Listing of Interpretations Published               677

             Appendix D: Topics Not Yet Addressed                           679

             Appendix E: Consolidated Glossary                              683

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vohle  I, version 1.0
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Volume I, V&ion 1.0
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           STATEMENT       OF FEDERAi                                   FIl%iNCliAL
               ACCOUNTI% ‘9:.‘,, CdtihPTS.                                  N’O.’ 1
0-._.-        I,,, ,‘,              ? : :.                                 ‘) ‘, ,.,
       .??I. ,Objectives of Federal h&@&l                                Reporting

      STATUS                                                                                             ‘,

      ISSUed:                    .September2, 1993          ,.         I’        ,,
                                                                I ; ‘.
      Volume I References:        The objectivesprovide,.the,,    framework for ‘all standards;
            ,,                    therefore,all ,SF$ASsaddressobjectives  ,I’,.     in the ex&anat~~ text.
                      ‘8.                                                               .._,    ‘._,i _
                 6 ‘,.,f\  :               I., ;,/,          .’ ,:. ,”                       ,.       ,’
      Volume:nkefer+s:          .           ,,.     ; ‘.                   ,,,:,
                                      . ..               .,,         ;l. : ;,
      Interpretations:.                                                                         ,

      Affects:                    No other statements.

      Affected by:                No other statements.

                                                               ..                    ’
      SUMMARY             s                               ., :, /

             This documentis a conceutualstatementon the objectivesof financial reporting by the
      federal government: It focuseson the uses,userneeds,and objectivesof such reporting. The.
      objectivesare ,designedto guide the Board in developingaccountings@dards to enhancethe
      financial information reportedby the federalgovernment‘to (1) demonstrateits accountability,
      (2) provide usefulinformation, and (3). help internalusers.of financial information improve
      the government’s,management.In additionto guidingthe Boar+the objectives.mayserveas
      useful guidanceto othersinvolved in Federalfinancial,reporting. For example,the,objectives
      may be useful in developing’accounting   policy, designingrepoits, and writing narrativesand
      notesto financial reports.

             The objectivesreflect the federal’environment.They,alsoconsidermany of the needs
      expressedby current and potential usersof federalfinancialinformation. They provide a
      framework for assessingthe existing financialreportingsystemsof the federal government
      and for consideringhow new accountingstandardsmight help to enhanceaccountabilityand
      decision-makingin a cost-effectivemanner.

                                            Volume i. Version 1.0
                                              February 28, 1997

      The four objectivesof FederalFinancialReportingare:
      Budpetarv-Federal               ficial      reporting should assist in fulfilling the government’s duty to be
 P    publicly accountable for monies raised through taxes and other means and for their expenditure in
      accordance with the appropriations laws that establish the government’s budget for a particular fiscal
      year and related laws and regulations. Federal finanoial reporting should provide information that helps
      the reader to determine
      b         how budgetary resources have been obtained and used and whether their acquisition and use
                were in acoordanw~ with the legal authorization,
      .         the status of budgetary resources, and
      .         how information on the use of budgetary resources relates ‘to ,information on the costs of
                program .operations and whether information on the status of budgetary resources is consistent
                with other accounting information on assets and: liabilities.                    .“,    4::
           :                                   ‘. “y i,       ‘. .,
      V-Federal                            fihancial reporting should assist report users in evaluating the setWe
      efforts, costs. and accomplishments of the reporting entity; the manner in which these efforts and
      aeoomplishments have been furanosd, and the management of the entity’s assets and liabilities. ,Fedenl
      finrnoial reporting should provide information that helps the reader to determine
      .         the costs of providing specific programs and activities and the composition of, and changes in,
      these costs;
      .         the effoa and accomplishments associated with federal programs and the changes over time
      and in relation to costs; and
      .        the efficiency and effectiveness of the government’s management of its assets and liabilities.

      gtewarQshjp-Fe&ral finanoial reporting should assist report users in assessing the impact on the
      counhy of the government’s operations and investments for the period and how, as a result, the
      government’s and the nation’s financial condition has changed and may change in the future. Federal
      fiMIlcia1 reporting should provide information that helps the reader to determine whether
      .        3he ,govetnment’s finmcial position imvoved or deteriorated over the period,                           t
      .         future budgetary resources will likely be sufficient. to sustain public services and to meet
      obligationsas they come due, and
      .         government operations have contributed to the nation’s current and future well-being.

      Svstcms             -Federal
                            .’     financial reporting should assist report users in understanding whether
      financial management systems and intetnal.acoounting and administrative controls are adequate to
      .        transactions are executed in accordance with budgetary and fvcial      laws and other
      reguimn~W consistent with the’purpoSes authorized, and ars redorded in accordance, with federal
      rocountitlg standards;
      .         assets are properly safeguarded to deter fraud, waste, and abuse; and
      .          performance measurement information is adequately supported.


                                           Volume I, Version 1.0
                                             February 28,1997
                                                                                                                                                               . 13
                                                                                                                                                        SFFAC NO. 1,

                                                                     .    OF CONtENTS                                                                     ,1               :
                                                                                    ,.;.                                                ., ,: .,’

                                                                                  Paragraphs in
                   Contents:                                                Original Pronouncements:                                                               Page:
                                        ‘-.,’ ”
     :,            Federal F+cial      Reporting and the
                   Role of the.Federal Accounting Standards                   :
                   Mvisoty Bo+d . . . .‘ii. . ‘.‘. :. . .. . . . . :. . . . . . . i. 2148          ,. . . . . . .‘. . . . . . . . . . . . .‘. . . , . . . . . . . . . . 14
                        -;    ’ .,*,. 1. : :’
                   ‘The FedeM;Accounting. and Financial                                                     I. .
                _, Rep+tiq E”&*at-            ..‘. ; .;. ;;.; .,. . , . . : . . . . . . :,,49-70   . . . .I. . . c ‘a. . . : . . :. . ., :‘. . . . . . . . . . . . . . 19
                                                                                                             ., ;;: .T’:          :’      .’
                   Amountability and Users’ Information Needs-
                   the Found&ion of:Governmental Financial                                                   .,             ,/:_::\
                   Reportin,,    . . . . 1 . . . . ,.:.i.;;....:        . . . . . . . . . .. 71-104 .:,.;.   . . . . ,:ri . . . . . . :.:   . . . . . . . . . . . . . . . 24
                          xl:,      _:                  ,“.”                           ,.       /j             .,
                   Objectives of Federal ‘-
                   Fiarnoid ibpoa          .,.. . -. . . ‘;.. . . . . . . . . . . . . . . l,os-is0 . . . .   . . . . . . . . . . . .‘i . . .,. . . . . . . . . . . . . . 30
                                                                                           ,’                                    ,.
                   Balancing Costs and. Benefits
                   inR&omm&tdiag~Standards:      . . . . . . . . . . . . . . . 151-155 . . .: .‘. . . . . . . . . . .“.,.:.                  . . . . . . . . . . . . . . 38    ,
                   Qualitativk $haracteristics
                   of Informati$n- in Finandial Reports           . . . . . . . . . 156-164 ;‘. . . . :. . :. . . . . . . . . . . . . . . . ! . . . ‘. . . . . . 39                1
                   HOW Accoti$ng Supports Federal                                                                                                                                  I
                   Financial Reporting (. . . . .,. . . . . . . . . . . . . . . . . 165-191 . . . . . . . :. . . . . . . . . . . . :,. . . . . . . . . . . . . . 41
                                     ,‘_’      ; _                                                                                                                                 I
                   How Financial Rep&t@ Supports
                   Reporting on Operating; Performance . . . . . . . . . 192-212 . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . . . . . 48                           I
                  Appendix A: Basis-for Conclusions                .‘; . . . . . . . . 213-248      . . . . . . . . . . . . . :, . . . . . . . . . . , . . . .‘. . . .‘. 52

                   Appendix B: Users’ li&mation,Needs                                                                                                                              /
                   Addressed by Federal Finaqcia! Reporting . . . . .                  249-264, . . . . . . . . . . . . . . : . . . . . . . . . . . . . . . . . . . 58
                   Appendix G: Selected Federal Reports Prepared
                   onaRecurrin~Basis    .: ..,............,...                         265:266      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

                   Paragraphsl-20 emitterd.                                                                                                                                        iI

                                                        ..~      . ,,        ._,                                                  ., I

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 BOARD                                                                                                                 9
                          21.        Financial repOttillS by the federal SovermMrt provides information for
                           formulating policy, planni.nS actions, evaluatixq perfotmance, and other, purposes. In
                          addition, the processes of preparing and audit@ frnrrnoial reports can enhance the
                          government’s ovemll accountability structure by providing eater assurancesthat
                          tmnsactions am recorded and reported accurately, that consistent definitions are used
                          to desfkibethe transactions, etc. Thus, federal finanoial relkutinS. helpsto fuIfd1 the
                          government’s duty to manage progams economically, effkiently, and.effectively and
                          to be publicly accountable.
                                                                                      :_         ,’           ,, ,.,
                          22.        Financial reporting is supported and made possible by accounting and
                          accounting systems. “Financial reporting” may be defined as the process of recording.
                          reporting. and interpreting, in terms of money, an entity’s financial transactions and
                          events with economic consequences for the entity. Reporting’in the fedeml
                          government also deals with nonfiicial        information about service efforts and
                          accomplishments of the government, i.e., the inputs of resources used by the
                          government, the outputs of goods and services provided by the government, the
                          outcomes and impacts of 8overnmental programs, and the relationships among ,these

                                                                                                                       ‘--   t ,.
                          23.      The mission of the FASAB is to recommend accounting standards [for the              ii2
                                    federal government] after .. . considering the financial and budgetary
                                    information needs of congressional oversight groups, executive agencies, and
                                  . the needs of other users of fedeml financial information.’

                          The FASAB and its sponsors believe that any description of federal Rnangial reporting
                          objectives should consider the needs of both internal and external report users and the
                          decisions they make; This implies a different role for the FASAB than for the
                          Financial AccountinS Standards Board (FASB) and the Governmental AcoountinS
                          Standards Board (GASB). The FASB sets fmancial reporting standards for privately
                          owned entities in the United States. The GASB sets financial reporting standards for
                          state and local Sovernments.

                      .   24.      Those Boards exist pkuarily to set standards for general purpose financial
                          reporting to external users of fmancial reports. This is because those users, by

         ‘Except where the context indicates otherwise, the term “government” in this document refers both to
the U.S. government as a whole and to its component reportinS entities, such as agencies and programs.

         ‘From the FASAB Mission Statement, approved by the Board and by the Secretary of the Treasury, the
Director of OMB, and the Comptroller General of the United States in 1991.

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e                                                                                                                                     15
                                                                                                                         SIfFAC NO. 1
                                                                                            i.i,‘         ,i.

                                           definition, have limited ability to control the ita& of the i&k&i            n&e available
                                           to them. The FA8B and the GAS! ‘do,‘not,,*d to weigh he,aviIy managers’
                                           information needs because tljose’inijividuals,~,,by dlfmition.,are assumed to have ready
         -1                                a&is to the information they need ‘about ‘the fwcial         transactions and events that
    i                                      affect the financial positton, operations, rind,financial condition of the entities they
                                           qyee*                                   : I
                                           25.       The FASAB, on the other haiid considers the it&nation            needs of both
                     -I1                   internal and external users:, In part, .this is*,becausa the distinction between internal
                   “#I.d                   and .eger+‘u&a      is.,in many ivays’ leas signiflcani for the. federal government than for
                       j                   other
                                              .,  et@&     GffiWs     who ~‘~~~~,?hoould.~~e’~~,a~.iDc~~           to information often
                    ‘“‘YI       ,:         f@ in ~rac&a that it is not available.” Fi$&s that contributk to this problem include
                     .i                    ++..k,   ,~+?y!M~ity
                                           executlyes  co&~dy&the a! $F he   g?!!jy~$       ,,jWppid tiajhbver -oogsystsms
                                                                                  rcqulrsd:to.Bs~~~~&&tion               s&r h political
                     :*              .’

                                           ‘+&    6;f oh f&&h :pd @of&@ B&&s &&;                    ’ fi& p&B      was created to l &M
                            ,               &     $ p/        (igeni; $ *j;:p+iden~)‘&d.            iiie G&jdn     agent of *e Congrru)
                                                                          i;,,‘.... _i, . .., ,.,:.
                                          ’ on a&$@ig~ &&a&for’        fedeml
                                                                          -.‘P.  agencies      and programs
                                                                                   ; ., ,‘,::, .,,,           in order to improve
               ,                           ~.~f&oi++&~       ~pmdti+*                                    _I_‘, :’
                                           27.       The Board’s sponsors have separate constitutional and statutory authonuas for
                    7.                     ietthg,accO;rjnting policy for th&go$%iriiient:~ .The &vision ‘of powers in the U S
                                           &wet+tipt     tticans tiiat iliffitint’ ~p&+ial&rs with iqd+cndent authority find It
                                           useful to ‘have a’mecl@sm to coordi+their            iccoiktikg policy activities. The
                    .::                    Board and iti Iiir~lib’deiibcrati~e’~r~~ess’~lsd provide ‘a tie& arena for the panrcqmnta
         I                                 to deliberate and to discover how federal accounting.: and financial reporting can bs
                                           hpriived.       I        .:-’ ii. ; cb ; ,         , ,,
        62          ,(
                                                                            ,,.    ..                 ;’
                                           28.       Just as the traditional distinction between internal and external repot? users IS
                                           less useful in the federal context, some of the traditional ways of classifying financtal
                                           &ports are less relevant. Reports bin bq itken$ed primarily ,for a ‘designated special
                                           purpose or for genenil purpose use. “‘hi the federal govekment. as in tnost’,entities.          1
                                           internal financial reporting is designed for kp&al purposes: Internal financial
                                           reporting helps managers to plan, conduct, and coordinate their activities and to
                                           evaluate the economy, efficiency, and effectiveness of their.,’ programs.,

                                             29.      Much external federal financial reporting also is for special purposes, but
                                             some is for general purpose use; that is, it attempts to meet ,the common needs of
                                          .’ many different users who.have limited power to demand information directly. These
                                             reports are known as general purpose
                                                                                / reports.’
                                                                                    . .

                       ‘In state and local governmental accounting, ihetkn?‘gkral-purpose    financial statements (GPFS)”
              hr 8 gttite spacific meaning. Standarda published by the GASB define in detail the form and content of such
              re~orta. The tetm “general-purpose rep&s? is used in a more generic sense in this document to refer to a variety
              of fW       ktancial reports.

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                       30.         The FASB and the GASB focus primarily on general purpose financial
                      reporting becay ‘that is their mandate and reason for being.’ Even so, those Boards
                      recognize ‘that general purpose financial reporting is not the only source of finrurcial        3._
                      infont~~ti~n    hut such entiti~. hi many, cases, users Of gett~al purpose finanoirl
                     reports need to consult other sources to satisfy their infotmation needs. This is no less
                     true for the federal government.
                     31. ”         ,While certairi’information is provided by general purpose frnanoirl reporta,
                     o,ther information is better provided by, or can be ,provided only by, f-cl1         reporting
                     outaide such reports. Still other iqfotmationis provided by nonfiicial         reports or by
                     fyiql         repotqs about seeents of the nationa! society other than the federal
                     government and its component et&tie; (e.g.. economic mp&ting).

                     32.        Often, to satisfy the information needs of various individuals, it is necessary
                     to combine and report fmancial and nonfinancial information. Often, combining
                     information about the govehmeni%th          information about aspects of the national
                     society is necessary to assess past or planned governmental actions. For example,
                     infoichation about the number of people gainfully, employed after participating in a
                     vocational education program would be imporiani both in assessing past governtnental
                     expenditures for training and in evaluating plans for similar new expenditures.

                     33.      Some questions arise with special force regarding the nature of general
                     purpose reports because, by ‘deftition, no user or potential user is able unilaterally to
                     deft the requirements for these reports The FASAB is, by design, well constituted
                     to consider the issues involved with such reports.

                    34.      Federal accounting also must support special purpose reporting to the
                    Congress, executives, and others that the FASAB represents. Indeed, most federal
                    facial    reporting is special purpose reporting. Also, the Board notes that traditional
                    “general purpose” financial reports may serve a larger and more useful purpose for a
                    variety of,audiences if traditionai designs for such reports are expanded to include a
                    variety of reportsaddressing, budgetary integrity,’ operating perfotmance. stewardship,
                    and control of federal activities.                             .A


                    35.       The FASAB recognixes that developing and implementing standards that will
                    contribute to achieving certain objectives may take considerable time. Time will be
                    needed to establish mfotmation-gathering systems and to gain experience by
                    experimenting with alternative approaches.

                    36.      The FASAB expects that some of these objectives may best be accomplished
                    through means of reporting outside general purpose financial reports. Indeed, the
                    FASAB recognizes that information sources other than financial reporting, sources
                    over which the FASAB may have little or no influence, also are important to
                    achieving the goals implied by these objectives.

                    37.       In developing specific standards, the FASAB will consider the needs of
                    financial information users, the usefulness of the infomiation in relation to the cost of

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                           I developing and’providmg it, and the abi‘i& of accounting standards to address .lhose
 .,     ,,                   aeeds:.compamd with other informauo,n sources. ’
      : ,,              :_’ ‘, ,,,,’
        INFOR~~AT~ON                     ON FEDERAL         FINANCUL         REPoRT~C

                              38.              Different -people are likely to talk about veti different things when asked to
                               describ fe.deral financial reporting or, federa! accounting. A few examples will
      ; ,!.g        ‘.        ‘ibtde          ,.this po@F                ,,             ,,,.  ‘.: _ :
          *n’”               : 3g; .‘C.‘:
                                               Ak ceonor&t, wl& iskid hi~~quhi~a. is likely to refer to reports about
          ,$A,         ‘,
                               the    &t&&l          ‘Isociety.as a wh,o@.. ‘Among the most important of such financial reports
          ,g              ‘,
                              :.;;-.; the    ‘national
                                               ,.-ex,j&&~s             & ,product accounts (NIPA) th;a!~,~sure the nation’s
                                                            ‘., .1,I, oa
           :‘, :               aggregati                                  .&&,+.   +&&ed &$,,,jk Fe&@ governmeat
                 /-_ * e&d&s;ot’ooui5i;                                ‘cb&&     d:;i.@&&    f&tioa df:ti;c total exp&nves  in the
                              econ&y.‘,,TheN~As,     as i’ systt’m; emerged’ in&e 1940s and were built on. work
                              done in the U.S. Department of Cominerce~b&&ngin          the”l93Os and earlier by
                              prjva$ orgattiuations.
                     ,,                                                       ‘, f ,,1:    , :
       ;       ,,’     ‘.‘I
                              4d.   ,’The ~NIPAr’p&ide a $%ure of the economic transactions that occur in an
                              X0&.&     ,&JM&’ a& ds.a year. ne a$roa&‘fGi i. providi such a picnrre throu&
                         a sot of account that’ aggregate the accounts belonging to the individual transactors in
                         the economy-workers, businesses, and consumers, among others-whether or not
                         formal /’accounting,.’statements exist expl+ly for all of them.
                    , ,: .,_
                         41.       The NIPAs $rovide vital infor&ion”to          policymakers and others who are
                         planning future actions iad’to tndivid~~s~wlio would like to assess the effects of past
       .;*. :            acttons. The NIpAs are ricog&edas           an,‘esseatialRart of economic reporting by
          ‘.    ,./      natiiindl goveriiments;    For this reason,  the’ United Nations has developed the System
                         of National Aixouats (SNA). The:SNA is d &mprehensive~ integrated, and
                         inteinauonaliy comparable ‘statistical base, for analysis in key policy-making areas,
              .          such as economic gr&th, inflation,   ,./ and
                                                                   ‘. ”productivity.
                               42.      This Statement does not deal directly ,with such accounts of the economic
                               activity of the natio;nPl society. The focus of this Statement is on accounting systems
                              ‘and financial reports that &al with‘the budgetary integrity,‘operatiag performance. and
                               stewardship of the government as such; that is, of the government as a legal and
                               o&nizationa~ ,entity within’the ttatioriai society. Ho”wever. to report on some aspects
                               of the govemntent’s performance and stewardship, economic and, other information
                               about the national society is essential. Thti, the FASAB’niay consider whether such
                               ecoaomic information should be included in certain financial reports, such as general
           z                   purpose financial reports for the U.S. government as a whole.

                              43.       A tlnancial andyat on Wall Street, when asked about federal fiaancial
                              reporting, is likely to think of the.“Daily Treasury Statement” and the “Monthly
                              Treasury Statement of Receipts and Outlays of the United States Government.”        Some
                              financial analysts study these Treasury reports regularly to assessthe effect of cash
                              flows on bank reserves and the size of the government’s borrowing requirementsThe
                              federal government’s borrowing is viewed as free of default risk because of the
                              government’s ability to tax and to create money. The power to tax depends on the
                              government’s willingness to tax and the strength of the economy.

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                 44.     From a longer-term perspective, it is true. however, that ‘borrowers’
                expectations about such factors ns future inflation and the relative value of the dollar
                compared with other currencies can influence the borrowing costs of the United States.
                Those expectations, in turn, may k influenced by the deficit reported or projected by          i\3
                the government, the current intlation rate, and other factors.                                     _

                 45.        Someone concerned with formulating o.r executing the U.S. budget, when
                 asked about the “federal accounting model.” is    iikelytothhk       of the budgetary
                 accounting system. This is the system used to keep track of spending authority rt
                 various stages of budget execution .from appropriation through @portionatent and
                .allotrrtent to obhgation and eventual outhty. This system is used by Congress and the
                 e~oc~be brqch forksuch purposes as “scoring’ the budget and for assessing the
                 ~fxptiic implica&ns of federal’ fii&l          (ictivity at an h&gate     level. It also is
                 usql for plan&g end eont@l& ,govetr&ent op&tio@r et more detailed,
                 disaggregated leveb:: ‘,Qf cours&~$eople involved with ,tk budget also are informed
                 by, rind rely on, sf3yces of ,information other than the budgetary accounting system.
                 e.g.. progrh evalu#ion &rd performance measures.
                        i.                                             .,       ”
                46,         Although the FASAB does not recommend standards for the budget or budget
                concepts, patt, of its mission is to recommend, eccounting principles that will klp
                provide relevant and reliable fticial      inform&ion to support the budgetary +cesa
                Furthermore, information about budget execution is ess+.isl to assessing budgewy
                47.     A&ount&        working for’the federal govimment,  individuals audtckg
                government pro-a,        or rtudents in l governmental accounting course ur hkely
                to think fust of vvkt ,are known .within the federal >goverrunent as .the “propn-’
                accounts and the reports prepared, in p&t. from information in them. These acceunu
                are used to record as&s and liabilities that a&not accoutit$ for in the budgq
                &counts. These reports are said-‘to present “financial position” and “results of
                operations” in accordance with some set of accounting standards. The FASAE u most
                directly concerned with these accounts and with the reports that are prepared, m large
                par4 with information ‘from them.

                48.       Attention, to this and other aspects of federal @ccounting and financial
                reporting ks ken greatly increased by the Chief Fnancial Officers Act of 1990 (CFO
                Act). This act mandates improved fraancial management by ,requiring, among other
                things, (1) new financial organixations. (2) enhanced systems, and (3) audited financial
                reporting. However, the FASAB’s &a of concern is not limited to the reports
                required by the CFO Act.

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CHAPTER 2: THE FEDERAL                                          ACCOUNTING                                         AND ‘FINANCIAL’            >
REPORTING  ENVIRONMENT                                           :

                          49.      ‘. Financial reporting is an important, basic tool in the management and
                          oversight of most organizations. It isparticularly important for the federal
                          government because ,of the government’s fundamental nature and responsibilities and
                          b&a&i “th’e federal ~govemment operates with fewer external restraints than other
                          entities. Federal’accounting and financial reporting’are shaped by, and need to
                          respond”t0; the’unique characteristics and environment of the federal government, as
                          discussed below.
SOVEREICm                        ,“.- .“:.                  :      .       :’          :                        :; ‘; I,                          <

                  I,’                            . .    ;              :    ),   i”   ,,.‘.   ‘,       :,:.:;            ,,

                          50.        .The federal ‘government is ‘unique, when compared with any other entity in
                          the ‘country; because it-is the vehicle through whioh:the&zens      of the United States
                          exemis&th&fso+ereigti ‘power;’ The federal gotemrnent has. the power through law,
                          regtrlation. and taxation td .exercise ‘ultimate control over.many facets of the national
                          ec’onomy and ‘sooCiet)i.’All other entities withinthe nation; both public and private,
                          operate within the context of laws, oversigh& and accountability established by the
                          national government. The federal government is accountable only to its citizens. It is
                          politically accountable’to the electorate, but no higher agency has the power to
         ;,?L             demand an accounting from the government:
         : .’
                                                                   .’ ,,
         I ia,. OF POWERS
         &.a.,                             . .,,                      ‘i,
                      51.       Because of their con~ern’about’potential abuse of the national government’s
                      power, the founders designed a government characterized by the separation of powers.
                      Each branch of government-legislative,       executive, and judicial-is ch’ecked and
                      constrained by the others. Paradoxically, this same separation’of power can obscure
                      reswnsibilitv and reduce accountability. The interrelated responsibilities of the
                      legislative and executive branches.,for-example, can make it difficult to assign
                      responsibility for the policies that -are adopted.

           ‘The word “sovereign,” much discussed by legal and political philosophers, is used here in its broad,
popular sense to imply (1) internally that the people are the ultimate (if indirect) overseer or authority in the
decision-making process of a democratic state and (2) externally that the state isautonomous or independent. As
noted by one authority on the subject, either type of sovereignty, internal or external, implies that there is no
higher agency. In a more limited sense, sovereignty is the power to make or change the law, a power exercised
collectively by individuals and institutions operating in a complex system of relationships. See “Sovereignty,”
W. J. Stankicwicz, m New Encvclonedia Britannica, 15th. cd. (1976). vol. 17, pp. 309-313.

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                        52.       The federal system of government- comprising federal, state. and looal
                        levels of govenuneat-also makes it ditXcult to pinpoint accountability for many            i
                        programs. The federal government’s responsibility relative to that of the states has
                        grsduslly expanded The federal government has mderbken responsibilities in ueas
                        such as income redistribution, education, sad health osro. Often, however, the
                        expansion has come without direct fedemI Control Over related, operations.
                        Responsibilities sad f-&l      resouroes of the three levels of,goverameat hve become
                        intermingled; Citizens are not olanr about who is in charge, where to press for
                        perfonaaace. sad whom they should blaare for bad results.


                         53.       The federal government is unique in that it has continuing responsibility for
                        .the nation’s comfi~on defease end general. welfare. rQI a resul? the government’s
                         fInancia1 condition is necessarily a secoadsry qonsideratioa. in many csses. For
                        example, the nation would enter into military conflict to protect its vital national
                         interests despite the fact that doing so would worsen an already large deficit.
                         (Similarly, the govermaent’s greatest resource is one that it does not own but can tax:
                        the national eooaomy.)

                        54. ~ Further, providing for the nation’s general welfsre is a broad responsibility
                        that involves multiple, goals. There is ao,siagle measure of success (like “return on
                        investment” or “earnings per share”). Goals often sre not explicitly defined in
                        quantifiable terms and sometimes coatIict with each other. Relevant measures of
                        performance are usually aoafiicial.      For exaraple, msay federal loan progrums are
                        charged with two .coaflictiag goals: (1) to operate as a fiscally prudent lea&r and (2)
                        to, provide high-risk lenders with credit.                                                       1


                        55.       As stated, the federal government has unique access to frnanchl resources sad
                        financing. It has the power to mx. to borrow, and to create money. These powers
                        give the government a’ call on the underlying wealth of the United States-a vast but
                        finite pool of resources.

                        56.      There is a0 oonstitutionsl requirement to provide sufficient revenues to ftmd
                        expenditures of the federal govetnmeat. There ‘is a statutory limit on the amouat of
                        U.S. debt. This limit is routinely increased by Congress and the Resident The
                        federal government’s ability to ftnrnci its debt has not been constrained by capital
                        market assessments of its creditworthiness. It is true, however, that tl~aostaf””    ~
                        seticing the U.S. debt now constrains the range of feasible fiscal and monetary
                        policies more than was formerly the osse.

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                                             57.       The federal, government-through    the Federal Reserve-also has the power to.
                                             create money and to control its s~pply.~ This ensures that creditors will be repaid, at
                                             least in nominal terms. When the- governinent’s, debt is large, it also provides a
                                             temptation to create money, as:well’ as inflation.
                                                        I                                ,-,.’  ,,

               INFLUENCE            OF ORGANIZED         INTERESTS                    ”
                           i..                58:‘~: .~‘:Becauseof the size and nature of government programs, it is difficult, for
                           ; _,               individuals ‘to evaluate or to infhr&ce policies and actions of, the federal government.
                           f.                 Typically. individuals must organize to exercise influence. Small groups whose
                                              members&r& sig&+ritly        affected by a ,looinmon factor or concern c&t be organized
                                              relatively easily, but,they may’fmd~‘,it diffibuh m.wield mu&influence.      Large groups
                      r    ,,2*. :           ,mry ,giiiiiii*il”?&       x.&..&j7~aiac’ult            i~,,&e,,ti&~m bw od’mmon but
                                             diffuse interests. O’nie or@tnixed+iterest ‘groups’tendto plrpetuate themselves.
                                                                 ,‘.   I,:‘, .,. ‘,.,   -2.‘;;.,
                                                                                             I.I/_,:; i,\.: s, ( :;’
                                                                                                                 ,, :.‘. :‘:.:i.; ,,/:,*.‘,
                                             59.       ‘As a result, most e,lected and appointed fed& officials. and the, groups to
                                             which they are responsive, have been interested primarily in ‘mformation about
                                             individual g&-en!        programs, ~funct@&‘~~ i&v&q&, nijt &e‘ G&d if&&,‘. ’                    ‘:
                    ‘,/                      interested in information about the government as a .whole and even less concerned’
                                         .   about ,mtermediate levelb,‘of reporting, such as ~indivi~ual departments
                                                      “I              ..I,        .. .,(.                                             (.’

I              -LdTICAL             SYSTEM VERSUS PRIVATE            MARKETS                .’
                           .”..,‘                                                                                                                      ~
                          .:y,               60.       The federal government is not subject to the discipline of competitive markets
                           ,,*               for private goods, services, and capital. Generally, ‘transrictions~between ,citi&s and                   I
                          ,+,                                                                                                                          I
                                             the government are not individual exchanges between willing buyers and willing
:         F-              LI                 sellers. Taxpayers provide resources involuntarily,, based on their consumption,
                                             wealth, or income rather than on their desire for particular ‘government services: Even                   I
                                             when ‘user ,feti are charged, they often are not intended to represent market clearing
                                             prices-prices that would, in markets for private goods, balance supply and demand.                    ’
                                                                                   :                                                                   I
                                             61.       Thus,.citixens as individuals have little say in selecting the public services
                                             they Pay for. Decisions ,on what public ‘services will be provided are collective
                                             decisionsmade through the political process. Politically influential recipients of
                                             benefits can force less’influential non-recipients to bear the cost of the benefits.                      I

                                             62.       Further, because most governmental revenues are not earned in individual,
                                             voluntary, exchange transactions, no private market directly measures the value of
                                             output. Consequently, the value added tosociety’s well-being, by government                               I
                                             programs cannot be gauged by conventional measures of net, income, nor is there
                                             much competitive market constraimon the quantity or quality of services provided.
                                             Instead,, decisions about the quantity, quality, and value of.public services are
                                             collective decisions made by the political ‘process.


                       6The Federal Reserve Board functions as a largely independent entity but is. of course, a government
               am     created by congressional action.

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     ASSETS                                                    .’

                            63.     The government ,makes significant investments in assets. including public
                            domain assets and large ~investments intend& to produce growth (educational
                            programs and research and development, for example).

                            64.         ln government, as in the private sector, assets am expected to provide benefita
                            that outweigh costs. In the private sector, the notion of benefita is’ relatively
                            straightforward: benefits, are measured in terms of cash inflows. Assets are not
                            acquired unless the value of expccted.cash fl~~s,exweda       l oquisitjon  costs.
                            65. .- 1, .In the ggwrnmen< thh &pl&does            not.&ally    exist. Expected benefita
                       ’    of@n arc not oash.inflows but rather are the s&ices provided by the asset.
                            Sometiines those servi&s :arc pipyided 9 the. goynupqt        itself (e.g., government
                            office buildings or. motor pools). ,More often, the services arc provided to the public
                            (e.g., education and research and development).
                                  :       .

    RESPONhLITY      TO iiE      NEWS IyIEDi       ’

                            66;      The federal government is subj&d       to, andshould encourage, scrutiny by the
                            news media. Because of the lack of ixternal restraints and because the government’s
                            power ultimately resides in the citizens. it has a special responsibility to citizens and
                            taxpayers to disclose its activities.

    IMPORTANCE     OF THE BUDGET                  >

                            67.        The. budget is the most widely recognized and used,financial report of the
                           ‘federal government. It is a ,principal surrogate for the missing external restraints
                            discussed above. It is a vehicle for the politioal,,process to reach agreement on goals
                            and to allocate resources among competing priorities. it provides a system for
                            controlling expenditures. And it supplies information necessary for assessing the
                           ‘effect on the.economy..of the government’s fisca! policies. The role of budgeting in
                            fmncial reporting isdiscussed further in Chapter 7 under “Relationship of Financial
                           .Reporting to Budgeting”

    NEED FOR SPECIAL       CONTROL     MEcHANlsMs          ’

                           68.       The lack of external restraints noted above creates a need for special control
                           mechanisms. Some me&nisms exist ‘today. The moat important, of course, arc the
                           political constraints and aqzountability imposedby regular elections and the separation
I                          of powers and the other constitutional constraints and accountabilities, such as the
                           federal system and freedom of speech.

                           69.       Accounting and financial reporting also play a role. Budgetary obligation
                           accounting is used to control activities, primarily at the budget account level. Audited
                           financial reports can providc.uscrs with assurance that accounting systems arc
                           providing consistent-and reliable data.

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      70.”     However, the need for ‘kpvement~ ih fti@ai     reporting is widely ;. :
      recog+ed; as,,is ,ae ,fa$ t+a! f-+1    infox+on   alone often is inst$qient @r.

      decision-making. For example, financial infkmation on &stk oh&h must 1;;!‘do,pbined
      with nonfinancial information on perfommnce to provide a basis for assessing ,the
      effhiency and effectiveness of government programs.


                       ,,           .

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 NEEDS-THE FOUNDATIO,N OF GOVERNMENTAL FINANCIAL                                                                         /
 REPORTING                                                                                                               i3

                          71.       It ‘may be said that “accountability** and its corollary, “decision usefulness,”
                          comprise the two fundamental values of governmental accounting and financial
                          reporting. They provide the foundation for the objectives of federal facial
                          repotting. Because a democratic government should be accountable for its integrity,
                          performance, and stewardship, it follows that the government must provide
                          information useful to assess that accountability. Similarly, because a democratic
                          government is accountable for operating economically, efficiently, and effectively, for
                          the purposes intended by ‘citizens and their elected officials, certain other conclusions
                          logically follow. .Specifically, those who formulate, select, and implement government
                          policies and programs need information useful for planning, controlling. and
                          conducting government functions:
                          72.’     The assertion of accountability therefore leads to identifying. first, those to
                          whom government is accountable and, second, the information needed to mauitam and
                          demonstrate that accountability. Accordingly, this Chapter ftrst discusses the concept
                          of accountability, then identifies the four groups of users of federal financial rrponr.
                          It concludes by providing some examples of the information needs that may br
                          addressed to some extent by federal financial repot%


                          73.      Several different kinds of accountability can be distinguished, and a grven
                          piece of information may be relevant in different ways to judgments about
                          accountability. For example, one authority suggests that there are five levels or tvpes
                          of public accountability:

                                  .         Level 1 is policy accountability-selection    of policies pursued and
                                  rejected (value).
                                  .         Level 2 is program adcountability-establishment       and achievement
                                  of goals (outcomes).
                                  .         Level 3 is performance accountability-efficient     operation (efficiency
                                  and economy).
                                  .         Level 4 is process accountability-using     adequate processes,
                                  procedures, or measures in performing the actions called for (planning,
                                  allocating, and managing).
                                  .         Level 5 is probity and legality accountability-spending      the funds in
                                  accordance with approved budget and/or approved items (compliance).’

                          74.      In a democracy. appointed officials are accountable to their superiors, and
                          elected offtcials are accountable to the citizens for each of these kinds of

        ‘J. D. Stewart, “The Role of Information in public Accountability,” eds. Tony Hopwood and Cyril R.
Tompkins, Issues in Public Sector Account      (Oxford, Great Britain: Philip Allan, 1984), pp. 14-15, as &cd by
the GASB in its r ’ ’ a’ V’ ws                        S      cc      ’   ents ReDorting (Dec. 1992).

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                                     * :’      accou&bility.          A&mting              and, financial reporting Fan. help. elected and appointed
                                               offtcials ,t& &it&tiand;to                 demonstrate. their accountability.. The last kind of
,.                                             accountability listed. for “probity and legality,” probably is the kind most often
   (0. . ._-A
                                               associated by the public with accounting. However, the accounting profession has
                                               long recognized that accounting can and should contribute to achieving and
                                               demonstrating several kinds of accountability, such as
                                                                                            :            :, : “, ,”
                          -0.                             -.            accountability          for  f~cial.r@urces;                     , I,
                           *li      ~’                       ..         ticouittability for faithful compliance or adherence to legal
                             ‘q.                           : requirem;iiu -ind administrative policies;                          ... I: : ,,             ‘-
                             ..                              9.         ‘acc&mtability’         for  effrcienoy.     andxconomy              in operations;   and
                           ,.. .                             .          accountability for the results of government programs’and activities,
            ._i              ..       -.. ,                 .as reflected in accompiishments, benefits, and effectiveness.8
                           %A.,                            ‘, 8 .‘..
                          :               (I                                                                        I .i.
                                 ., : ‘,                2._,                ‘*‘:.,,         ““,                      I,,..‘.‘.c::‘.,:-,*, *
                                                                                                                          :, ::.                                      I
                USERS-OF FEDERAL, F&NCUL.REPORTS.                                          2 ‘. : j, ’ :                                    ‘,:
                                              ,..       ,,                              .;;; ‘i”> ,’ ,, !
                                                                     .,’ ,‘.,v                                        : ” :. ,,..,,) _,_
                                                            .,,I,, .’ ..i ‘>“,. :              ‘_ ‘: -‘.         ,,,‘_,..                  “_
                                               75. .’ The Board believesthat users of.finaneial ,infomtation about the federal                                           Y;c
                                               government         can be classified in four major groups: citizens; Congress, cxecuttves,
                                               and program managers.
                cltkcar .,                                                                                                  i_ ‘_
                                                                                                                      .;           ;..
                                               76.           This group includes individual citizens (without regard to whether they are
                                               taxpayers, voters, or service recipients). Citizens include the general news media and
                                               more specialized users. such as trade journals; public interest and other advocacy                                      ,
                           1.                  groups;     state   and   local      legislators   and    executives;        and      analysts   from    corporations,
                                               academe, and elsewhere.                        ~              ‘.;. , :
                                                                                                     ,.              ,, ‘. ,,
                        _,                   ’ 77.;’ ’ C~itizens are interested in many aspects,of the :federal govemmcnt. They are
                                               concerned about individual programs, ‘candidates for office, the services the
                                               government provides, and the fiscal responsibility of their elected and appointed
                                               representatives., Citizens receive and pay for go,vemment                            ,’ services and therefore are
                                               cbncemed with the outputs and oritcomes.of those servtces and the efficiency wth
                                               which ,rhey are ‘provided’ Citizens are concerned abotttthetr families and, in
                                               particular., tiith the .financial ,burden theirchilclr~n ,and .grandchildren will inherit. As
                                               individuals; citizens typically have limited. time and a.bility to analyze reports about
                                               their government; they ‘want and rely on assurances that the govctqment IS functioning
                                               economically, efficiently, and effectively. * As they are’ organized and represented, by
                                               analysts working for interegt ,groups and the news ,media, citizens want more
                                               information about the government’s activities.
                                         ,’          .,’ ,,..              ”                      ..:, :
                                               78.’          Citizens express their interest in the, government by discussing issues, by
                                               voting. and by writing to their representattves-,about the quality and quanuty of the
                                               services they receive. Insome cases,.citizens may decide whether and when to use
                                               services and products provided by the’gove&ent.                                  They may contribute to political
                                                                                                           __..,.,,,.                .^ ..-

                          8  of the CQtggpttee on Concents of AccouatlIlO,BPbiicable to the Public Sector, American
              Accounling Association (1970-71). pp. 80-81, as cited by the GASB in Preliminarv Views on Service Efforts and
                               Re~ott~lp (Dec. 1992).

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                     campaigns, demonstrate support or opposition for individuals responsible for past and
                     proposed government actions. and even run for offtoe.
                     79.       Thii group includes elected members of Congress aud their staffs, including
                     staff of the Congressional Budget Offke (CBO) and the GAO. Congress is concerned
                     with broad-policies.’ priorities, and the programs that implement those priorities. it
                     decides what taxes to impose, what funds should he spent, and for what purpose.
                     Thus, ~oagress ,is concerned both with how to finanoe progmm~ and with how they
                     * executed.
                                              .-      .
                     80.       Congress participates-along with the administrxtion-in     the basic decisions
                     &at &scribe the intent of govemat.          Such decisions include passing laws in
                     response to public demand, allocating resources among competing programs, and
                     establishing policy that affects various aspects of the country’s economic and social
                     life. These decisions often are influenced by assessing costs and benefits and by
                     consideriug the effect of the government’s aggregate financial requirements on the.

                     81.        Coagress also participates in monitoring government programs. It assesses
                     the management performance of the executive branch hnd the efftciency and
                     effectiveness of programs.

                     82.      This group includes the Presidept aad those acting as his agents, i.e., program
                     agency heads and their deputy, under. and assistant agency heads; heads of bureaus,
                     administrations, services, and agencies; and the central agency officials in OMB and
                     the Depart&at of the Treasuty.

                     83.      Executives, like Congress, are concerned with the government’s goals,
                     objectives, and policies. Executives focus on the strategic plans and programs that are
                     intended to achieve presidential and congressional goals aad to implement their
                     policies. In par&ular, they pay rtteution to budgets that, from the, perspective of each
                     agency, are the source of the resources needed to achieve goals aad to implement
                     policies. Executives are, of course, directly concerned about the management of
                     programs, that is, with the actualdelivery of services and with the efficiency aad
                     effedveness of the delivery process.

                      84.      Executives develop legislative proposals, recommend the necessary level of
                      program kiing,      and formulate ftnancing and revenue-raising strategies. They help
                      select the method for delivering services. They determine whether program managers
                      have been accountable for the resources entrusted to them and whether programs are
                      operetiag efftcie?tly and effectively. Executives also provide infomaatiop that will
                      enable the President and Congress to monitor programs.

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      Progmm         mana+                     “.      ‘1’    ,,, ,,           ,, ‘y ‘, ‘,   :
                                      85.     This group jn&&s individuals who manage goverdment prOpIllS.        Their
                                      concerns include operating plans, program operations, and budget execution.
                      ;       .’
                                      861      Program’ma~gers’assist in the design of programsand organize. the method
                                      seleoted for delivering~seivices. They recommend.‘progratti budgets based on detailed
                                      plans that set faith needs for money, staffing; fa{ilities. and inventory.
              .Y                                                  ./
               “-I,, ;.               8?.,    ,~Program .managem establish operating procedures for their programs and
                                      amagi th!q witl& th6. l,irn& of the spending- authority granted by Congress. They
                                      select+tp@s&       and.e.valirate~plnonriel.’ They al,so ,make sure that program inventory
                                      and fa&es      are icquirrd’iowdinic~iiyr,inainfdi~~d’~~iiuitcly,     and used efftciently.
                                      hgnm      mmagers need to provide informatioti to’enable executives and Congress to
                                      monitor, the programs.
                                                  -;                    ,,.                           .. ,.,
      THE NEh                Oj USERS OF PEDEILriL’ FMANCIAi’           iiEPORTS                 ’

                                      88.     While the fmancial, information needs of these groups is more diverse than
                                      their memkrship, those needs can be categorized under four broad headings.

                                      89.      AI1 user groups need information about the budget. For citizens, Ltiormation
                                      about budget execution,.. provides assurance that their elected and appointed
                                      representatives’ have fulfilled their ‘most basic fiduciary responsibility: to raise and
                                      spend money in accordance &th the law.

                                      90.       For the President’s economic team and for congressional budget,committees.
                                      information is needed on budget aggregates (total budget authority, total receipts and
                                      coIlections, and total outlays) to establish fiscal policy, including governmental
                                      fmancing needs. These officials need’to know that prior-year ‘-‘actuals” have been
                                      accurately -reCorded in accordance with the same budgetary principles used to prepare
                                                                                            ,j.,’ .,

                                      91.      To avoid violations of the Anti-D&oiency Act and the Impoundment Control
                                      Act, &am      managers need information about obligations incurred on their programs.
                                      They need periodic information about the status of budgetary resources, that is, the
                                      extent to which the resources have been used or remamavailable. They also want to
                                      know whether budgetary resources are available to be used for other purposes through

      opcratillg      Ptrform8nee

                                      92.      Citizens want information about programs that affect ,them. Veterans. for
                                      example, want to know about new hospitals, and defense workers want information
                                      about contract awards (and cancellations). Retirees and people planning
                                      retirement-and their representatives in Congress-want to know that the Social
                                      Security Administration provides reliable services to the public.

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                   93.      Congress and executives want information about the oomparative costs of
                  programs (such as the per student cost of the Job Corps program versus that of other
                  job training programs). For comparisons to be valid, costs must be defmed and
                  measured alike.      .

                  94.     Of course, information on the effectiveness of prngtams is alsoneeded to
                  make valid comparisons ‘among programs. Information is needed about outputs (e.g..
              ,   nutyber of students who graduated) and outcomes (e.g.. number of students who got
                  and held jobs for which they were trained).

                  9s..     Exeoutives
                            ‘.        and, program managers nesd.t+tow        the cost .of performing work
                  reimbursed by other, goveta&tt,‘enuties   or by nonfederal customers. Costs, in this
                  w, would measure the m+roei‘(peironnel,         material. ipd equipment) used to
                  accompiish the ‘work.      :            b

                  96.      Congress and executives often want cost’ inf&mation that would help to
                  compare alternative courses of actiqn. How much mom or less would it cost if the
                  Census Bureau used a, new approach to taking the census? How much would be,
                  saved if an Army dbhion w& based’iq the United States rather than in Ei&pe?

                  Pi.        Rugram managers n&d ihfotmati?it 09 the assets aitd liabilities related to
                  operations. Managers of loan programs need information on the quality of their loan
                  portfolios. Managers of repair depots want infotmation on inventories. such as their
                  value, quantity, location. age. and condition. Managers of government facilities need
                  to know the facilities’ condition and an estimate of future outlays made necessary by
                  d:ferring needed maintenance.

                  98.      Congress and executives need infonitation about the market value of assets
                  that could be sold..such as precious metals or other commodities.


                  PP.       Citizens, Congress. executives. and program managers need information to
                  assess the effect of the government’s activities on its financial condition and ‘tit of
                  ‘the nation. information is needed about the financial outlook for both the short and
                  the long term.

                  100.      Information is needed on the government’s exposure and risks associated with
                  deposit insurance. pension ins&rice, and flood insurance. People need to know about
                  likely future ,expenditures for cleaning up nuclear weapons sites and military bases.
                  They want information that will help them assess the likelihood and amotmt of future
                  claims that might eiiw from goveramea t- sponsored enterprises.

                   101.     All users need information on earmarked revenues recorded in trust tundr.
                  They want to know, for example. whether the Social Security Trust funds are likely,
                  in the foreseeable future, to need infusions of new taxes to pay ‘benefit+. Citizens
                  need to know the implications of investing trust fund revenues in government
                  securities.     )

                  102.   Users also needtrend information on spending on investments in physical and
                  human capital versus spendmg on consumption.

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                       103.       Users at all levels need infbrmation on’ internal controls and the adequacy of
c L..J                ftnanoial management systems. Citixins want ,as+rances that systems and controls are
         L-           in place-to   pfotect.,the reswrces they. sti~@y to, the ~?vemtneft t. They want to.know
                      that~opcnting procedures-a+ processes pm+               rea+mal$e assurance that those
                      rbstwces are used economically +d etfic&ly             fir the purposes intended C&ess,
                      executives, and program managen need, to ~@onstrate, to +ose to whom they are
              .       l Ooountable thattheyhave, in f+t, p+c+d            th&e ,resources and used them well.
                      Users ,want -t6 know, for example,, .&at tgepcy heads have d&emitted that internal
                  ‘, controla are adequate, tl&b@          f-F@,      sJ++?ents are .yu$itable, and that high-risk
                     ‘has ha*,, been identified .mj .awsscd            .^ ‘8      ,. ,,

                   104..     Tha :impli~atio.np qf !heq, fQv ,@oad categories of information needs for .the
                   objectives.,of ,feder$l fwial     .reportipg .UC discpsed ,@ more detail in the next
                   chapter.-..               ” 1.                 ‘,
                                           :                   ‘,


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CHAPTER            4: OB JECl IVES OF FEDERAL                        FINANCIAL             Rl$POiTmG

                         105.     The federal government derives its just powers from the consent of the
                        governed It therefore has a special responsibility to report on its actions and the
                        resultsof those actions. These reports must accurately reflect the distinctive nature of
                        the f&e& 8OV~Wt          and must provide .infOrrnatiOy  useful to the PCOplC, their
                       ,ele&d represenutive~; and federal executives;. Provrding this information to the
                        public, thk’news~inedia;‘and elected offtcials4s.an~esrentirlssemial
                                                                                        ‘part of accountability in
                        8OVklIC~t      Providing ‘this infonna+n to progmmalaM(prs, executives, and
                        members of Congress’ is essential’ to piannirlg and~conducting the government’s
                         functions economically, efficiently, and.effectively for. the byefit of society.

                       106.     Finaitcirl-report&g is not the only ,source’.of information to support
                       decision-making and accountability; ” Neither ,can &an@        repOr@, by itself, ensure
                       that the government operates as it should. Financial reporting can, however, make a
                       useful contribution toward those objectives.

                       107.      The objectives discussed below apply both to internal and to external
                       financial report. To some degree, they also apply both to special purpose and to
                       general purpose reports. Users of general purpose ftnanoial reports may have
                       difftculty obtaining relevant information to hold the federal government accountable~ if
                       the government operates without appropriate reporting objectives and accounting
                       standards. The Board also intends that these objectives and the ensuing standards will
                       prove widely useful for other purposes, though they may not apply to every special
                       report or every item in the accounting system. The objectives are intended to improve
                       the relevance, consistency, and quality of accounting and other data available for a
                       wide variety of applications.                                                                      \

                        108.      The Board expects, that its recommendations will be applied to improve
       .                information for program management and executive and legislative branch
                        decision-making. The Department of the Treasury, OMB. and the GAO expect that,
                        to the extent possible, their reporting requirements, will be aligned with the Board’s
                        objectives and standards.

                        109.      Four major objectives are proposed, around which accounting standards
                        should be organized These objectives are designed to help ensure the adcountability
                        of the federal government and to better inform decisions influenced by financial
                        information about the 8ovemment. Each objective reflects the federal environment
                        and meets many of the,needs expressed by current and potential users of federal
                        fmancial information. Together, they provide a framework for assessing the exist@ ,
                        accountability and fmancial reporting systems of the federal government and for
                        cons&ing      how new accounting standards might be able to enhance those systems in...
                        a cost-effective manner.

                        110.     Current and potential users of federal fiaancial information want information
                        to help them assess how well the government is doing by answering questions
                        re@ing topics like those below:

                                  .        Budgetary Integrity: What legal authority was provided for
                                  ftaancing government activities and for spending the monies? Were the

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                                               financing and spending in accordance with these authorities7 How much was
                                               left?                                    ‘, ..“!

      -.                                        .          Operating Performance:      How much do various programs cost, and
                                                how were they f-&d?           What outputs and outcomes were achieved? What
                                                and where are the important assets, and how effectively are they managed?
                                                What liabilities arose from operating the program, and how will they be
                                                provided for or liquidated?
                       :.i                                          .,:   /,           .‘,           .’
                        /, ;.                             Stewardship: Did the government’s financial condition improve or
                                                Liorate?      1 What provision was made;for the future?
                       ff                     I        .r’ :. ’         ,. :: .*    ,;y,< ‘.,,ii , ..!: ;,
                                                        Syrtems and C&rol:       Does the govanmeafhavl       cost-effective
                                                &ems and controls to safeguard its assets? Is it able to detect likely
                                                problems?’ Is it ~correctingdeficienoies when detected?
                                                                  ;.,..                  .“.    ;;,      ,
                                       111.     Concerns  like the&%fme      the objectives  of  federal fiMncia1 reporting. In the
                                      following text, objectives and subobjectives are stated in bold italic type. Each of the
                                      objectives and subobjectives is followed by a commenuuy that explains some of the
                                      implications of the objective.
           BUDGETARY         INTEGRITY
                       i(l                                                                                                            ,
                                                                                 \                                                    I
                ‘OBJECTIVE        1
                                      112.      Federal financial reporting should assist in fulfilling the government’s
                                      duty to be publicly accountable for’monies riised through taxer and other means
 ’ ‘\
                                      and for their expenditure in accordance with the appropriationi” Iawa th8t
(;d                                   establiib the gcivemabetit’s budget for ‘a ,particular fiscal iear and related laws
                                      and regulations.
                                       113.    This objective arises generally from the responsibility of representative
                                      governments to b&accountable for the monies that are raised and spent and for
                                      compliance with law. More specifically it a&s from the requirement in Article I,
                                      Section 9 of the Constitution of the United States that “No Money. shall be drawn
                                      from the Treasury, but in Consequence of Appropriations made by Law; and a regular
                                      Statement and Account of the Receipts and Expenditures of all public Money shall be
                                      published.from time to time.” Its focus is the,Budi‘t of the United Stateg
                                      $+OvertmWl, the President’s annual budget submission to theCongress, which is the
                                      goVemment’s principal fmncial report, and the lawsenacting budget authority for a
                                      given fiscal year. The Budnet of the United States Govw            is the initial frame of
                                      reference within which Congress and the President .enact the laws that require the
                                      payment ‘of taxes and provide the authority to. obligate and spend money.

                                       114.    The focus of this objective is retrospective. That is, the focus is on recording .
                                      actual data from budget execution against appropriations made by Congress using
                                      existing budgetary standards. Thus, it would validate the “bctual” column shown in
                                      *e it,      of the-.united,.States G;ovl rnment . It would also~provide dam that could be
                                      shown ‘iit other reports as a statement ofbudget execution or; i statement of the status
                                      of budgetaty resources. The data also-could be displayed in analytical tables showing,
                                      for example, the historical patternof receipts and outlays.

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              115.    Certain subobjeoti*.%s arise from the basic objective                                              of budgetary integrity, as
    .         discussed below.
              pdtml             f&n&l          rmortinn                 should brovidt           information       that h&s           the tcadtr     tQ

              116.     IA. How budgetary rtsourtts have btta obtained and ustd and whether
              their acquisition and use were in accordance with the Ieg8l authorization.

              117.              Considering this objtctivt in conjunction with the specific information needs
              identified         by the Board suggests some examples of information that might help meet
              w      objective:                                 .                               .:.
                                       :govexnamkreceipts                             and offseuing~colleoiions reported in total and

                              .         obligations according to the &ure of sew&es or items procured;                                                           :_
                              .         information about the extent of coqpliance with the budget and laws,
                              and whether money was expended as intended by the federal government and
                              its grantees; and

                                .        valid data on budget author@, obligations; and outlays by program
                                and for all appropriation and fund accounts (summarized appropriatejy to fit
                                the intended audience).

              118.               1B. The status               of    budgetary            rtsoomr

                                Examples of information that could help meet this objective include

                                ..       information about the sufficiency of budget authority for covering
                                          and       the SUPS of obligated and unobligated balances of
                                 budgetary resources and

                                 .        assurances that funds authorized                            for a given purpose were actually
                                 ipent for that.purpose.
                                                  . .
               119.              lc.    How       iIlfO~8tiOn                on the ust of budgetary                rcsourcts rthtts           to
               illfOrlU8tiOll           on   thtt~sta              of   pro~~moptl'8tiOns              and     Whtthtr         infOrlU8tiOll    on   the
               statat of budgetary                      resources           isconsistent.with          othtr8ccountinginform8tion                     on
               asatb.tad lit~Uitks.

                120.    This subobjective arises from the fact that accxual-basis mehsure~ df the cost
               of government programs, functions, and activities may differ from the amounts used in
               the budget’ for 8 variety of valid reasons.
c              121.    Reports primarily intended to address objective 1 and its fint two
              subobjectives would use budgetary ine”asurerngk @@objective 1C would use both
              budgetrry and accrual measures because recon&ation of the two is implied. The
              basic r&~&@&g unit for this objective would be the @dgtt account, although
              accounts are often,aggregated for some d          purposes.

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                         '. /' ,.:                                                                  /
                                                                                  '.    ,,:
      ‘\../                OBJEcTng           2
f.                                                                                              ,   ,.
                                                   122.     Federal financial npoking’should             assist repoti oaen in evaluat&g the
                                                  aenica   efforts, &r&and    l ccompliihmcntr      of the reportlag eat@; the manoer ln
                                                  nhkh  th&e efforts and accompllshakts           have b&en &aced;     aad ,the
                                                  managtment of the tntlty’s as+r ...I.and    liabll~+.
                                                          ‘.     .T,:                  ,’ ‘, : /,‘I ,l
                                                    123.      This objective arises from a demo&c’governkeSs                duty to be accaunuble
                                                   to its citizerrJ!fp;$ managing resources an4 providing .services economically and
                                   : : $i .       ‘if&i&ly      ‘&~d fbr ifieciiire&ss iii ~Ui+$$‘~lkkd            eo$a’. Also, the eovenrment
                    ;.       ..
                                                   slioul( be akot+jbi& for &is&g kkces               efficiently;
                                                            .*          -.,              “...-      I    .,“..,; .: I,.
                                                   13% ‘;: “‘&&&&emm~ni                 &vi&s tie’ iht &ally protided in exchange for
                                                   ~ol&&$~i;llynie&          or‘fees;-expensei ctidtWki&bed            s@inst revenue to measun
                                                   “earnings” or “net income” as would be done in business l ccounti$g. Moreover.
                                                   directly measuring the value add&d to “&i&‘s welfare by government actions is
                                                   d&&k         tkketheiess, expenses cdn’be ‘matched agiinst the provision of services year
                                                  %y yeai. The rkulting coit Cai then k:Snalyzed’ in’~latiODship to a vatiety of
                                                   measures of the achievement          of resuk .;
                                                       __                 -II _..
                    ,:i”      .                     125.      Certain
                                                                 -‘-    s&objective& arise frdm the basic objeotive of reponing on &rating
                                                   performaneej ‘as diskksed below.

                                                          Fedctil financial     rcaoitine     should nrovide Information      that heias the
                     ,                                                                                  :
                                                  reader to de&mine:

                                                  126.      2A. The costs of providing specific programs and actlvlticr and the
                                                  xomposition    of, and changer in, the= costs.

                                                  127.      Examples of financial information that can hilp to address this objective

                                                            .        informauon on the costs of programs and activities;

                                                            .       cost comparisons with estimates, with similar functions, with targets,9
                                                            and over time; and

                                                            .        relevant analyses of the composition and behavior of costs, such as
                                                            full and incremental costs, fixed and variable costs, direct and indirect costs,
                                                            and reimbursable and other costs, when appropriate.         ’

                                                  128.    2B. The effort8 and accompllshmentr associated with federal programr
                                                  aad the changes over time and ia relation to costs.

                           ‘“Performance targets” specify the level of performance that is set as a goal by policy’ and program
              OffkiAls.      TA.QCtSmiry be Skt in terms of outputs. outcomes. klpACtS, COStper unit Of-Output, CtC.

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 I                          129.     Examples of information that can help to address this objective include
                                     .        financial aad nonfinanoial indicators of senke inputs, outputs, and          T‘)
                                     outcomes, including comparisons with goals;                                           ‘. ,.,
                                     .        indicators of program efftciency and effectiveness;
                                     .        work load measures and unit costs; and
                                              total andmarginal costs and benefits. the relationship of these to
                                     i*et   reque+, aad when thk benefits will he realixed.

                             130.   2C. Tbc cflkiency     cad cffcetiveaess of the government%      management     of
                            lb uaolr end IirbiUtbs.

                            131. ~ This &objective implies cqacern with the management of all federal assets
                            and liabilities used by q under the control of agencies. ., Users of fmial     reports
                            foeus oa the use of these resow&s in program operations, not solely oa their fmmcial
                            value. Reports intended to address*this objective would pvide information to help
                            users assets .th~, efficiency and effectiveness with whiqh
                                      .         cashisused;
                                      .         loan, loan guarantee, and other receivables programs are conducted.
                                      .         inventories of supplies, materials, and similar items are maintained;
                                      .          forfeited and other tangible assets are handled.

                             132.    Other examples of informatioa relevant to this objective might iniAude

                                     .         the service life.and replacement cost of major systems and
                                     .         backlogs (and budgetary impact) of delayedmaintenance.
                                     rehabilitation cost or replacement value of assets;                                                i
                                                the marlret value of forfeited and other assets, particularly those held
                                     ior sale;
                                      .         the extent of unpaid expenses; aad
                                      .         estimates (and ranges of estimates) of other known liabilities (such as
                                      leases or deposit aad other insurance liabilities) aad other exposures to loss.

                             133.    Further .discussioa of performance measurement and how financial reporting
                             CM contribute to reporting on performance is provided in Chapter 8.



                             134.    Federal fin8acLI reporting should assist report users in uwuiag  the
                             impect on the country of the goverameat’s operations and bwestawats for the
                             jeriod sod how, u 8 result, the govemm&t’r   and the natioa’s finaaCtl condltioo
                             hu changed ead may cheap in the lb~ture.‘~

             “The concepts of “f-4       position” and “ftnancial condition” are discussed in Chapter 7.

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                           135.     This objective is based on the federal gohamen A responsibility for the
                           gen@ welfare of the nation ‘in perpetuity. It focuses not on the provision of specific
                           se&&s but on thk riquirement that the govemmeat report: the broad outcomes of its
                           actions. Certain subobjectives arise from the basic objective of stcwardship,,as
                           discussed below.

                                     Federal financial rebortine should nrovldc information that helbs the
                           reader to d&nninq :
      ‘>?                  136.      3A. Whither the~pvemmeat’s          flnaacial porition improved or
                           deteriorated over the pgiod.          ”
                                         ), ) ^,,,
      r<;    _,   ”                  Examples of infotrn&ion relevent to this objective ~include
      i                                                 .L ..,          .a
                                     .’       the emount of assets, liabihties, and ngt assets (or net position);
                                     .      “:an analysis of government debt, its ,grokth, and debt setice
                                     .        &anger in theemount and ,$&ice potential of capital assets; and
                                               the emotmt of -contingent liabiiitics and unrecognized obligations
                                     ;such as the probable cost of deposit insurance).
                            137.     Assess@ whether the 80 vernment’s fwial          position improved or
                           deteriorated over the period is important not only because it has finanoial implications
                           but also because it has social hnd political implications. This is because analysis of
      g.                  -&y finanoial position improved or deteriorated helps to explain whether frrrancial
                           burdens were passed on .by current-year taxpayers to t%ure-year taxpayers without
                           related benefits. The latter notion is sometimes referred,& as “interperiod equity.“”
      ,.i,                  138.       Viewed in this broader context, providing information to meet objective 3 and
                           its subobjectives ,will help to satisfy the needsexpressed by financial report users.
                           It will also help to explain the issuance of‘new debt in’relation to expenditures for
                           activities with current benefits versus expenditures for investment-type activities that
                           .       future benefits.

                           139.     3R Whether future budgetary resources will likely be ruMcient           to
                           sustain .publk services and to mot obligatiois as they cow due.

                           140.     Infotmation.about the results of past government operations is useful in
                           assessing the stewardship exercised by the government. Users of financial reporu also
                           want help in assessing the likelihood that the government will continue to provide the
                           current level of,benefits and services to constituent groups, such as fatmers, retirees,

           “In paragrttph 61 ‘of its fust conceptual statement, Obfcctivcs ofFinunciuf Reporting. the GASB noted:
YJ’he Board believes that interperiod equity is a significant part of accountability and is tklamental to public
adain@ration.     It therefore needs to be considered when establishing financial reporting objectives [for state arid
locel governmental entities]. In short, financial reporting should help users assesswhether current-year revenues
are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume
burdens for services previously provided.” GASB’s Statement 11, Maaauremrnt          Focw and Basis of Accounting-
-Gavemntental Fund Operating Statements, adds ‘Conversely, [a merkure of interperiod equity] would show
whether current-year revenues not only were suffcient to pay for current-year services, but also increked
rcoumuiated net resources.”

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                    and the poor.

                     141.     Information relevant to this objective may includedisclosures of financial        q
                    risks that.are likely or reasonably possible from sources such as government-sponsored      ’ .,’
                    enterprises, deposit insurance, and disaster relief programs. Tit could also include
                    information such as

                                .      the long-term financial implications of the budgetary process,
                                .      the status of trust funds, and
                                .      backlogs of: deferred maintenance.
                   142.       Providing information of this kind may require the’use of reporting
                   mechanisms other than tmd$ional financial statements. For ‘example, special reports
                   may have to be developed to demonstrate whether the level of a particular year’s
                   maintenance and rehabilitation expenditures resulted in an improvement or a
..                 deterioration of capital assets and infrastructure.

                   143;    3C.. Whether government         operations have contributed    to the notion’s
                   eurrcnt and IMure well-being.

                    144.     Objective 3, in general, and subobjective 3C. in particular, imply a concern
                   with “financial ‘condition,” as well as “financial position.” Financial condition is a
                   broader and more forward-looking. concept than that of financial position. Reporting
                   on f-cial     condition requires financial.and nonfinancial information about the
                   national economy and society, as well as about the government itself. For example,
                   reports intended to help meet this objective might address users’ needs for information

               .            .          :investments in (or expenditures for) research and development,
                            military    readiness, aad education;
                            .           changes. in the service potential of infrastructure assets;
                            ..          spending for consumption relative to investments;
                            .           opportunities for growth-stimulating activities; and
                            .           the likelihood of future’inflatioa.
                    145.      Indicators of financial positiog measured on an accrual basis, are the starting
                   point for reporting oa financial condition but must be supplemented in a variety of
                   ways. For example, subobjective 3B might imply reporting, among’other things, a
                   ctureat.law budget projection under a range of alternative assumptions. Reports
                   intended to achieve subobjective 3C might disclose. among other things, the
                   contribution that the government jr making to national wealth by financing assets that
                   are not federally owned, such as research and development, education and training,
                   and stateowned infrastructure. information on treads in total national wealth and.. +.:..
                   income is also important.

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          SYSTEMSAND               CONTROL             ”                                         ”

, c---l                    oBJEcTrvE4

                                         146.     @~III   fman+     nportkg  ThouId artirt report uwr~ in undentanding
                                        whether finu~c~l man+&emW &ystem~ &ad i&rail                accounting and
                                        l dminir!rative controti are adequate to 7.entire that
                                                                                          ..,I,,, ”

                     .,                          .         i&nsacti&~ .re ~recuted in accord~ce ,with budgetary and
                                                 fia~+l      &ws and other ~&kments,     eoniia+k with the purpoaea
                                                 au+or&ed, in~‘are re+r+ed in a&rdsn&           with federal accoqnting
                                                 smdinlr;’                   :..’ ,;        ,., ,.
                                                           ,.:       I.     ,-       ._.    ;i;     :-
                     .;,                        ..         qssets a~.propcrly       safeguarded to deter fraud, wute, and abuse;
                .’                        /,     hd         1.   ‘,      ’ , *,I         ,,‘.), .” ,, .,,.I.’ ;,
                                                 .       ,.p&Winaacc’k~e~~~~~ot            hifckktioi   is adequately, rupportod.
                                                          .’                             .:,. ,, 1 “”
                                                       I                                                                             I
                      :                                                   ,.,.             : ‘. ,. .I,j. i                           I
                                         147.‘ ‘l’h$ objictke ariei frbti the three prcc&dg& objectives, in conjunction vlth
                                        tl$ f&iwt     acco&ng suppOr& b&h effediive m&ui&ent           ‘and control of
                                        drganizaiions and 6, procel of rep&~        ‘&tiil, iiW&tion.    Indeed, accounting
            .                           process&s are ah iliiegrdl p&t of th+, mahagbment contiol~system.
                  6,                      148.     T)e ability to prepare financial reports that report all transactions, clasufud
                . *.. .,                 in appropriate ways ~that’faithfully represent thi underlying events, is itself an
                                         indicktion tl$ c&Lain essential bdntrols are in piaCC    and operating effectively. Th
                                        ‘pnPrr+on of ‘kliatile fiaancial reports als&‘he$s to ensure that reporting entitles have
                     ::                  early warning sykteti to indicati ‘potential problims and, take actions to correct          I
                                         material wedknesses or problems.                                                            ii

                                         149. * Sound controls over internal processes are essential both to safeguard assets
                                        and to ensure ccqnouty, efficiency, atid effectiveness in many govemmental programs.

                                        150;      Infkmation relevant to thij objectiye he!ps financial report users to determine
                                        whether the entity has established reasonable, cos~&fective’programs to safeguard
                                        assets, p&exit arid detect waste hhd abuse,. and red&e error’ rates. An example of
                                        information that would address this objective is management’s issertion about the
                                        effectiveness of the intemal~accounting ‘and operational control system.

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                 151.      Use+ information needs define financial reporting. Even so, the process of
                articuiating frnrnoial reporting objectives and then recommending accounting standa&
                is not a simple progression from canvassing users of federal financial information to
               .recomptding      stand@% This is,pady beyse such users, when asked about their
                information needs,may give aymveis ,$at ari limited by their past needs and
                ex*emes.      Mom fundame+aiIy, it is bcc&sa aiti~uiating objwtiver and
                recommending accounting standards ncccey          ‘involve judgmentsabout the costs and
                benefits of producing more @formation or of repo&ig it differently.

                152.     The‘staadardtsetthg pr&ess is further complicated by the fact that any given
               accounting standard can have many different kinds of effects that must be considered.
               For e,xampie, ,accounting standards can, influence the activities of agency accountants
               and the auditors who review reports prepared by those accountants, as well as the
               decisions of those who read the financial statements. Thus, a standard may influence
               which physioal assets are under accounting control and the extent of work the auditor’
               does to provide assurance about those assets. Jhe accountants’ and auditors’ reports,
               in turn, may influence various decisionmakers in different ways as they select policies
               regarding the assets and the systems used to control them, decide how to implement
               the policies, and evaluate the results.
               153.      he standard setter must, to some extent, be aware of these potential effects
               when dons&ring the costs and benefits of any given accounting alternative. As an
               added complication, rhr some piece of informorion    may be used in different ways for
               different deo@ons. In other words, there am different kinds of “use.” In some cases,
               the information may be consciously used in welldefmed ways; in other cases, it may
               subtly influence the way people see the ‘world, understand their options, and assess
               their priorities.

               154.       For example, the size of the deficit may have a very specific meaning with
               quite explicit implications (e.g.. sequestration) under certain rules for scoring the
               budget. The deficit may also influence the economy because it affects aggregate
               +and       and the go&unen~s financing requirements in a variety of ways that
               economists can only partially explain and quantify. Finally, the deficit may influence
               people’s perceptions of their own well-being or of the nation’s furaacial condition in
               more subjective or qmbolio ways that OF affect both private and collective behavior
               (e.g., willingness to undertake various new commitments, to pay more in taxes, or to
               accept reductions in program benefits).

               155.      Finally, as noted earlier, accounting and financial   reporting cannot satisfy
               every need for information and accountability. For many         purposes, other information
               sources and other techniques to maintain and demonstrate        accountability are either
               essential or more costcffective. This constraint pervades       any discussion of the
               objectives of federal fraanoial reporting.

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                           156.     Financial repotting is the means of communicating with those who use
                           fm&ial information. For this communication to be effective, information in finanoial
                          reports must have these basic characteristics: understandability, reliability, relevance,
     ‘,.,                 timeliness, consistency, and comparability.!’
      2                                ,
UNI)ERSTANDABILITY                                              .,      ,.  .)
       ;.                         .‘..,   ‘(           ..    ,,._,,     ‘..,           ,‘.
                           157.    Special purpi~sereports are prepared to meet thetneeds of specified users.
       c                                                                                                              _
                          Understandability .is rarely a problem in such cases because mutual understanding of
                          what information is needed can generally be assumed between. report preparer and
                          report user. Information in general purpose financial reports, however, should be
                          expressed as simply as possible. Users of general purpose financial reports, including
                          internal users, ‘tend to have different levels of knowledge and sophistication about
                          government operations, accounting, and finance.

                          158.     To be publicly accountable, the federal government and its component entities
                          should issue, general purpose’ financial reports that can be understood by those who
                         may not have a detailed knowledge of accounting prindiples., Those reports should
                         include explanations and mterpretations to help report users understand the
                         information in the proper context. However;general purpose financial reports should
                         not exclude essential information merely because it is difficult to understand or
                         .because some report users choose not to use it.

                          159.       For reports to be understandable to different audiences, different reports may
                         be necessary to provide infotmation relevant to the needs of the expected report users,
                         with suitable amounts of detail, explanation, and related narrative. To be fully
                         intelligible, tinancial information in general purpose reports may need to be presented
                         in relation to the goals, service efforts, and accomplishments of the reponing entity.


                          160.    Financial .reporting should be reliable; that is, the information presented
                         should be verifiable and free from bias and should faithfully represent what it purports
                         to represent. To be reliable,.financial reporting needs to be comprehensive. Nothing
                         material should be omitted from the information necessary to represent faithfully the
                         underlying events and conditions, nor should anything be included that would likely
                         cause the information to be misleading to the intended report user. Reliability does
                         not imply precision or certainty, but reliability is affected by the degree of estimation
                         in the measurement process and by -uncertainties inherent in what is being measured.

        12For the most part, these characteristics are similar to those described by the FASB and the GASB.

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                Financial reporting nky neqd to include narratiye explanations about the underlying
                assumptions and uncertainties inherent in this process. Under certain ~~~~IM~MCCS. a
                properly explained estimate provides more meaningful information than no estimate at
                                                                                                                 \ ./

                161.      Relevance encompasses many of the other ~oharacteristics. For example, if the
                information provided in a financial report is not timely or reliable, it is not relevant.
                Information can, however, meet all other characteristics and still not be relevant. To
                be relevant, a logical relationship must exist between the information provided and the
                purpose for which it is needed. Information is relevant if it is capable of making a
                difference in a user’s assessment of a problem, condition, or event. Relevance
                depends ori’the~~per .of ,financial. infotmation needed by the<various users to make
                decisions and to assess accountability.


                 162.      In some circu&anoes, the mere knowledge that d report eventually will,@
                made public can influence behavior in desirable ways, just as the, knowledge that one’s
                .tax returr.might eventually.be audited can influence the behavior of people when they
                report their income. In other circumstances, however. if financial reports are to be
                useful, they must be issued soon enough to affect decisions. Timeliness alone does
                not make information useful, but the, passage of time usually diminishes the usefulness
                that the information otherwise would have had. In some instances, timeliness may be
                so essential .that it -requires sacrificing .a certain amount of precision or detail; B timely
                                                                                                                 ,; .
                estimate may then be more useful than precise information that takes longer to
                produce.                                                                                         WJ 1

                 163.     Financial reports should be consistent over ‘time; that is, once an accounting
                principle or reporting method is adopted, it should be used for all similar transactions
                and events unless there is good cause to change. The concept of consistency in
                financial reporting extends to many areas, such as valuation methods, basis of
                accounting, and determination of the ftnancial reporting entity. If accounting
                principles have changed or if the financial reporting entity has changed, the nature and
                reason for the change, as well as the effect of the change, should be disclosed.


                164.      Financial reporting should help report users make relevant comparisons
                among similar federal reporting units, such as comparisons of the costs of specific
                functions or activities. Comparability implies that differences among finanoial reports
                should be caused by substantive differences. in the underlying transactions or
                organizations rather than by the mere selection of different alternatives in accounting
                procedures or practices.

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                FINANCIAL..J@@R~iNG ';".,;.r"' .;" '; ,,,,1',I.' ,_';'                                                         ;
        n_._/           __.           _.'( ',                                                                                      ,_, .:-
    c                                                                                              ::     /         ,,

                                                    165. ‘. This Chapter ‘explairis the fobus of the gASjEt’s con+n by showing how,
                                                   aqqo,unting supports financial reporting,, and thus how ac,cou+ing stand&& ‘.-
                      “.F.                        ,noommended by the,FASAB can intluen& federal financ&l qorting.                  This Chapter
                         t: ;-                     shows how the,FAgAB’s recommendations can.,jnf&enqe a;,wjc+ ,ya+ty of fmancial
                          ;                        re@nte.” ‘Additionally, it lays a foundation for-the discussion jin Chapter g) of,how           I
                         ‘:‘“,-. .-iws,            finanoial, mj5orting’iii general, and cost ‘information in particular; dontribute tm
                          ,‘,. (!
                         ..*                   i .bjlSi&nanci mportitig;~ ‘In ‘effeci, Chapter 7 ouilines parW0f.a. c&eptual framework ,:
                          .’J                      for fed$al ~a&ouniing but’& limited to those ideas, ,such.as:cfinano~l,*poaition” and
                              ,:..a                ‘%nan~ial”condition,” ihiit GilI ‘help readers understand’the ,-Board’s proposedatatement
                                     ,,            of &j&k&       ‘for federal fina@    reporting.    :’      ” 1 L::-I;‘. i            : .:,.I* ’
                                                                / ;                                            ./ .. ,,,      ,.‘.           :
                                                                                                                                 .. ..I ,.

                                                  166.  The accounting processbegins with recording information about transactions
                                                 between the gove.Fent (or one of its component entities) and other entities, that is,
                                                 id&$ &id Lbutfjo&;J,df‘ ~ew~ee~~o~ ‘$&isej to provid6 them. fiese Ay. s+divg;
                             i,,                 flows of economic goods, cash, or promises. These comprise the “core” data of the
                             il                  accounting diiipline. : This initial step in the accounting process is depicted at the
                                                 bottom of figure 1, in ,the box numbered 1. To enhance the usefulness of this core set
                             .:                  of data about transactions. with other entities, accountants make various accruals,
                              I>                 classifications, interpretations, etc.




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                                                         Figure 1
                            Hok Accounting Contributes to Infokmation Used by
                 ---------,            ---= Federal
                                ------      - - --~ ~~~ Executives. and Program Mjrnagers                                                           c---J

 Information usedto assessaccountabilityandperformance,to make planningand

                        Filiaacial Information                                                Nonfinancial                   Information
                specti-purpose reportJ                            ‘. Gencnl-purpose’report8                              specl8l-purpose
 Various special-    e;g.. agency           budget               e.g., fmancial               e.g.,                      special-purpose
 purpose           , budget                 execution            information :                yonfinancial               nonfmancial
 frnanoial reports   requests, the          =pofts               requir+ by the               infokation                 information
 from,committees -Budget of the                            (.    CFO Act        ,.           .requk@~’                   from agencies,
 of congress,         United States                                                           .the CFO                   news media.
 agencies, GAO,      Govemmm(                                                                 Act                        etc., e.g.,
 news media, etc.                                                                                                        Fe&ml
                                                                                                                         Integrity Act

                            --                                                                                               --         I
                                        3. Reporting Useful information


                                                     2. Environmental                  Data
                                 in msdca    value    or smite   potential   conlingcfbl   grinr   4% l0uer.   pr0lpun       rcsultr)

                                                                                                         I               I                      1

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                                        167.       Many ‘accountin8 entries recorded in the adcoimtant’s general ledger data base
                                       are such rearrangements of data about previously rec’orded transactions with other
                                       entities rather than aew transactions   involving flows of resources or promises between
                               ^       ‘eatitiei.”
                                   -   1’68.     In, the branch of accounting called, financial a~oountin8, the most noteworthy
                                       int&retatio~’ or classifications &e-thosi iLx~ut which data Pertain to ‘the past and
                                       which pertain to the B&r& In other ‘words, financial ~accounting is largely concerned
                                    ‘~ with assigning the value of past transactions to appropriate time periods.
                                                                   ” ,,‘, ., _. :. ,,,<.,’       ‘, (I i ,i
                                          169.        Transaction data assigned to a period that has elapsed are said to be
                                         “recogaizcd” in the statemeat of opemtjons                (Or income statement), e.g.. as an expense
               I?,                       or a revenue of that period. Transaction data pertaining to ihe future ‘& &n&d                      in
                                         the statement of frnahoial position (or balance sheet) as assets and liabilities.                ’
                                   ,~: ‘.‘“~ ., : ,:;, ,, ,“z;,.;i!.i$.r,.‘., ;-. :.,!‘,:, . ‘,.‘-,;, , ? ’                                       /,
                                      ,. 170. ” To8ether with the statement of cash flows, t% income statement (or statement
                                         of 6pemti$th      or a&vities) and& balance sheet comprise the three “basic” general
                                     ” purpose fecial           statements for,@vately o&d entities. Other statements, such as a                  r
                                         oomparison’of a&ua! ‘results with the budget; may be regarded as part of the basic
                                         statements for 8overnmental entities.

                                       171.      At the initial stage of the accountin process, the” infonnatioa about atyo
                                       and liabilities is merely the result of assigning all, or part of the value of ceNcP
                                       transactions to the future. “Assets” and “liabilities” at this’stage are nor.statements
                                       about future benefits or sacrifices ‘that can be proven or disproven. They are
                                       a+cations of the cost of past traasactions based on assumptions about future benefit
                                       and ,sacrifibe.
                                        172.      This has been a common source of confusion when accountants commumcate
                                       with aonaccountants, ,for whom the word “asset” typically implies something of value
                                       that can be sold or used. Much of the evolution of accountin under the FASB and
                                       the GASB has been to reduce this confusion, to improve co,mmunication, and to make
                                       finsncitil reports more faithfully represent ,economic reality interms meaningjful to
                                       report users. This evolution has involved adding increasing amounts of infonnation to
                                       the core set of transaction data. That protiess is discussed later.
                                                                    I’         >           .’
                                        173.    In other words, the amount of “equity” or “net assets” based on the core data
                                       in a bookkqer’s trial balanbe is abtsa d&t meusure of either the market value or
                                       the aervioe~p&ential of the entity. In some circumstances, however, net assets can be

                                                                                  .                 i

                   ‘“8ee~ William J. S&r&r, Robert E. Maloom; and John J:, Willingham; ?A Partitioned Events View of
          Financial Reportln&” Accounting Horizons (Dec. 1988), p 10-20. For a more academic exploration of the i&as
          involved, See Yuji Ijiri:“Theory of Accounting Measuremea~” &dies in Accounfing Remwch # 10, ~American
          Accounting Association 0975).

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                           a meanhgful indicator of that’value or &e&al.        me word “indicator” is used
                           deliberately to avoid tho implication of precision that may k associated with the word
                           “tlleasure.“)”                                                                                I
                            174.      Accounting data m&be further a&i@ed, allocated’ or associated with units
                           of activity or production, segments of organizations,  etc., within the sawm time pertad.
                           These kinds of inwopmiud     allocations are devoloped most extensively in the branch of
                           accounting called cost or managerial accounting. Neither the FASB nor the GASB
                           hasdevoted much attention,to this braqoh of accounting, but the, FASAB, beoause of
                           its unique mission, 911 need to do ,so. Gnoreason, for performing cost accounting is
                           to assist in performance moasuremont.

                                                .‘_        :   ‘:
 NONFlNAkCui         CORE BATA                         ,. L
                                                        , : ./,
                           175.     :Traditionally. finanoial accountants reoord and describe transactions in terms
                           of money. A$,+e most dotailod level, howover, their records usually include
                           information about tbo associated,physioal inputa and outputs of goods, labor, etc. This
                           non!++        information is an, &&ant     .part ,of the data available for reporting and,
                    _      evaluating the economy and efficiency of the organixation’s performance.


                           i76.     In govemmont the data on transactions with other entities include information
                          on &budget authority. obligations, outlays, receipts. and offsetting collections for the
                          transactions. This information is ,maintained in what are called budgetary accounts to
                          distinguish them from the “proprietary” accounts that &cord other information on:
                          transactions. The,budgetary and proprietary accounts at this lovelare said to be               y”‘)
                          “integrated;” In effect, they maintain information about different stages of a                W I


                           177. ‘$0 core set of aocoun&ng data is expanded with a variety of what n~y be
                          called “environmental” data to distinguish them from tho data that arise from
                          transactions .(floys of roscuroes or promises) with other entitios. Box 2 in figure 1
                          depicts this step of the accounting and reporting process. Many events within the
                          environment of a reporting entity may have economic consequences for the entity.
                          Examples of environmental data that,may be relevant to financial reporting for somo
                          purposes in&de cumnt market prices, not ealixablo values, changes in discount
                          (interest) rates, and impairment of assets (either in terms of market value or in terms
                          of service potential). Judgments about what environmental data should be added are
                          mado by considering the specific information needed for specific purposes.

          “The term “measure” is commonly used in accounting literature regarding cost and in other literature
(inoluding the GASBs) regarding performance. This document follows that practice. In a conceptual
disoussion, however, it is important to note that “cost,’ “perfotmance.’ and “financial condition” are all
multidimensional concepts., It may be monprecise to think in terms of multiple indicators that provide
information about these concepts instead of a single-valued “measure” of any of thorn.

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                                  178.     At this level of the a&&ing     and financial reporting process, the
                                 information repotted in the balance sheet transcend bookkeeping. It can now
                                 represent more of what is knoti about ‘future economic benefits and sacrifices. To
                                 the extent that this is acoom~lished,‘the balance sheet may be said to represent the
                                 “financial position” of the reporting entity. The concept of financial position is that of
                                 a point-in-time snapshot of an entity’s economic resources and the claims on those

                              ‘, I                INFOR+$TICjN            ,. -.
                           ‘,    179. ,.~onflnancial: i&+&on        about brogram efforts; accomplishments. and
       ,.   1/                  qt~,o.mes:~may.,be ,~pllect~,~~,~~~,~s~cia~d with the’,c’f*,?
                                                                                              .;..‘;,; environmental data. This
            i:                  information ij putidularly trnl@trirq for ,,govermnents b&ruse there is no direct
       ,,                       analogue iti’~%et m$onie” or “eakings”~‘t0 gauge the’&nomy, effioiency, and
                                       ,,     or’net
                                               x ,‘_ value ‘of gove+mentil   aetiifitj;.‘ “. I”
                                                                . ‘,,.                   c, ;          .,
                     /’                     :    T                          _: *’ ,t ,.,i        I:,‘.              I
 THE CONCEPT        OF, FINANC.@            ,COeJTION
                                 ISO.      A&ore’ &i&mentdl          data ,&added to the core data, a concept that is
                                 broader and ‘more forkard-looking than ?inancial position” emerges.. That concept is
                                 “financial condition.” F’or the US.’ government, thenadditional data could include
                                 financial and nonfiicial     infotr&tion -about current conditions and reasonable
            :                   expeotations regarding the national and even the global society. For example, the
                                expkted impltcatioris of enviion&ntd         degradation, the relative competitiveness and
                                productivity of the U.S. economy; or expected changes in the population’s composition
            I*                  in terrk of age, gender~‘longe\;ity. education, health, and indome all might affect
                                judgments about the goveiament’s financial condition.”

                                 181.       Infotnnttion about financial condition can .be conveyed ,in a variety of
                                schedulep, notes, projections, and narrative disclokres. Among the most important of
                                            ._             “discussion and analysis” of known trends, demands,
                                commitments, events. and uncertainties. For’ federal reporting entities, management’s
                                discussion and analysis  .\ might
                                                             :     address such tolkk ‘as       ”

                                         i         budgetary compiianee;
                                         .         &hl      bont&l $@&;
                                         .       ’ capital resources ‘and investments;
                                         .         se&e efforts, accomplishments;‘and results of operation% and
                                         .         the reasonably possible future imp&t of known trends, risks,
                                         demands, doinmitments, events, or unceiiainties that may affect future

                                 182.    Increasingly, managers and investors in the private sector are attending to
                                other factors that may sometimes be useful indicators of an entity’s financial condition,
                                including such intangible factors as the quality of the entity’s
       ’ “%uch a dis&sion and&al&s          is m&ed’in    federal ~fiia&ial reports prepared pursuant to the CFO
Act of 1990. In these reports, the discussion and analysis is referred to as the “overview” section. OMB Bulletin
92-03 provides guidance on preparing the overview section.

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                               .        information  and analysis capabilities.
                               .        strategic plaBBiBg,
                               .        human resource development and management, and
                               .        COBStitWtt mtiSfaCtiOB.

                     similar factors may be relevant for Bt8By federal reporting entities.


                     183.         The inform&on .pkduced by these accounting processes supports the overall
                     reporting process. Traditionblly, the itee of infornration included in fiaanoirl         ,
                     strtem~tq are classified in various ~~elements” of frnrnoial reporting, such as “assets,”
                     %~bilitic&” urevenues,” oi%t$k~~.”            I$, future p$&si’the  FASAR may consider
                     the dcfia$ion      of elements of federal fiBa&ial reporting. For the purposes of this
                     Statement of Concepts,       however,‘it is not necessary to do so. It is sufficient to note
                     that needed fmanciai information identified by some current and potential users of
                     fedeml financial reports can be classified under six broad headings:

                               .         information on the sources and uses of budgetary resources,
                               .        infotrnation about opemtions and the related resources,
                               .        information about the government’s assets;
                               .        iafonn~~tio~        about the government’s liabilities and financial
                               .         informatio~thataddmsesconcetnswiththe                  futumand
                               .         Infotmation         that discloses the levels of financial controls:

                     184.    Examples and further discussion of such information needs am provided m
                     appendix B.


                     185.       The core and environnrental financial infotition,   often supplemented with
                     inforntation from other sources, is the basis for a variety of general purpose and
                     special purpose reports. For this reason, figure 1 culminates with the preparation of
                     useful reports. A direct relationship exists between the accounting and reporting
                     processes both for general purpose f-n&al       reports and for budgar rxecurion reports.
                     The dotted line in figure 1 leading to other hinds of reports emphasizes that other
                     hinds of information   are oftenmore heavily involved in producing them. Accounting
                     contributes to these reports but has less influence over the nature. scope, and content
                     of them. (Appendix C lists ‘selected federal repotts that are regularly prepared.)


                     186.      “The budget” is a broad term that nuty include, among other things, a
                     projection of spending authorities and means of finanoing them for a future period and
                     a report of the actual spending and associated finanqing for a past period. The
                     FASAR’s recommendations may influence the reporting of actual budgetary data.

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                           187.’   The tit      of the United States ‘&ovemmg& is ti most widely s&ogt&ed
                          and used financial report of the federal governtxqt. The budget .prooess is the ’ b’, “.,
                          governme& principal mechanism for reaching agr~etnent on goals, for allocating
                          resources among competing uses, and for assessing the government’s fiscal effects on
                          economic stability and growth. Most attention is paid to these future-oriented roles of
                          the budget. ”        .‘,

                          188.     Budget exqcu~on is designed to control and’track tax receipts and the use of
                         r&u&ces according to the purposes for which budget authority was approved. Actual                 -.
                         receipts, obligations, and outlays arc recorded by account, as is the status of budgetary
                                                                                                            -     -
      .,.                resot&cs at the end of each fiscal year.
                          189. :‘. &@&aty .mea&em&           .:,:is designed ‘to assist ;m tl& Control and alloCation of
     ‘. Q
     *,,            .’   re~~ej     bj;..~~o~g ,~‘,cri :. ’ outla~~‘,i~~lieiab)    Earth ~~ib~on when *e decision is
     ,o.__,.             midi ‘, b die cases, ‘the budget now ‘also includes’dcrtta~s for costs in advance of
                         tbe‘&@ired+sh       outlay., Budgetary concepts are ur&r.~cominual review. They may
                ”        be.cj&tged by la& ‘or,‘aftir coirs&ition with the ‘&&ssj     ‘6 the annual revision of
                         O@ Ci&u          A-1 1, “&j&p~~&~d       Subrriij&& & &git, Estimates;”
                         190.      The’Board’s at&o+      d&i ‘not extend to recominending budgetary standards
                         or budgetary concepts, but the Board is committedto providing reliable accounting
                         information that supports budget planning and formulation. The Board also supports
                         efforts to ensure the ‘a&racy and reliability of nport.+g on the budget,

                           191.     The Board’s, own focus is. on developing generally. acceptld accounting
                          standards for np&ting’on the,‘f=cial      operations, financial position, and financial
                         ‘condition of the federal goveriri&nt and its component entities and other useful
                          financial information. This implies a variety of measures ‘of costs and other.
                          information that ‘iomplements the information availabli in ‘the budget. Together with
                          budgetary reports. these reportswill @ro\;idc a ‘more domprehensive and insightful
                          understanding of the government’s f&ncial position, results of operations, and.
                          ftnancial condition than either set of reports alone.


                            ,.                           _                      ,    *_,,

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                   192.      The second objective and its subobjectives concern reporting on performance.                             I
                   References to measuring cost pervade this objective and its supporting narrative. The
                   topics of cost and performance measurement are related because it is by associating
                   cost with activities or “cost objectives” that accounting can make much of its
                   contribution ,to reporting on performanoe.

                   193.       Setting performance &g& is a function of management, not of accountanta.            ’
                   That ,is, ,elected ad appointed ofllcials, in+ding both program and policy offtcials,
                   deeid+ what the government will do, how much .the g?yeFent will do, and how it
                   will be done. These off@ls consider. the relevant constraints and other factors when
                   establishing the performance targets. +feasuring I&umance. against those goals is an
                   me&id part of management. On the other hand, measuring cost is an important part
                   of meaawing performance, and measuring cost and repotting the results is a function
                   of accounting and the financial rep&&g system. Financial reporting standards deal
                   with what information is reported and how it is reponed. not with the target levels of

                    194.    This Chapter fint discusses cost measurement in general terms, then outlines
                   a framework for reporting on performance to show how cost information can assist in
                   that endeavor. Both cost measurement and performance measurement are complex
                   subjects. DifE&tlt problems arise during attempts to implement the ideas involved.
                   For example, meaningful interpretation may require disaggregation of information, or
                   adjustrneni of ,targets for differences in client characteristics, for local conditions, and
                   for other factors beyond the government’s control. Such problems are beyond the
                   scope of this.con~eptual document. This Statement does not purport to present a
                   comprehensive discussion of .how to measure cost or performance. Neither does this
                   Statement address the problems of implementation: it merely shows the relationship
                   between financial reporting and performance reporting in conceptual terms.


                    195.    As used in this Statement of Concepts, “cost” is the monetary value of the    .
                   resources used. Thus far, the FASAB has considered the recognition and
                   measurement of certain assets and, liabilities that could influence the amount of cost
                   recognized in a given period by a federal reporting entity.. For example, the Board’s
                   Statement on Accounring for Direcr Lwns and Loan Guuronrec~ imfilements accrual
                   accounting for these programs, similar to the accrual budgeting mandated for them by
                   the Credit Reform Act of 1990.

                    1%.       A “cost objective” is a program, a function, an activity, an organizational
                    subdivision, a contract, or another work unit for which cost data are desired and for
                    which provision is made to accumulate and measure the cost of processes, producta,
                   jobs, capital projects, etc. The basic premise of cost accounting has been described                       ../_:
                   by saying that the measurement, assignment, and allocation of costs to cost objectives
                    should be based on the beneficial or causal relationship between those costs and the
                   cost objectives. In defining the proper measurement, assignment, and allocation of

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                                                     cost for a given purpose, selecting the appropriate accounting method and whether to
                                                     use ful! costing should be carefully ‘~oniidemd.       ” ,. .’
            Method ef i4&+ng                                           ,

                                                     197.     The accrual basis of accounting generally provides a better matching of costs
                                                     to the production of goods and’kices,    but its u&and application for any given
                                                     purpose must be carefully evaluated.

                        ‘,   I,_.,,

                                      &.      ,..     19di ’ ‘Full’dhigtktent of all costs ofi period, including general and administrative
                                                    ‘.&&&a&          ail ~~~i;~~;;,i’cosfs,‘:ii~n   ,iin~~rii basis”for meas&g oost of
                .   .                 .              ‘s&i&       ‘Ho&ever, full #ok is ‘not ne&sat@y ‘the.r&ant cost for making all
                                                      de&&         For example, iir&menid~‘&t      i&ri& .appropriate for many kinds of
                                                      decisions, while opportunity cost is more appropriate ,for others. Similarly, cost that is
                                                      controllable at a givenmanagement level is more appropriate for most evaluations of
                                                      the performance of those: managers. Accordmgly, accounting systems should ‘permit’
                                                      the calculation of’the relevant costs needed for a range of decisions, as determined by
                                                      the '$&cifk situation, and findndial’repkkts should, reflect costs ,iuiteble to the purpose
                                                      hiteA&&                                                       ‘,
                                                        ‘, ,.

            PERFORMkNCE~M$ASURkMENT                         “I
                    2; _             ‘/, .’                                    :                 .,
                       i:,      199.       Perfo&nce reporting ,is broader thar. ftincial reporting, but .good financial
                     ‘:>‘I     reporting    is essential to support, perfoiriraiice reporting. The GASB has identified
                    ,‘. “/..,
        6                      three broad categories’ of measures for r@&ting on performance of state and local
-I!!2                          governmental entities: those that measure service efforts, those, that measure service
                               accomplishments, and ‘th& that relate &forts to. accomplishments. Although some
                               performance measures may not be clearly assignable to one of these categories, the
                               categories are ‘helpful forkndersianding how and Where financial reporting can
                               conhibure to performance
                                                 il            repotiing by providing relevant financial information.
                                                                              “ _^
                                                     200.      To clarify’this relationship, the FASAB may wish to change or expand parts
                                                     of ‘the following, discussion in future ,projic& At this time, however, the FASAB
                                                     b&w this basic frameWork is appropriate for the limited purpose of explaining how
                                                     financia! reporting can contribute to perfotmance reporting.”
                                                                                             I_         ,,    ,
            Measurer of Efforts                                   I,

                                       .,,’          201.     Efforts are ‘the amount of fdncial and nonfiincial resources (in terms of
                                                     money, material, and so forth)’ that are put ‘into a program’ or a process. Measures of
                                                     service efforts also i&h& ratios that compare ftincialresour~es       with other measures
                                                     that may i&ate      potential ,demand for services, such as the number of potential
                                                     service recipients.
                                                                           :       ,,       ., .”   -, /,,“. ,. .“..
                     ‘Yhe  followings discussion is based largely on the GASB’s Prelimi.nary Views on Service Efforts and
            Accompiidmrnts    Reporting, December, 1992.

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                       202.     Ffnanctal information includes financial measures of resources used. They
                       include the cost of salaries, employee benetits,,materials and supplies, contract
                       services, equipment, etc., used in providing a service. The FASAB’s exposumdraft
                       (ED) on Accounting for Inventory and Related Properry is an example of how the
                       FASAB’s recommendations could affect information reported on resources used.

                       203.     Nonfinancial   information   includes the following:

                                .          Number of persormel: Because personnel are a major resource for
                                many. federal agencies and programs, indicators that measure the nuatbat of
                                full-time equivalent .employees or employee-hours used in providing a service
                                often provide a significant measura of resources used.
                                .       ,. Other measures: These may include the amount of equipment (such
                                as number of veh&les) or. other, capital assets used, m providing a service.
                                Because some,<federal ,prograt@ use large amounts .of capital assets. measures
                                of the ,use of such ,ass& can be important indicators ‘of resources used.

Measures of Accomplishmcnt~

                       204.      Meast&.of accomplishments report what was provided and achieved with
                       the resources used. There are two types of measures of accomplishments-outnu
                       and m.           &puts measure the quantity of &ices provided. Outcomes measure
                       the results of providing those outputs. For some kinds of programs, financial
                       information can provide measures of accomplishments. For example, for some
                       government business-type activities, just as for protit-seeking businesses, the revenue
                       earned can be used as an indicator of accomplishments. In most government
                       programs, however, the important indicators of accomplishments are based on
                       nonfinanoial information, as .discussed below.

                      ,205.    Outputs, which can be measured in these ways:

                               .        Quant$y of service provided: These indicators measure the physical
                               quantity of a service provided.
                               .        Quantity of a service provided that meets a cortain quality
                               requirement: ‘These indicators measure..the physical quantity of a service
                               provided that meets a specified criterion or a set of criteria. (Quality
                               requirements can also ,be defined and measured reguding inputs.)

                      206.      Outcomes, for which indicators measure accomplishments or results that
                      occur (at least partially) because of the service. efforts. Some authorities use terms
                      like “impac&” “effect,’ or “results” to distinguish the change in outcomes specifically
                      caused by the governmental activity from the total change in outcomes that can be
                      caused by many factors. Though it is not always feasible, in theory performance
                      evaluation should focus on results or effects in the sense of impacts, i.e., on the
                      differences between program outcomes and the outcomes that would have occurred in
                      the absence of the program. Results also include measures of public perceptions of

                      207.     Outcome measures are particularly useful when .presented as comparisons
                      with previous years, established targets, goals and objectives, generally accepted
                      norms and standards (in the sense of “targets”), other parts of the entity, or other

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                                      comparable entities.:              ,.        ,‘,                                                             ,   ‘,

                                      20s.     Sometimes, the secondary and/or unintended effects of a seti~e  on the
                                      service recipients, community, or nation can be identified and may warrant reporting.. :

    Meuoms     That     Relate ERo&           to &ckmplishmeota

         ‘$                           2qi.      For, pr+seekiug    en&s .#nd for some business-type government programs,
                                      the a&&t of net i&o&e cia be ihought Oi as a single i&i&tor that relates
           .,.                        orgaqiptiona~ ,efforta,to a&omp&shrnents. For most government activities, however,
          iyj                         r&ti$g ,&orts *th~,a&o+$nirrnts               m a,meafingful manner is more complex. Two
         .,,;’ .-        ‘,           $l?+f.y&        indi$t?yy .y .,h=+d
                                                                        ‘,...(.‘,I’. bh.
                                                                                     ‘:;‘. .:;’ . _-.,,., -’.,(.
            i r\                                 .        EffcienFy mayures thatrelate efforts to outputs of services: These
                                                 ir#cators tr$$ur$ ,the financial re:cs”t)r&es,used or. the cost (in dollars,
                           ,’                    employ&hour& ‘or ~equipmentj per ,unit of .outpuL” They provide information
                      .‘, :,
                                                 a’&$&     p&&i&on of iia output’at a giv& level- of resource use aad
                                                 de~~~~ie     ~an’~~~s              mlatiire   efficiency’   ‘Thea   doinpared   with   previous


                                                rest+, established goals and objectives, generally accepted norms or targets,
                                                ;. iisd&‘i~h;;+ed  by h.hi    edtitiei.,           _’ “,
                                                         Effectiveness or cost-outcome measures that relate efforts to the
                                                 Lcomes ,or results of services: vesa measures report the cost per unit, of
                                                 outcome or result. They relate costs ‘and results to help manage& executives.
         .:.,                                    Congress; and citixens assess the value of the se&es provided by an entity.
          i I.
         ..,                                        I,       ,..           .’          I,     ‘,
         p .;                         2io.     As is evident, financial or cost information ‘is an important component of both
              ;A’                     types of measures that attempt to relate efforts to ac&mplishments.
                                                                                                  , .,

Limihtionr          of Pekfokuauee           M~aurembot

                                      20.       P;erfoiiaance meai~meat ‘is an essential part of good management, and
                                      performance reporting is ‘an’ essential part ‘of government ap&ntability . Important
                              ; “,    limitations ‘&I diffiiuhies ashated with performance ‘measurement and reponing
                                      should be noted, although they cannot be fuily.e,xplored in a brief outline of the
                                      s&j&such       as this. For example, perform&ce,usually cannot be fully described by a
                                      single measure, indicators of service effotts aad accomplishments do not, by
                                      themselves, indicate why performance is at the leve! reported, and reporting
                                      quantifiable indicators can ,sometimes have unintended consequences.

                                        212.       For these and other rehjogs;the three categories of ,perfonnance measures
                                        generally need to be ac&ompknied by kritab~e explatiatkuy @formation. Indeed,
                                     , narrative, infotition    is an essential part of re~rtihg’ on performance. Explanatory
                                       ‘information includes both quaatkative and narrative information to help report users
                                        understand reported measures,~assessthe rkpor&g entity’s performance, and evaluate
                                        the sig&cance of underlying factors tit may have affected ‘the reported performance.
                                        (Asaoted, the reporting entity may be‘the fedemi govei%Gnt as a whole or any of its
                                        component reporting entities.) Explanatory information caninclude, for exainple,
                                        inforrnatioa about factors substantially outside the entity’s control, as well as
                                        infoknatioa about factors over which the entity ‘has significant control.

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                        213.      This appendix summarixes some of the considerations that were deemed
                        significant by members of the Board in reacti    the conclusions in this Statement. It
                        includes reasons for accepting certain approaches and for rejecting others. Individual
                        Board members gave’ greater ,weight to some factors ,than to others.

                        2 i4.     w Board ‘ised w&al m$lqdi to arrive .rt the knowledge base and’
                        conclusions that shape’thisSt&ment.        It.s+ff Conducted focus group discussions~
                        interviewed users and pre@ors of’fiicial          information, and performed other research.
                        215.      Bas&l,,on this ~0% the Board published an exposure draft on January 8.
                         1993, as galled ‘for by the Board’s iulea’of prooedu& Forty-six letters were received
                        in response., &,Boah       also held a,,publio hearing on the exposure drag on April 2 I-
                        22, 1993. it &hick it received valuable ‘cbkhents.

                        216.     The ‘Board wishes, to.’ thanh everyone who participated in the process.


                        217.      The Board considered whether it should modify the exposure draft’s
                        discussion of the relationship between furancial reporting and the budget. Severai
                        respondents commented on this subject, but often in different ways. Some alluded to
                        budgetary and proprietary” (or “aconial” or “f~ncial”) accounting in a context I&I                  _-
                       implied each.should be on a different basis but reported in an integrated fashion                         t
                        Others suggested that using the same !&8 for reporting and for budgeting was
                        essential to achieve the objectives stated for federal facial reporting.

                       218.      Many recommendations have been made over the years that informauon on
                       expenditures be arranged to permit better,perception of the relationship between the
                       expenditures and national policy objectives. Some of.those recommendations have
                       related to the budget. Some have called for an “accrual~besis” budget. Those who
                       would like tti change ihe organization and/or the basis of the budget, e.g., to more of a
                       “program” organ&don or to more of kn “accrual” basis, m&t regard financial
                       reporting from’s program perspective and/or on an accrual basis as a valuable first
                       step before considering restnhring     the budget.

                        219.       Others may have fundamentally different views. For example, some believe
                        there is merit in maintaining a distinkuon between accrual accounting and budgeting,
                        except to the extent that those involved in preparing and approving the budget elect to
                      - use an accrual donventioa as in the Credit Reform Act ,of 1990. These persons
                        believe that,the budgetary basis of measurement should, in principle, sometimes be
                        different from ihe accrual basis. The infer this from the different purposes of
                             ^ ._,, and f-4“:-”   report+                        _
                       220.      The Board ooncluded that then was no reason to change the discussion of
                       this topic in this Statement, because the Board has no jurisdiction regarding the

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             STATE AND LOCAL           GOVERNMEhTSAND                 OTHER NONFEDERAL                   ENTITIES
            -.-                         221.       Some respondents expressed concern about the potential impact of federal
                                        a&outtting st&idards~~onstate,.~andlocal governmental accounting. These respondents
                                        would like to minimize the cost of compliance with federal requirements. ‘To the
                                        extent possiblei they $vottld, like .to avoid the .need to report cm a basis different from
                                        that 4pe&ed l@the .GASB. ,Presumably their comments dealt with general purpose
                                        reporiiiig~.becaW grantees must. now prepare various special purpose reports pursuant
                                        to therequiktiientsof           granting agencies, OMB, the Single Audit Act, et%
                                                    ,i4 ,.:6.,. ..‘.‘,., .;,,:. ‘- ; :.   ‘,. .../. I ,2.
                                        222.       The FASAB has no intent to .moommend standards for general purpose
                                        external financial reporting by nonfedeml entities. The FASAB’s missiottis to
                                        ~considk and:&xmktend accounting principles for the federal government The
                         ._      ._      FASAB’s~wor&theiefo~, vvill have no,:direit.effect:o~-qqnfediml                   entities. It is truer
                                        however, th&the:FASAB’s recommendations could eventually result in increased
                                        demands fdr,infonnatiw-from’lrrcipienti.0~             federal, funds. This could happen when
                                         such infotinationwar neoessciry:for -federal ‘report&entities-to               achieve the stated
                                         objectives of federal financial reporting. Such requirements would be “special
                                         purpose” reporting requirements, from the~perspeotive of grant and contract recipients.
                                                       ,.                 “.       . *                        r :,>’_,,
                                         223.      These requirements most likely would be imposed<by program offtcials in
                                         contmetcand grant agreements with the recipients of the. federal funds. The Board
                                        acknowledges ‘that the federal government has ‘a responsibility to .co&kr the cost
                                         imposed50tt nonfederal entities. when making decisions to impose such requirements.
                                         At the,same time, benefitsto all entities and to a11citizens .involved also must be
    /’ -\
                                                    ,’     ,,.
i       P
             REPORTING        ON PERFORMANCE             AiD      USING NONFINANCIAL              INFORMATION

                                          224.     .Most respondents who addressed reporting on ,perfotmance supported the
                                          exposure draft, but some. thought the language was too encompassing. The Board
                                          concluded that their concern was stimulated. in part by the wording of the first three
                                          objectives in the exposure draft. Each began with the phrase “federal financial
                                          reporting should assist . . . ” However, each of these objectives subsequently
                                          included a ,phrase “Fe&ml financial reporting should enable the reader to determine . .
                                          .” that perhaps implied more than the Board intended.
                  .                       225.      Accordingly, the Board substituted the phrase “provide information that helps
                                          the reader . ; .” for “enable . . .” The Board also made certain other changes
                                          recommended by some respondents. In particular, the Statement now uses the phrase
                                          “perfotmance target” to refer to desired levels of perfotmanoe defmed by elected and
                                          appointed offtioials. This term is used instead of “performance standard” to avoid
                                          possible confusion with “financial reporting standards;” which deal with what
                                          information is to be ‘reported in designated reports and with how it is reported.
                                      :. ,226..     The Statement.alsomakes it clear-that .performance targets should be set by
                                          program and policy offtcials working together. .Financial officials have a role to play
                                          in this process, especially where financial data are involved. ,That role is based on
                                          their expertise in cost measurement and their responsibility to ensure the integrity of

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                        the data.

                       227.         Gne authority on public administration has explained the relationship in this
                       way:                                                                                            \3
                                                               . _;                -
                                 Govermnent accountants are responsible in. part for ‘Apurring.
                                 reporting, and analyzing actual fqqial         information important for
                                 both policy making and management. Policy analysts and budget
                                 professionals &al primarily with what,ghOuld occut and accountants
                                 deal. primarily with capturing and recording what &d ocou~ In
                               ,.addition, govermnent accountants have aud$ors reviewing their work
                                 professionally to, further ensure the integrity of the accounting
                                 prtxwss.” ‘,                        .,.:;      .”
                                                                 .,      .. ,a ;’ , .,,
                       228. ,: The Board ,believes that accounting supports fvcial           reporting and that, in
                       the “government, fmncial ,repotting goes, hand in hand with -accountability and
                       performance evaluation. Financial accounting and. frnanoial reporting have a special
                       role in assuriug compliance with f-e-related           requirementd for transactions. This is
                       most directly relevant to objectives 1 and 4.
                       22%       Financial reporting, however, also provides useful information about costs,
                       assets, and liabilities. This information is especially relevant to objectives 2 and 3.
                       Routine reporting of outputs.. ou~omes, and their costs is an important part of a
                       performance monitoring system.- Assessments of,impacts (also referred to as effects,
                       or results) specifically caused by governmental action. are more likely to be performed
                       in less-frequent program evaluations and special studies. Those studies draw upon the
                       output, outcome. and cost infotmation that is (or should be) more frequently
                                                                                                                       / ..
                       230.      Federal accounting and financial reporting exist within the context of various        b!!        )
                       ~lawsintended to foster accountability and perfotmance evaluation. Neither the
                       FASAR nor federal financial reporting can independently accomplish the objectives of
                       evaluating performance or assuring accountability, but they can contribute to achieving
                       them. Furthetmore,to make their essential contribution’to these ends, accountants,
                       auditors, and financial managers must understand the oven11 framework for achieving
                       these objectives.

                       231. 1 For nongovernmental entities, competitive markets for goods, services, and
                       capital provide an independent assessment of the economy, efftciency, and
                       effectiveness with which those entities use resources to meet their customers’ needs.
                       There is no similar proofof value for federal output independent of the political
                       process. To report on the results of opemtions of a governmental entity, nonfhrancial
                       information is essential, in conjuuction with financial information.

                       232.      In concept, this fact could imply that a complete financial report of a federal
                       reporting entity sho@d include‘indicators of economy, efficiency, and cost
                       effectiveness if the report is to fairly present the entity’s financial position and results
                       of operations. Paragraph 164 notes that financial or. cost information is an important
                       component of both types of measums that attempt to relate efforts to accomplishments.

       “Thomas   D. Lynch, “President’s Column.’ ASPA Tw             vol. 16, No. 6 (June 1.1993). p. 5.

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                             In practice, the extent to which it is feasible’and cost effective to present such
                             information can 6e decided only after careful study of the specific circumstances.
                             233.      While specific decisions will require tinther study,-the Board notes its belief
                             tit aity attempt to’demortstrate accountability beyond probity (level 5) and process
                             (level 4) requires, perforrrpnce measures. ‘s
                                                                         : The Board’s user needs study, its public
                            ~h&u@; and &r&r sources of information suggest a widespread belief that the
                             federal government needs to make a more systematic. attempt to measure and report
            c                outputs, outcomes (including impacts), and the costs of producing them. To do this.
           .>                the Board believes, accounting and financial reporting play ah-essential part
       .‘. .,
                             throughout the cycle of planning, budgeting, fiaancial ~mimagement, and evaluation of
            1.                                                               :   ;    I,”
                             federal activities.
          .,v                                                                 .,           .:
                                                             ‘.. ._                     ,’ ,,.,1.. ‘,
                                                                                              :-., ,
                                                                       ,, ‘. ,- , ,’ I
                             234.      A few respondents said that the stewardship objeotiva described in the
                             expbaure draft was too broad. They felt that infotmation on the effects on the nation
                 I.          of poliOy decisions was outside the.,+opeof federal, ftnanoial reporting. The Board
                             concluded that ~this~concern~like the, preceding one regardtitg reporting on
                             performance-stemmed in part from the wording and structure of the first three
                             bbjeotives in the exposure draft.                              :

          :,.,.1.             235.       Accordingly, the Board substituted ‘the phrase “provide information that helps
   .      ‘,Ty                . . .” for “enable . . .” As ,noted earlier, ,fedeml financial reporting cannot by itself
          ‘:                  accomplish the objectives of evaluating or assuring stewardship; it can only contribute
                              to those goals.

                              236.      The Board notes that the federal government has two levels of stewardship.
                              One is for its own assets and habilities and its ongoing ability to operate. The other
                              is its constitutional responsibility for the nation’s wealth and well-being. It is unique
                              in this respect. If the nation’s wealth and well-being are deteriorating, the
                              government’s financial condition is, or soon will be. deteriorating also-and vice versa.
                              The financial ,condition of a sovereign national government and .&at of the nation
                              itself are inextricably intertwined. Some information about the overall context must
                              be provided, therefore, when reporting on the,government as a whole, and perhaps
                              when reporting on selected programs.. As explained in Chapter 1, the FASAB does
                              not recommend standards for economic reporting, but it may consider whether. such
                              information should’be included in certain financial reports.


                              237.      Most respondents who addressed the fourth objective, originally titled
                              “Deterring Fraud Waste and Abuse,” supported the exposure draft, though some
                              suggested that it could be phrased in a more positive fashion. Several emphasized the
                              need for this objective and for standards to achieve it, but a few thought that internal
                              control should not be regarded as an element of financial reporting. Others suggested
                              that a separate objective on this topic was not necessary
                                                                                   .     because it could be infetred’

           “Levels    of accountability are discussed in ‘Chapter 3.

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                  from the other objective+.

                  238. The Board agreed that the objective should bestated in more positive tem~.
                  Accordingly, it replaced “Deterring Fraud, Waste, and Abuse” with the new heading           ;‘)
                  ‘Systems and Control” and made other changes in wording the objective. With regard                ’
                  to the fundamental point, however, the Board continues to believe that systems and
                  control are topics of sufkient importance and relevance to ‘warrant addressing in ,their
                  own right.
                  239. The Board’s user needs study, public hearings, .end other sources of
                  information   makeabuadantly 01e~ that IIM~ want ,a.*~         that reported   id~~~~tion
                  is credible, and reliable. They also want to know. that%masonable controls are in place
                  to deter fraud, waste, and abuse. Independent audit can’help provide this assumnce,
                  but whether information is audited or not, effective systctns and controls are essential
                  to providing such assurance in a cost-effective way. Futthennotc, cff&i~~     vctcmr
                  and controls are essential to achieving the other objectives.

                  240. Perhaps the unique contribution of accounting-based reports for objectives 1
                  and 4 is the,%ore” accounting data base on.transactions, especially on controlled
                  transactions subject to finance-related restrktions. Systems of accounting control are
                  integral parts of this special role for financial~reporting. Similarly, regarding
                  objective 2 and, to some extent, objective 3, systems and controls are important
                  because direct observation of outcomes and impacts is often infeasible or expensive.
                  In these cases, reliance on accounting and administrative controls to ensure
                  compliance with good practices and processes is often a cost-effective surrogate for,
                  trying to measure the value added by governmental activities.

                  241.      Finally, the fundamental notion of accountability pervades the entire set of
                  objectives. Effective systems and controls are essential prerequisites to accountable
                  government. Thus, the Board regards systems and controls as an integral part of
                  accounting, accountability, and financial reporting.

                  242. Several respondents mentioned users, but no consensus about a change to the
                  exposure draft was evident. For example, some respondents urged greater emphasis
                  on the information needs of external users or on objectives of general purpose.
                  external fmancial reporting. Others urged greater emphasis on information needs of
                  lower-level program managers and employees. These comment’s are not necessarily
                  contradictory, nor are the competing perspectives necessarily mutually exclusive. The
                  Board continues to believe that it must consider both external and internal users. ‘fhe
                  Board itself is the agent of off&Is who, in turn, are agents of the public. This
                  organixational fact contributes to the dual focus.

                  243. Also, as noted in Chapter 1, the distinction between internal and external
                  users is not clear for the federal government. Except in degree of detail, virtually all
                  federal financial information is of interest to at least some segnients of the public.

                  244.    The Board acknowledges tliat this dual focus will often create the need to
                  balance various considerations to arrive at an optimal result. For example, as one
                  respondent properly noted, there could be a danger of emphasizing what he termed

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                          “comparable 6onsistency” for uniform reporting to users who want comphrabli                      ’
                          information across -agencies. He was’ concerned ‘that this might interfere with ~“TC!CVUU
                          customization” of information systems to meet the unique needs of agencies in                      ”
                          response to their’specific environments. It is understood that .“comparable
                         consistency” of information is needed for some purposes and, “relevant customixation”
                          forothers.                             ‘,,       :
                                         ‘,                                                : ,.
                         245:        The Boa&is primarily conoemed Cith the former class of uses and reports,
         : _:            i.e., with ensuring the provision of comparable d#a.where it is relevant and cost-
         .:              effective to do so. Individual preparers often are not in a good position to judge the
         ,.: ,.          cost-benefit ratio ,of such information governmentwide. They are aware of the costs
          I,             they incur to produce information, but they often. tue not a&are of the ~tential benefit
             .,.         of producing that information: -‘Neither are they in a $osition to establish standards
                         that :.would produce such ,information.
                         246.      i .I,, ”       :. ,.,%
                                                        “‘1 :L, \ ,..                                                  *@&&& ... ,.,
                                    Qn .the other ,hand,, there should be
                                                                       ., /.,&&eed
                                                                             .- .,::.I: ‘i”’ for outsiders .lik&the &n&o?Z’!~$;      ..:z-   .
                         its sponsors to mandate relevant c,ustomixation wi,thm age&i? &esumably each
                         preparer can3andiwil! take,:areof @r&provided that resources are available to do so
                         and that there are no bureaucratic ,+npediments.,

                         247.      lnconcepr. therefore, there, need be no conflict between “comparable
                         consistency” and “relevant customization.” Furthermom? in theory, properly designed
         ,:>’            accounting systems should facilitate both internal and external reporting. In prucricc,
         .I.,I           however, because administrative resources for information processing systems are
         ,i: ‘:          limited and because new. systems take time to install, externally-imposed requirements
                         for comparable consistency could competg~ with addressing internally perceived need;
        .::              for relevant customization. The Board acknowledges this trade-off. This is just one
        ..,,.            of many cost-benefit factorsmat the Board will need to consider as it addresses each
         !               specific issue in subsequent projects.       ~     i

                         248.      Some respondents suggested there should be separate sets of objectives for
                         govenrmentwide and component entjty reports. Similarly, it might also be possible to
                         distinguish objectives for reporting by ornanizational unit components from those for
                         functional or protzram components. Alternatively, one might imagine separate sets of
                         objectives for reports to .different audienbes. The Board concluded that different
                         reports are Jikely .to emphasize different objectives but that there is no need to prepare
                         separate statements of objectives. The Board will give due consideration to variations
                         in emphasis among the objectives for different types of reportJ in subsequent
                         statements and projects..

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APPENDIX            B:    USERS’ INFORMATION                       NEEDS ADDRESSED                     BY

                      1   249.      This appendix is consistent with Chapter 3’s discu8aion of usera’ needs for
                          financial information. It represents an intermediate step in the Board’s consideration
                          of the frasncial reporting objectives implied by those needa. The appendix is included
                          to aid the reader in understanding the reporting objectives by providing another
                          perspective on thi issues.

                          250.     The finsncial information needs of the four user groups can be classified into
                          six categories:
                                                                             .. .
                                   1. Information on the sources and uses of budgetary resources
                                   2. Inforination about operations and the related resources
                                   3. Information about the government’s assets
                                   4. Information about the government’s liabilitiei and ftnancial responsibilities
                                   5. Woknation that addresses concerns with the future
                                   6. Information that discloses the levels of financial controls

                          251.      hi some cases, the specific nature of the information would be basically the
                          same for all four group& of usen; only the level of detail would vary. For example,
                          the amount of unobligated budgetary authority available to be obligated would be of
                          interest to program managers wanting to avoid violations of the Anti-Deficiency Act
                          and to executives wanting to know the availability of budgetary resources that can be
                          reprogrammed for other purposes.”                                     :
                          252.      In other cases, the specific nature of the information would vary, depending
                          on the reporting entity, the repoti user and the use to which the information was put.
                          For example, “etror rates” could refer to errors in determining the monthly payment an
                          individual was entitled to receive from the government or errors in calculating fees
                          that a company was required to pay the government.


                          253.     The budget is the starting point for the government’s finances. All users want
                          to know the makeup of the budget, i.e., the budget authority, the obligations, the
                          outlays, the receipts and offsetting collections, etc. They want to know how the     I
                          budget was. executed and particularly whether it was executed in accordance with the
                          appropriation statutes and other laws affecting the entity’i fmanoes. They want to
                          know the status of the budgetary resources, including the extent of obligated and
                          unobligated budget authority, Finally, they want to know the sufficiency of the
                          budget authority for covering.future commitments.

         lg”Obligations” has a meaning in federal accounting similar to that of “encumbrances” in state and
local governmental accounting; that is, it reflects a reservation of appropriated spending authority that will be
used to pay for a specific contract, a purchase or&r, or another item.

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        ~ORbiATION        ABOUT OPERATIONS             ANIi ?I-IE :RkLATED       RESOmCES

                                  254; ’ Accomwing          the ncecl for information ab&t budgetary resources is 8 need
                                  for information’ about the operations of the government’s ,programs. This includes
                                  information’about the costs of the ‘program%; 6lassifled inways that provide fbrther
                                  understanding, such as by program or activity, direct or indirect, fixed and variable, in
                                  comparison to estimates; or by object (t:g., p&sonnel).~ Information that discloses
                                  unit, total, and marginal costs and changes in costs is also useful
               .,;,      .-                    .,’       _,
                                  2% :. Cost iiiformation r&Iects the inputs for governmentsetices.              Equally useful
               _I j, . j ‘, ,
            : >,T.S’              ii informaiibn  l boui:the  outputs~  outcomes,  efficiency, 8nd  effectiveness  of
                            1 ‘2 go&Gent        s&oes;~by themselves or in relation’to’ a-budget or goals, and any
                          I       Ohange~. ,This woiild includ+an ideiM6ation ofthe~pCriod&               which the
          .; :.                   accomplishments     would  be  realized.  Such information   helps form   a basis for voting,
                                 -fund@, and managemeni deizisions. .’
                       (        .F:‘,. ,‘i. ‘, ‘( ;          .,’     I ,, ,. z’s:

                                                       “--, ,. ..
                                 256.      Financial ~it&&.it users want considerable information about the
                                 government’s assets. They want to know whether the balances in the tntsi and
                                 revolving funds will be sirfflcient for fulfilling the fund’s purposes. They want to
                               ‘kitbw   the nature arid’ ~ountsXWreciivables       otied the government and whether the
                                 receivables wiI1 he @aid. They, are interested in the size and condition of the
                                 inventoiies ad whether they -b&be iued as intended or. if not, how much would be
                                nheived for their disposition. There is mtich~thi ‘users want to know about the
                                government’s physical asset& .tIieir value:their expetited’iervice life, the replacement
                                costs, and the impact of the maintenance that has been deferred.
                                    : ”         .,    i                    i.,
                                257.       The ~goverrimeiit also’ holds assets asa custodian or only until the assets can
                                be sold. EXITS        are seized or forfeited assets. Information about these assets helps
                                to establish accountability for them and to make decisions about the best time and
                                method for their disposal.


                                 258.     Users want to know what the government oties and whether the amounts are
                                 shori term and precisely definable, long term and only an estimate, or just a
                                 contingency related to an enterprise or activity that is not a direct and current
                                 government responsibility, e.g., govemment+onsored enterprises. This information
                                 helps the reader assess the government’s ability to continue to operate at its current
                                 levels over a period of time and/or whether a tax increase is likely.

                                 259.     The changes in the amounts owed from year to year are also imporumt. The
                                 user often is willing to settle for (or may actually prefer) ranges mther titan point
                                 estimates and/or net present values rather than nominal (undiscounted) amounts.

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                           260.         The federal government is responsible. for the country’s well-being. Its
                            f’cial       actions affect that well-being, both cumntiy aad, h the fuhue. Thus, users        3j
                           1-k not jm for infomtion           to evalttstt the ~onditioa’ of the trust funds upott which
                           they    rely  for ,future wOurity.  Tlpy  also want iafotmatioa to assess the likelihood of
                           tax increases, service ,mductions. sad changes in the inflation rate.

                           261.      They therefore want information about possible sources of ad&ioaal finuroial
                           -urcM.       2hey want to see the amokmts of rcsol$rces expcadcd on coasumptioa
                           aotivities in compnrisoa to, iavestmortt +ivitier, such as +cuch aad developmeat.
:                          They want iafotmation on dhq growth4timulatiag activities. On the other hand, they
                           stillamt to be able to assess where spending w be mduc$d sigaiflcaatly.
                                                        ,      ‘,
                           262.      %mally,
                                      ”      they want to kaow th&~gaitude      of fhe probable future deficits, the
                           cost bttrdea this will place on taxpayers. and the potential e&U that this burdea might
                           bave on thi quality of life.


                           263.       Beoause the goveramcat spends such lkge amounts of monies, taxpayers and
                           other ,citixcas .are naturally concerned that the resoumea th&y supply arc being       ’
                           protected from fraud, waste, and abuse and that the errors are minimal. They want to
                           kaow tlut coatr&,arc in place kid operating effectively and thst problks arc being
                           quickly identified~and ccmoted. ,JTtey are particularly ooacctned that identified high
                           risksare addressed snd that adequate ftmds arc devoted to elimiastiag the risk.
                                                                                       .                                     _,_i.
                           264.       This con&      is not just with the’monies expended directly by the                  i’
                           govemmcat. It also extends to the monies expended by the ‘individuals and                       kiiii.    f
                           orgaaixations tbat reocive government contracts or grants.

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           APPENDIX            C: SELECTED
                                    FEDERAL REPORTS                                                         ” I’                ‘. ‘... .’ a
     -, PREPARED ON A R&C@$Rhfi,G .g.ASIS               i;.; : .,. :
? c,        .,          :   ‘.,.i :., , ‘. ‘.             .; .:/
.                   265. This appendix~&ssiftes~some ~$1~known m&s                              according to the categories
                                   set forth in figure 1 in Chapter 7. Reports arc classified according to whether they -arc
                                   primarily financial or nonfinancial and whether they have primarily a special or a
                                   general purpose. The classification iS somewhat subjeptive. ‘It is based on ,the~general                     ’
                      $            nature or emphasis of the reports. Many reports combine ‘information and functions
                                   from ditferept cwp~cs.       .,                ,: ( 1: i.

                                   266.     All these reports contribute to meeting the Board’s reporting objectives for
                                   some users. However, many of the specific reports listed-economic reports deal@
                                   with the nation as a whole, for example-will be influenced only indimqtly, if at all,
                                   by the.Board’s standan4s.. Indeed, because they deal with transactors other than the
                                   government (such as private citizens and corporations, states and local governments,
                                   and not-for-profit entities); economic reports fit within the context of figure 1 only to
                                   the extent that they may’provide information to assess the governme& operating
                                   pcrfotmance and stewardship.

          FINANCIAL       INFORMATION-SPECIAL               PUIiPOSE

                  _.,.I           Budget of the U.S. Government
                                  Analysis of the President’s Budget Proposals (CBO)
                   i.,            Etionomic and .Budget Outlook ‘Report (CBO)
                                  Economic and Budget Outlook Report Update (CBO)
                                  Midsession Review of the Budget
                                  Budget Enforcement Act Reports: Preview, Update, and Final Sequestration
                                  Request for Apportionment (SF 132)
                                  Repon on Budget Execution (SF 133)
                                  Economic Report of the President
                                  Federal Reserve Bulletin
                                  OPM Forms 1351 A-D: Work years and personnel costs reports
                                  Prompt Payment Report

          FiNAIWcuL       INFORMATION-GENERAL                PURPOSE

                                  Annual financial statement (principal financial statements, including footnotes and
                                  combining financial statements if applicable) required- by-J
                                                                                                 the   CFOv Act
                                                                                                 . ..- -1    0”.
                                                                                                                         .r.-v.. ----

                                  funds, trust hut&, substantial commercial functions, and
                                                                                        and oilot
                                                                                               pilot federal
                                                                                                        federal ancnqies
                                  Annual financial reporting by agencies required by Treasury (SF 220.- series)  --..-.I ‘)           ‘.
                                  Prototype Consolidated Financial
                                                                 r-s. Statements
                                                                      --I--Y-    of
                                                                                 “* the
                                                                                    Y,l U.S.
                                  The U.S Government Annual ReportRewrt and Appendix
                                                                              Aaacndix (Treasury)
                                  Monthly Treasury Statement of Receipts and Outlays . of “. the
                                                                                               I.- U.S.
                                  Monthly Statement of Public Debt
                                  Daily Treasury Statement (on cash and debt)

 1;3                                                   VOltme  i, Version 1.0
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                   Annual departmental reports to the President and Congress
                   Nonfiicial   information required by the CFO Act in the overview, supplemental   i.,3’ ,,
                   infomation. and other portions of the reportv


                   Reports required by the,Federal Managers’fhancial   Integrity Act of 1982

                                     volume I, version 1.0                                                     ‘!
                                       February 28, 1997
                   I                           OF FEDERAL               FINANCIAL      ‘1”’
                       &~~~Nf~~                      ‘.C’ONCEI’Ts :NO. ‘2 ‘_
                                                     /~, L.:. 5, ; ,, #,.i.     : :
                                              ‘. , ‘.,       : ‘,...>.
                                                                    I .,_
(’\ cc-l
     -..                      *              Entity and ~Dis&&                      .’

           Issud                        .:   -         ..April.20; ,199s
           V01unk I References:                         SFFAS No. 7, Ac~ounlinglbt     Revenue and Other
                                                        Financing Soutces
                                                                   ,_     .’              !’
           Volume II References:                                                                     ‘.
                                                                                  *.           .;’
           Interpretations:                                    : ,.,‘..:                             :
                                                 ,/    /;:,,
                                                        ,_      ,,    >   .“,.
                                                                             ;   : -              .,
           AffMS:                                     No othei statement.            :          :            *
                                                             ‘j ,.      ; ;,“i        ,.. ,.
           Aff&ed by:                                 SFFASNo. 7, the designatedmaterialin’paragraphs
                       , _’                           90-102addedto SFFAC No. 2.
                        .,                                                ‘., _”
                                                                   .’                                  _,
           SUMMARY                                                                   />
                   .,                                           ,.              ,.       . L
                   ,nis conceptsstatementdescribesthe basisfor definihg a iiporti$.intity for the
           general purp~sqfiqancialreportingperformedby..the-F.edqral          :govemment5.and/or      en&es
    /-     thereof. F$r r&y entity:to ,be.a reporting-entity,it shouldmeet$1 of *q, follqwiqg criteria:
  :i                       ,. ’                   ‘k..,        (,                ..~
                   -There is,a mana&em& r&o&ibie for, coqtro&di..a&$de&y& resources;“’
                   producingOtitpUtsand outcomes,execu&ngthe budgetor a portion thereof (assuming
                   that the eqtity is includedin the budget),and held accountable,        for the entity’s
                   --The entity’s’scope’is suchthat its financial statementswould provide a meaningful
                   representationof operationsand financialconditiori.
                   --There are likely to be usersof the financialstatementswho are interestedin and
                   could use the information in the statementsto help them makeresourceallocationand
                   other decisionsand hold the entity accountable‘for its deploymentand useof

                  Criteria for including componentsin ,a reporting entity are alsoprovided A
           conclusivecriterion establishesthat any organization,program, or budgetaccount(including
           off-budget accountsand governmentcorporations)appearingin the Federalbudgetsection

  :,,                                                 Volume 1, Version 1.O                                       1i
                                                       February 28. 1997
currently titled “FederalPrograms.by Agencyand Account” shouldbe consideredpart of thy
FederalGovernmentas well as part of’the organizationwith which it appears.)Indicative
criteria are presentedthat shouldbe consideredwhen an organizationis,not listed in the        ir, ,’
“FederalProgramsby Agency and Accountsyet the .generalpurposefinancial statements
might be misleadingor incompleteif the organizationwhere not includedtherein.

       This conceptsstatementalso describestheitems that shouldbe includedin Federal
financial reports and presentsillustrative statementsdepictingdesirabledisplaysof financial
tiormation. The itemsinclude:
       m      managementdiscussionand analysis;
       a      balancesheet;
       w      statementof net costs;
       m      statementof changesin net position;
       e      statementof ‘custodialactivities,when appropriate;
       m      statementof budgetaryresources;.
       M      statementof programperformancemeasures;
       w      accompanyingfootnotes;
       B      requiredsupplementalinformation pertainingto physical,human,and research
              and developmentcapital and selectedclaims on future resources,when
              appropriate;and                                                     ),
       w      other supplementalfinancial andmanagementinformation, when appropriate.

      SPFASNo. 7, Acco’unting’$orRevenue,akd‘OtherFinancingSources,amendsthe
abovelist to, include’%tatementof ‘financing.” SFFASNo. 7 ‘also,presentsan illustrative
statementof financing to amendthe,displaysshown in AppendixA of SFFACNo. 2..
Sectionsof SFFAC No. 2 that are amendedare marked\ivit)r‘&uble uerscoreg.                              ’

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                      .                                                                                                                                                65
                                                                                                                                                            SFF’A’C’NO. 2

                                                                         TABLE           OF CONTENTS

                                                                                           Paragtaphs in
            Cont+s:                                                                  Original Pronbnctiments:                                                            Page:
            Introduction            . . . . . . . . . . . . . . ..‘...............                 l-8 . . . . .._...........................                               66
            Rea&         for l&fining Reponipg Entities . . . . . . . . . . 9;lO :‘,. . . . . . . . . .,.,. . . . . . . . . * . . . . . . . . . . . .                       68
                                       ‘.              .,.
            Strum& of ,&e F&l                   ‘Government . . . . . . . . . . . 11~2ti .,. . . .‘: .: . . . . . . . . . . . . . . . . . . . . . . . . . .                 69
                    -,,*.,r:....:i’;;.,.: ,. ‘,   I ‘.
            Identify i& the, Rlpo@ng, E&es ior                                                                 ,;        .:
            Geneml~Rupo~.‘Financi~~ Rie+ng                  . . . . . . . . . . . 29:!8 .. . . . . . . . .: . . . . . . . . . _. . .’ . . . . . . . . . . . . .             72
            Criteria for Inchiding Co&o*enti
            ia a Riporting Entity .,..~. . I,. . .,. . . . :. . . . ., . . . . . 3?-50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      75
           ,Other Asp&$ Con&in*                        the
            CompknessoftheEnti~:                         . . . . . . . . . . . . . . . . . . 51-53 .;. :;. . . 1. .‘. . . . , . .‘. . . . ..a........                       79
           Display&           +anoial         Information          . . . . . . . . . . . . . . 54-83, . . . . . . . . . . . . . . , . . . ., . . . . . . . . , . .         80
           Reco~ended               C&tent ,tor the,
           Rkmu$edded               Dis&y~ ‘. . . . . . . . . . . . . . . . . . . . . 84.!,li           . . . . . . . . . . :. . . . . . . . . . . . . . , . . .           89
           Appendix          1-A:     Balance Sheet . . . . , . . . . . . . . :. . . . . . . . . .‘. . . . . . . . . . . . , : . . . . , . . . . . . . .                    98
i’-‘       Append&           1-e:    Statement of yet Costs . . ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      ...                   loo
d          Appendix          1-C:    Statement of,Changes in Net Position . 1 . . . . . . . . . . . . . . . . . . . . . : : : : : : : : . . .
           Appendix          1-D:    Statement 9%Cus!odial ActivitieS . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . , . . . . . . .
           Appendix          1-E:    Skternent of Budgetary Resources . . . . . . . . . . : . . . . . . . . . . . . . . . . . . . . . , . . .                             102
           Appendix,         1-F:    Statement of Program Performance           Measures
                                                                ,~‘~~~~~~~~~~~~~~.~~...................’....,.....                                                        104
                                                                                                     . . . . . . . . . . . . . . . ~........        .. ..                 u

                      ._.’           -.

                                                                                                                     1,   ,.,                    /,.   ,,    .I.   . .

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INTRODUCTION                                                                                                                     ,
                          1.        A basic postulate of accounting is that accounting information pertains to ’
                          entities, i.e.. circumscribed legal. administrative, fiduciary, or other organization8l
                          structures. Another bask postulate is that entities use facial      reports to communicate
                          financial and related information about the entity to persons concctned with the entity.     ,

                          2.        The +rpose of this statements of acoqunting concepts is to provide guidance
                          as to what would be encompassed by a Federal Gov ernment entit$s frnanoial report.
                          ‘The stntemeni specifies the types of entities for whikh.there ought, tobe fmial
                          reports (hereinafter called reporting entities), establishes guidelines for df*        the
                          makeup ‘of each type of reporting entity. identifies types of f-&l,       reports’ fa, :
                          conununicating the informstion for each type of rep&t@@ entity, and~kg@sts the
                          types of information each type of.report would conyy.              .
                          3.        A statement of f&&al       accounting concepts is intended to g&e the
                          members of the Federal Accounting Standards ‘Advisory Bert@ (FAS?) as they
                          deliberate and recommend accounting standards for the Fedekl Government. It also
                          would be useful to the Offke of Management and Budget (OMB), when it carries ‘out
                          its statutory responsibilities for specifying who should prepare finanoial statements and
                          the form.and content of those statements;! and as broad guide&e for prep&m.
                          auditors, and users of fmancial statements of Federal agendies. A statement of
                          finsncial accounting concepts does not, in and of itself, represent st$dar& that ‘Gould
                          be considered generally accepted’accounting principles for Federri ‘dgencies to be
                          followed for the preparation of financial statements.

                          4.       This statement does not try to define which reporting entities must prepare
                          and issue financial statements. That authority and responsibility resides with the
                          Congress, OMB, and other oversight organizations and resource providers:

                           5.       The specification of repotiing entities intends to be suitable for all
                           organizations within the Executive branch of the Federal Government. including the
                           Departments, independent agencies,’ commissions, and corporations. FASAB does not
                           propose to recommend accounting concepts and standards for the Legislative and
                           Judicial branches. However, the concepts recommended in this statement would be
                           appropriate for those branches.

    ‘OMB specifics the form and content of agency and govemmentwide financial statements, pursuant to
authority assigned.in the Chief Financial Offtcers Act of 1990, as amended (title 31, U.S. Code, section 3515(d)
and section 33 1(e)( 1)) through periodic issuance of OMB Bulletins. OMB intends to base the form and content
on the concepts contained in this statement.

     ‘“Independent agencies” is a term used to distinguish agencies that are independent of a Cabinet depnrtment
 from the agencies ,that are part of the Cabinet departments. Independent agencies report directly to the President
 and nre.pnrr of the U.S. Government.

                                           * Volume I, Version 1.0                                                         i’\
                                               February 28, 1997

..’     general purpose financial reporting performed by Federal entities. This is the financial
        ~nporting that thig entities yoiid uidiit&~ tci ,help meet the-objectives ‘defmed in
        Stiteiirent of Federal @Gncial’A~&riting      Concepts (SFFAC)’ No. 1, “Objectives of
        fk@al knancial kportiitg.’,) Theii objectives are as follows:
                                               ”   _. .;.,.
                   ..            ButgebG itt&ri~.         &leralf~i$al     reporting should assist in
                    fulfiiling the go&merit’s         duty io ‘be publidy accountable for monies raised
                    through taxes and other means and for-their ex@diture in accordance with
                    thq qprqp@i~ts         +w, tlyt establish the government’s budget for a particular
                    fuoil Lti ~.mla~:~*aw              ind re#*ti&
                                                                     .,, ”    ..,:
                    .           .O~~+III~ paiformamo. Federal feial                reporting should assist
          “.’         ‘,..,
                   report rt& ‘i+&iatiug           ‘Jie &rice efforts;’ costs, and accomplishments of
                         ” ‘L’, ;
 ..!.         ,’ th+pmlgiii , ,~ ,,,: ]tityi tWmaririer,,in‘whi&these      efforts and accomplishments
          .        have, been fm             and*the ‘manag&nent of the entity’s assets and liabilities.
                              ; i.’ :‘i ‘. j, iq!..;‘, .. .:
                ‘.          ’ ““&&,&&~ip;~~~~             ftrianci;l *de       jhodd assist report tin     h
                 assessing the impact on the country of thegovernment’s operations and
                 hn&t~&ti      for ‘the $&idd ‘&l ,hoki as a, nsult, the governkent’s and the
                 nation’s fycial      &nditiooj ‘have
                                                 _, &an&d and         may change in the future.
                                  ‘I ,,                            :
                 .        ,Spteats aria eentreLFedem1 fkcial            reporting should assist report
                 users in ‘understanding ivhether f&Gal         management systems and internal.
                 acooiukng &I ad&ist&ive           controliaii-adequate     to ensure proper
                 exe&i& ‘of trathktiotui; -daleguard assets, and support performance

        7.       The concepts are also intended, as FASAB’s mission ,statement requires, to
        help in meeting the financial and budgetary information needs of executive agencies
        and Congressional oversight groups, and to strengthen the conceptual basis and
        consistency of Federal accounting data.

        8.        The entity and display concepts presented in this statement do not preclude
        the specification of ad hoc or temporary reporting entities to meet special reporting
        needs of users of Federal agencies’ financial information. Nor do they preclude a
        reporting entity from preparing special pu+ose financial reports to meet the specific
        needs ‘of persons in the reporting entity or in response to requests from persons
        outside the entity for certain financial information; or from preparing a so-called
        ‘po~&r report,” which provides a simplified, highly readable. easily understandable
        description of a reporting entity’s futances. These statements would not necessarily
        purport to be presented in accordance with generally accepted accounting principles.

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                              February 28, 1997


               9..       The most basic .reasott for having an explicit understanding of what the             p
               reporting entity entails is to ensure that the users of the entity’s financial reports are         1
               provided with all the information that is relevant to the reporting entity, subject to cost
               and time constraints. Clearly definiag the boundaries of the reporting entity provides
               the users with a clear understanding of w&t the reporting entity encompasses. It helps
               to establish what information is relevant to the fticial    statements and what
               information is not.

               10.      Other reasons for having an explicit, ttndemtanding of what the reporting
               entity entails are to:

                        .          eruyre that for. the aggregation of information at each reporting level,
                        no entity is omitted, and to provide for .oonsoli&tions and/or ‘combinations of
                        information’ from reporting unitsat the same level, as appropriate;
                        .          assist in malting comparisons among comparable reporting entities by
                        reducing the possibility of unintended or arbitrary exclusions or inclusions of
                        .          assist in making con&isons among alternative ways to provide
                        similar services or products;
                        .          be able to distribute costs properly and fully and to properly attribute
                        the responsibility for assets and liabilities; and
                        .          facilitate .eval&ing performance, responsibility, and control,
                        especially where one agency is the provider or recipient of services
                        attributable to or financed by another agency.

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                                     .                                                                                          SPPAC NO. 2.

         STkUCTUIiE                             OF THE FEDERAL; . GOVERNMENT   .’     “.,..                ..,,
i3 -..      ‘:,,                                     1%  ‘fhe ,Fedeml ‘Government is an e&m&              compl& organization composed of
                                                       many different components. For accounting’and re$orting,~pur@es, it may be viewed
                                                       from at least three perspectives. However. the nature of each type of component and
                                                       the relationships among the components and perspectives are not always consistent.
         ORGANIZiTIOiYPERSk’ECTIVE                         ’                     .’
                                                                     ‘.      >:    ‘,    ,.: ,,    .5.:
                                          12. ’ The fti’type of p&spktive is the oigattik@on perspective. The Federal
                                         Government is composed of organizations that manage~resoiuces and are responsible
                                        ,&r tye~tjons, i.e., dehvering services. These include the major Depkments and
            ..“.,.    :. ,/              independent agencids, whibh ire generally~~divided into suborga&ations, i.e., smaller
                                         orgj&ation&,units     ‘with a’ wide variety of titles,%&d&j           bureaus. administrations,
                                         ag~~~ie~,:,~~~cct;,~~~ ~or@ations’; ‘Many of the& iir&[f@her divided into even
                      .,           .i    ,&ii&n;bb%anr@hti Gn;the”other ljand, there ark‘!11 agencies for which
                                         di+ion   into sniallerunits., is~geiierally not ooitsklertd   app&*te.
                 1’                    .I                  ..                              .1!          (’ : ,, (;
                    :        ,        I.                                   :’

                                                        13. ’ From anothei~plrs+ctive, the~govemrkent is composed of accounts presented
                       .,            ,                 ‘in the budget; hereinafter referred’ to as budgeC:&ouati.      ,Budget accounts are
                   ..,,,’                          ” composed of i$xndituk(appibpriatio~             or fund) hcdot+s and receipt (including
                    I ..                              offsetting receipt) atkounts. The size and scoti of,these accounts varies according to
                                                 ’    Congressional p@ference. They ‘can vary from very small, accounts, which are useful
                            .,                        .for con&raniiitg’ma~gement,      to ve’ry large adcotints, khioh can be used to f&nce
                                                                                                  i.                    ..,
                                                      many activities.‘,.     1
                                                             ’1                                       .’ ;                                 ‘..
                                                       14;       Budget accounts ‘are not the same as Treasury ,a&ounts. The latter are
                                                      accounts established in the Treasury to, among ‘other purposes, record the
                                                      appropriations and other budgetary resources provided by statutes and the transactions
                                                      affecting those adcounts. For’ the most pari. budget.accounts are aggregations of
                                                      Treasury accounts. Also, ‘Treasury ‘accounts incltide~depos~t accounts as well as budget
                                                     ‘acobunts.                 ”    ‘,        ,.        :; .,           ,‘,

                                                       IS.       Nor are budget accounts the same as the uniform ledger accounts established
                                                       by the U.S., Government Standard General Ledger (SGL). SOL accounts record
                                                       specific homogeneoustypes of transactions and balances that aggregate to spkific
                                                       classificauons on the fmncial statements. They have been established so that agencies
                                                       can~establishoontrol over their ftincial transactions and balances, meet the basic
                                                       financial reponingrequirements;~and integrate, budgetaiy and financial accounting in
                                                      .the same general ledger.       ,’

                                                       16.        A budget account may coincide with’an organization or one or more of its ,
                                                      ,suborganizations. Other times, several budget accounts need to be aggregated to
                                 i                     constitute an organization or sub-organkation; .’ .;’ :,         i’(
                     _..                          .        i .:_ : :-;.,        .‘I ;;   . : .‘-,       ./. .,. ).‘. :,
                                                                                             , i i :* . ..-
                                                       17.       ”Budget accounts are classified as.federal funds or trust funds. Any account
                                                      that is designated by the -laws goveming the federal budget as being a tntst fund is so
                                                      classified. Federal funds comprise the larger group and include all transactions not

s)                                                                      Volume I, Version 1.0
                                                                          February 28, 1997
                       classified by law as trust funds. Three components make up federal funds: the general
                       fund, special funds, and revolving funds. The definition of each of these categories
                       can be found in the OMB circular A-l 1 and the GAO w             of Tw     Used m t&
                       Federal Budnet Proccs+

                          18.        CuemurtbetrLenindets~,.~eaanwofalltnut~&~d~eir
                         relationship to the entity responsible for them. A few trust ftutds ate truly fiduciary in
                         nature. Most trust funds included in, the budget are not of a fiduciary nature and are     ’
                         used in federal finanoing in a way that differs f&n the eommott underatattding of trust
                         funds outside the federal government. In many ways, there trust funds ti be &iI&
                         to revolving~or special funds in that their spending is financed, by eanmuked
                         colbctiona.            ‘,
                                 i,:       ,/        ” ‘“.c”’      ”                ;9
                          19.        1E &&nary     usage, the term %&t fund’ referaio’money belonging to one
                         party: held,% 4:         by anotherparty operating asa fidue~.       The money in a trust
              j          fund must be used in, accordance wih, the tqut’s terp4 yhikh the tnutee cannot
                        .unilatemlly modify, and iri maintained: separately and not oommingled with the
                       : trustee’s oti funds. This is not the apse forhost federal trust funds that are included
                         in the budget-the fidu&y         relationship usually does not exist. The beneficiaries do
                         not own the funds and the temts in the law that created the trust fund can k:
                         unilaterally altered by Congress.

                       20.1     Special .funds and trust funds, except trust revolving funds, are aggregates of
                       budget accounts. They normally. consist of one or more receipt accounts and one or
                       more, expenditure accounts. Among, the trust funds, social msurance
                                                                                     ’         programs (such as
                       sooial security .and unemployment compensation) have the largest amount of funds and
                       federal employee .programs (such ,as &ement       and health benefits) the second largest.
                       Together they make up about 90 percent of all. trust fund receipts. Other tmat funds
                       include excise tax financed programs for highway oons+otioa, airports and airway
                       operations, and other public works. Like other budget accounts, trust funds are usually
                       the responsibility of a single organization, although sometimes they are the
                       responsibility of more than one organizatioa.

                       21.      Budget accounts are also categotjxed, as mandated by law and defined by
                       OMB, into functions and subftnotions that represent national needs of continuing
                       national importance and substantial expenditures of resources. Examples ,of functions
                       are national defense and health.


                        22.         From a thitd perspective, the government is composed of programs and
                        utivitiea,i.e..-the. services the organixations provide and the specific lines of work
                        they perform. Each program and activity is responsible for producing certain outputs
                        in order to achieve desired outcomes.

                       23.      Then is no firm deftition for the term ‘program;” it varies in the eye of the
                       beholder. For example, the Highway program could relate to the entire Federal
                       highway progmrn, the program to build interstate highways (in contrast to city streets,
                       secondary ma&, etc.), dr a .grogram to build a highway between two specific pointa.
                       Moreover, in accordanoe with the sequester provisions of the Balanced Budget and
                       Emergency Deficit Control Aat of 1985. as amended, the House and Senate

                                           Volume I, Venion 1.0
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                                                                                                                SFFAC NO. 2

                             Appropriations Subcommittees annually defmei in the Committee Reports; the
                             meaning of “Programs, Projects, and Activities” as they relate to eachof the
                             Appropriations Acts.

                             24.       The term “program” is also often used interchangeably with the terms
                             Yuuc~~o~~and %ub&mction”       (see paragraph 21). Generally, however, the term
                             gftmction” ivould be used only for the functions defmed in the budget. Gtherwise, the
                             tern- “progmm” would be used.       ‘.
           p ):             . . ).
                                    I                 ,, .’     .,         .’
                                            The pii@&           ak &niaistcrcd ,by the organizations and finanoecl by the
           ,_.                                       . In( l ,‘feui’ instances,‘then’ is a one-to-one relationship among the three
                            ‘. +,++jes.           9, $i@le‘ bud get account faces a single program and organization.
                                Th&,‘ihe progmm ‘3 o&cd out only. by the single organization and the organixation
                         .,    :$&*          odf:oirc piogiam.,                          9
                                  ,, .: ,‘I’ ,.(. ;. ,,I. ‘(                ,,         ,, ;
                                26.         However, most ~piosnmr are finanoed by more than one budget account.
                                some of which might not be under the control of the organizational unit administenng
                                the prbgrim.~,Somi &r&s                  am eved~administered by more than one organization.
                                Liketise, a single ,orgaiiiktion or budget account could be responsible for sevml
                                programs. .In some instances, a program could also be considered an organixatioarl
                                tinit, e&t.. the Center for Disease Control and Prevention.
          !:I,                           ,.
              .,                27          Furthermore, some -of ,the support necessaty to’ perform a program is
          p:                    frequently provided by other organizations an&or financed by other budget accounrs
          Li,..                 Examples are the computer support for a program that is obtained from a central ulut
          ‘+i.,                 withinthe departmen~~or~retirement health costs for a program’s current and forma
                                employees.         ”                       ,.
                                               . . ..,”
                               ,2g. :. ” This komplex situation’ is the result of the evolution of Federal organizauona,
                                programs, and budgetary structures over many years. As Federal missions and
                                programs have expanded and changed, new departments have been created, new
                                organizations have been ad&d to existing departments, ‘and new duties have been
                               ,asji@ed to existing organizations on the basis of various considerations. Similarly, the
                                budget structure has evolved in response tothe needs of the Congress; its committees
                                and’subcorntnittees; and various initiatives by the President, program managers, and
                                interest groups.


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                                                                                                                ‘\ .J
               29: .    .As stated reporting entities are entities that issue general purpose financial
               statements to communicate finanoial and related information about the entity. For any
               entity to be a’ reporting entity, as defined by this Stat&rent of Federal Financial
               Accounting Concepts, it would need to meet all of the following criteria.

                          .         There is a management responsible for controliing and deploying
                          resources, producing outputs and outcomes,.,axe+uing the budget or a potion
                          thereof (assuming that the’enti~ is included m the b&et). and held               “’
                          accountable for the..entity’s performaqoe.         j
                         l         .The entity’s scope is s&h ,&it, 6s fvcial,       statements would provide
                        .,a.,me~gful’,representa,tion-of       operations and :fF$al      condition.
                          .         ;‘lhere are likely to be users ,of the financial statements who are
                          interested in snd could use the information in the statements to help them
                          make resource allocation and other decisions and hold the entity accountable
                          for its deployment and use of resources.                I :
                                              ,,.                                   ..
               30.        Budget accounts, in and of themselves, do not meet the criteria in the
               preceding paragraph and, therefore, would not be considered a reporting entity for the
               purposes.of issuing general,purpose financial statements. Also, the size and scope of
               the budget accounts ,across all government agencies lack sufficient consistency for
               them to be universally considered as the reporting entity. Similarly. programs
               generally do not meet the criteria. in paragraph.29 and, therefore, would not be a
               considered a reporting entity that prepares general ,purpose finanoi@ statements.
                31.       On the-other hand, organizations,. and particularly’ larger organizations, meet
               the criteria in paragraph 29. While the occasional overlap of programs and budget
               accounts among more than one organizational unit could complicate financial
               ~reporting, the association of data with the responsibility centers, revenue centers, profit
               centers, cost centers, etc. which managers typically use for organizing and operating
               permit the .following:
                                                      I_    ‘I/.,
                          .          aggregating. information for not only the organization (and
                          s&organizations), but also for one or more of the programs performed ,by the
                          organization. and one or more of the budget accounts for which the
                          organization’ is responsible, and
                          .          the subsequent arraying of the information not only by organization.
                          but also by sub-organization, program, and/or budget accounts.

               32.     This approach to defining the appropriate reponing entities in the Federal
               Government supports establishment of accountability in the organizations (and
               suborganizations) while still enabling them to provide information pertaining to their

               33.      Although a reporting entity might not control all the budget accounts used to
               finance one or more of the programs it administers, any revenues attributable, to or
               costs incurred on behalf of the programs it administers should be associated with that,

                                                                                                                /\,,,--. ‘).
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                                     February 28,1997                                                             J

                                                                                       .,              SFFA~ MO. 2
                  . . ‘,
      ,’                      reporting entity This notion’ holds uue regardless of whether the reporting entity
                               ,,;      persq~el    bn‘a payroll. ’           ’     .’ ”
            ‘,                                 ,...   .(, < ,,”     “,, .’ _ _,,‘/ i.
                              34.       The~‘department$ and&jor~ independent age&es are organizational units’and
                            I therefore .would be the primary reponing exitities. However, in many instances,
                              financial statements that present aggregations of information into suborganization
                              entities, i.e., bureaus, administrations, or agencies, may be more useful than statements
                              that present only aggregations into organizational entities. The former can provide a
                              better understanding of the financial results and status of the many individual
            -                 suborganizations and programs constituting a department ,or major independent agency.
                              They can reveal instances where programs are carried out by several s&organizations
                              within the department or major independent agency.
                               35.      Similar to other budget accounts, trust funds, special funds, and revolving
                               funds are ,usually administered by a Single organization. For financial reporting’
                              purposes, the organization would be the reporting entity; the trust fund or revolving
                              fund wouldbe a component of the organization that administers the fund in the same
                              mamier that a suborganiuition~or other type of budget account is a component of the
                           - ,,organizatior& This would not preclude separate reporting’ for the trust fund, sp&ial
                    3’        fund, or revolving fund by the ma,naging.organization. nor would’it preclude
                              disclosure of trust fund, special fund, or revolving fund information within the
                              organization’s report when there is sufficient interest.’     ,’

                             36.       Likewise, some programs are coterminous, i.e., share the same boundaries,
                             with an organization or sub-organization, w.hile other programs--such as student loan
                             programs--are the component for which resources are deployed, are responsible for
                             achieving objectives, and/or are of great interest to outsiders. In both instances, the
                             financial operations and results of the program might warrant highlighting or even             .
                             separate reporting by the organization or +organitation      which manages the program.

                             37.      Financial statements for organizationally-based reporting entities may be        ~
                             audited and issued to external parties,’ unaudited and used for internal management
                             purposes, or, perhaps to be more relevant and meaningful, combined with financial
                             statements from other organizationally-based reporting entities.

                             38.       The ultimate aggregation of entities is into the entire Federal Government
                             which, in reality, is the only independent economic entity--although some would say
                             the entire country is the ultimate economic entity. The Federal Government entity
                             would encompass all of the resources and responsibilities existing within the
                             component entities, whether they are part of the Executive, Legislative, or Judicial
                             branches (although, as noted in paragraph 5, FASAB’s .recommendations pertain only
                             to the Executive Branch). The aggregation would include organizations for which the

       ‘For some trust funds, the collection of the revenues is performed by an organizational entity acting in a
 custodial capacity that differs from the organizational entity that administers the trust fund. In those instances,
the organizational entity that collects the revenues would be responsible for reporting only the collection and
,subsequent dis@osition of the funds. The organizational entity responsible for carrying out the program(s)
 financed by a trust fund, or in the case of multiple responsible entities, the entity with the preponderance of
fund activity, will report all assets, liabilities, revenues, and expense of the fund, notwithstanding the fact that
another entity has custodial responsibility for the assets.

                                               Volume I, Version- 1.O
                                                 February 28, ‘1997
E    74
_I   SFFAC NO. 2
 !                                                                                                         8
 I                 Fe&ml Coven      merit   is fiaancially accguntable as well as other organizations for which
                   the nature and significance of the@ ieiatkship with the government, (see paragraphs
                                   .I are such that their exclusion would cause the Fe&ml Government’s
                   financialstatent&ts     to be misleading or incomplete.


                                     Volume I. version 1.0
                                       Febnmy 28, 1997
INA REPOIiTING Egm'.',  "    ;,_                                                         ',    .,.
                        ',                                                    /,.
                          39.        R@rd+s of whether a reporting ‘entity is the U.S. Federal Government, or
                          aa oipization,       suborganization;‘ot”~~,‘~e~           cim tie ticertainty as to what
                          should be included’and iaooitsisteticy ds to &hat ‘is inchided in the reporting entity.
                          The i&,nt@cation and application of specified criteria can reduce _&is uncertainty and.
                                                                ;        ‘.’                   ‘. /
                              ,-                                           :...:, ,’         I”
                                     The Go\.. ‘..‘G.
                          40.                 vetnmen~l Acc&mting Standards Board (GASB) has established
                :         criteria for what would be mcluded m a state or local government reporting entity.
                          n&gv~            v-jag 3 financial:,a~co~~b~~i~, whidh inoltis appointmcmt of a
                                      .,l<,’a ‘$ ihe otganihtiodi      goki$ngSi*           together with imposition of
                       ,, \billy;*;f*~lk            ne:f lt t6 or burden   on a  primary  government.   These criteria, while
                           m,,$art relevant, m*,pi        tailored &the FedkalGovetiunent environment. First, there
                    ,‘I ,are n&‘ak many different tyg&of en&es in theFederal Government as there are in
                           ‘ete $iid lo&l ‘gover@ents~ ‘Sebond,the Congress,‘and others with oversight authority
                           frequently establish explioit’rules for what to in&de as part of a Federal reporting
                         ” eittity.“Fi&l~y; as indicated: with the exception ,of the Fe&ml Government as a whole,
                           all the yepOrting units are com~kds’of            a larger entity, namely the Federal
                           Coveida&< rathtr than h+uiint               economi$ entities.
                                                     ,_,                ‘,


                         41.      / There are two types of        criteria that should be considered when deciding what
                         to include as jkof     a financial       reporting entity. The first is a conclusive criterion,
                         i.e.; an inherent conclusion that        for finanCia1 reporting purpose& any organization
                         meeting thii criterion is part of        a specified larger entity.

                         42.     Atp&nce’in    the Federal budget section currently entitled “Federal Programs
                         by ‘Ag+ncy ad A ccount” is a conclusive criterion. Any organization. program, or
                         budget account, including’ off-budget accouW and government corporations, included
                         in that 3ecrion should be considemd’gart of ‘the U.S. Federal Government, as well as
                         @art of ‘the organkation ‘with which it appears. This does not mean, however, thaw an
                         appropriation that ‘finances a subsidy to a non-Fe&ml entity would, by itself. require
                         the redip&t to be inbluded in the ‘f&&al      ‘statements of the organization or program
                         that expe@s the appropriation.

                          :      ,’                                         d.
                         43.        There are instancei when, for political or other reasons, an organization
                         (in$ding a government corporation), prcigramib account is not listed in the “Federal
                         Programk by Agency and Acook,” yet the general purpose financial statements
                         would be misleading or incomplete-in regard‘to the objectives for Federal finanoial
                         ri$o?ti+4f     ,the~organixation. program; ty ,accoinit were, not included therein. These
                         organizations, programs, or accounts would normally ,be considered to be operating at
                         the “margm” of what would be considered a governmental function in contrast to
                         pkviding a more basic governmental .function. Thus, in addition to the conclusive

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                                                February 28, 1997

              criterion, there are several indfcetive critert that should.be bonsidered in the
              aggregate for defining a financial reporting entity in the Fcdeni Oov&nment. NO
              single indicative criterion is a conclusive criterion in the manner that appearance in
                                                                                                                       .-- -.
              the “Federal Programs by Agency and Account” section of the budget is. Nor can
              weights be assigned to the indicative criterie. Thus, while the indicative criteria are
              presented in descending order of importance, judgment must ba based on a           ,
              consideration of all of the indicative criteria.

              44. .’ The indicativeStetia ior determining whether k orgenizetion not listed in
              the “Fed&l FYograms by Agency and Accoud section of the budget is nevertheless
              put of a @a&al reporting entity are as follofl:

                          .         It exercisy iiiy myereign pow+r of the govemmcnt to terry out
                          F&ml functions. Evidence of sovereign pow& Ue the power to collect
                          com&ory         payments, e.&Xa*es; fme~,‘;++her cdmpulsory assessments; use
                    //    police @wers; conduct negotiations i&$$ig           the’ i&rests of the United
                          states yith ptbr nati&; or ‘bpmiti fun& for Gtive+nent use.
                          l         Ii, is o&e! by the,+dcnl, ~ovci&&,           particularly if the ownership
                          is of the .organization.and not just t+e -per&:       Ov&rship is also established
                         ,by oons@eri~ who is at risk if the organize&on fails, or identifying for
                          whom the or&xation’s         et&loyees work.
                          .         It is subject ti ihi direct or &tinuing     administrative control of the
                          reporting,entity, as revealed by such feat&s as (1) the ability to select or
                          remove the governing authority or the ability to designate management.
                         particularly if there is to be ‘a significant continuing relationship with the
                         govemtig authority or management with respect tb carrying out important
                         public functions (in contrast to selections and designations in which there is
                          little continuing .communication .with, or accountability to, the appointing           ,p
                         offCal); (2) authority to ,review and modify. or approve budget requests,                 --
                         budgetary ddjuatments, or amcndme&s or rate or fee changes; (3) ability to              hii2            !
                         veto. ‘overrule, or modify governing body decisions or otherwise significantly
                         idhence normal opemtions; (4) authority to sign contracts as the contracting
                         authority; (5) approval of hiring,,reassignment, and removal of key personnel;
                         (6) title to, ability to tiansfer title to, and/or exercise control over facilities
                         and property; and (7) right t,o require audits that do more than just support
                         ,*e granting of contracts. (While many of.$ese criteria exist in a client-
                         contractor relationship, it is not necessarily intended that an entity’s co&actor
                         bs considered as part of the reporting entity.)
                         .          It carries out Federal missions and objectives.
                         .          It determines the &come or disposition of matters affecting the
                         recipients of services that the Federal Government provides.
                         .          It has a fiduciary relationship with a reporting entity, as indicatedby
                         such factors & the ability of a reporting entity to commit the other entity
                         finanoially or control ,the oollcolion and disbursement of funb; and other
                         manifestations of fiaMoia1 interdependency, such as a reporting entity’s
                         responsibility for finanoing deficits, entitlement to surpluses (although not
                         necessarily the assets acquired from failed .&its). or the guarantee of or
                         “moral responsibility” for debt or other obligations. .
              45.        The entity Or any of the above criteria ‘be likely to remain in existence for a
              time,,i.e., the interest in the entity and its governmental &aracteristics is more than

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                                     Febmary 28, 1997
                           46.       In applying the indicative criteria, the ‘materiaiity of the em&&s aud their
                           relationship with one another should be colLided. Matuiality should not be
                           measured solely in,dollars. Potential embarrassment to any of the entities’ stakeholders
                           should also .be considered. Thus, a bias toward expansiveness and comprehensiveness
                           would be justified, particularly if it could contribute to maintenance of ‘fiscal control.’

FEDERAL         RESERVE SYSTEM                    ‘. ‘_

       .. 4.               47.         _.I; establishing and monitoring mot&y ,poliCy, the Federal Reserve System,
          k.                i.e., &Boardof          Governors of,,the Federal Reserve System and the Federal Re&e
            .               @an&a,could +,,+sidepd                 as funcuotiiug consistent with the indicative criteria
                            prosened in paragraph 44:‘Bowever;in’ theUnited Statel,’ the organization and
          A*‘,       ‘,.    functions
                                  ‘) ‘?.“.,pettaining
                                            j ,, .:c to   monetarv
                                                      , .._..,              policy
                                                               $,,../l,;?,,T.,:.,,     are traditionally separated from and
                                                                                 *,.‘) $‘;
          :                 independent of the other central government orga&atio&and                           functions in order to
                            achieve more effective monetaj; ‘and &al policies and economic results. Therefore,
                            the Fedeml Reserve System would not be considered part of the government-wide
                            reporting entity. Payments made to,or collections received from the Federal Reserve
                            System would be reported in the finan&ai statements of the Federal Governmen+.
                           ,Certain other disclosures might also be appropriate in the financial statement for the
                            entire government.


                           48.       There are also several Federally chartered but privately owned and operated
                           financial institutions that have been established as financial intermediaries to facilitate
                           the flow of investment funds to specific segmentsof the private sector. These entities
                           are called government sponsored enterprises (GSE). Examples are the Federal National
                           Mortgage Association. the, Farm Credit Banks. and the Federal Home Loan Banks. By
                           law, each of these GSEs is subject to ‘oversight from a specific Federal agency.
                           However, they are not included in the Federal budget section entitled “Federal
                           Programs by Agency and Account.” Nor, as currently constituted.,do they function in
                           a matmer consistent with the indicative criteria presented in paragraph 44. Thus they
                           would not be constdered port of the government-wide reporting entity nor the
                           reporting entity to which they have been assigned for oversight.

                           49.      On the other hand, there are “political expectations” associated with the
                           GSEs. the most significant of which is an expectation that legislation would’be
                           enacted to support a GSE experiencing severe financial diffi&lties. (Political
                           expectations are different than “moral obligations” established by’ many states. There is
                           no statutory authority that defines whether and how a political expectation would be
                           met. With a moral obligation, the manner in which it may be met is usually explicitly
                           defmed in statute.) Therefore, agencies assigned oversight responsibility for a GSE(s)
                           would need to consider making disclosures of the government’s relationship with the

    ‘Any uncertainty as to what to consider as a reporting entity would be resolved by OMB in consultation
with the appropriate Congreuional committees.

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                          G%(s) ard other infonaatiod that would provide au uuderstanding of the possibility
                          of a contingent liability?

                          50.         The Federal Government occasionally bails out, i.e., gusqntees or pays debt,
                          for a privately owed entity whose failure could have an adverse impact on the
                          nrtion’s economy, coaunercc, national security, etc. As a condition of the bail out, the
                          Federal Govekent        frequently obtains rights similar tothe authorities l ssooiated with
                          +e indicative criteria presented in. paragraph 44.7’he existence of these rights does not
                          mahe the bailed out en&y part of the Federel Govenuuent reporting entity or auy of
                          the other reporting entities that are patt of the Federal Govenuuent. Ditilosure of the
                          r$8tionship(s) w$) the bailed out eutity(ies) and any ibtiml or potential tnatetirl costs
                          or liabilities would be appropriate.

     ‘The term goverument spoked      enterprise is also sometimes used in a broader manner to encotqass other
entities established by the Federal Government to further a public pohcy and that are also not included in the
budget section “Federal Programs by Agency and AccounL~ Examples are the Financiug Corporation. Resolution
Funding Corporation. Amtrak and even, on occasion, the American National Red Cross. These entities have
varied ch&ctetistics and different types of relatiouships to the Federal Gov emmen& and therefore, ill mme
cases, may be included with the above mentioned GSEs in sections or tables of Federal budget docuatmts.
These entities need to be judged iudividually with respect to the indicative critetia presented in puagtuph 39 iu
order to determine whether they should be considered pat%of a Fedeml reporting entity.

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OTHERASPE~XSCONCERNINGTHE                          _’ ‘,    _,-.      ‘.(”         , ,,
            .“’                     ,’ :,
      Zd .~     51. ‘, The r$phation of spe&ed criteria to delineate the reporting entity’ is ona
                               ,&pect of ens&gthat        the users of a rep&ing%nity’s .financial reports are provided
                                with all the information relevant to the ‘reporting~entity;~ However, because the only
                                independent economic entity is the entire Federal Govetnnteat, f%uin~ial resources or
                         .’ f& kvke~ UC’ oft&i pfidled from ,orte component in the government to another
                                &+&itt      h+ldtt it Ii$tid :pro’ qud.‘For exadpk, ‘a portion of the, retirement costs of
     WL.                    ‘, F&ml ,&h$by&i ‘is reported by the Office of Personuel-‘Mnagemettt rather than the
     ,.-                        o+ixatior$       entitiesemploying the persons. Thus, within the parameters explained
     ?.i     -.: ,“,._   ;,“: ,~‘~~~~52            ye ‘53, ‘it ih bloat’    ~ ,enriiic: tht:the,;rrporti*g entity’s f-~irl
                             reports include amounts that are attributable to the &potting entiry’s activities, even
                             though thev are,mcorded elsewhere. This is particularly important for costs associated
                            ,%‘@i&& ‘&e oi’ j&an &uic+:              ,+onnel setvicii”are stih a. major part of most
                             g&himent       ~ictivik; It is ‘al& important for’ the Lo+ *of services provided by other
                              reporting entities, sjdh as cottip& services proviLdby,:another          unit.
               “.   i         ,, : ”        1: ,. i ,                   .‘,’ :’ 1 : ., ,‘, ::.,
                                        ,A ‘+&       ih whi& ,* e reporting en&y -is ,billed ‘and pays for the amounts
                              52, ,,’
                              attributable ‘ib its activities, is normally the‘ most desirable ,approaoh for recording and
                              reporting these amounts. However, when this type of d&t debiting or crediting is not
                              done.‘the decision as to whether to capture and report attributable amounts would be
                              based on &h ciiterih ‘as the magnitude’ of the attributable amounts, the decision
                              u&fulness~of4he information to ‘its likely usen,:the costsof capturing the data,
                             ‘whether a decision would be made differently as a reiult of ,having the information.
                              and whether the ‘information would have a ‘policy ‘impact.‘
                              53.      It might be appropriate to “consider ,the ‘interest expense inherent in devoting a
                              sum of cap&l to an organization or ‘program as, part of the total costs incurred in
                              operating the organization or performing the program. This, principle has already been
                              adopted. for the accounting for loans and loan guarantees; ,ivhereby a loan program is
                              charged, for me cost ‘of capital provided .by the, U.S.’ Treasury.’


        ?he Board is developing a Statement of Managerial Cost Accounting Concepts and Standards. This
    document, when fmalized, will address recognition,of these amounts.
        ‘The Board has decided to undertake a project addressing the types of capital for whioh it might be
    appropriate for i reporting entity to disclose the costs. the reasous thereof, and the manner m which to determine
    and report these costs. A determination of the appropriateness of considering interest expense as part of the costs
    incurred by an organixation or program will be made by that project.

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                     54.      Financial infotmation is typically provided by or for a reporting entity             _,
                     through financial statements. Financial statements represent the principal means of
                    commuttioating accounting information about an entity’s resources, obligations,
                    revenues, costs, etc. to those outside the entity. However, financial statements. and
                    particularly those prepared for governmental and other not-for-profit organiirtions, 1
                    may ,also contain information from sources other than accounting records. Also,
                    management may ,.commtmicate infotmation to those outside the entity by means of
                    facial     reporting other than ~financial statements, ciih? because the information is
                    nquirecl to be disclosed by statute. regulation, or custom; ,or because management
                    believes the infotmation would be useful to those outside the entity and discloses it
                    voluntarily.~        ,                                       ‘.
                    55.       To’mhance confid&e in the reliability of information presented in fulanctal
                    statements, the statements are often, but not‘alvvays, audited by Inspectors General,
                    independent accounting firms. or the General, Accot@ng,dffke.        Some financul
                    reporting by management. both within and outside the financial statements. is audmd.
                    or is reviewed but not audited; and some information is presented by management
                    without audit or review by persons independent of those who prepared the statements
                    or infotmation.

                    56.        In the Federal Government. there are several types .of reporting entitles
                    (organixations, suborganizations, programs, and the government as a whole) and
                    several financial reporting objectives (budgetary .integtity, operating performance.
                    stewardshi@, and systems and control)t Each of the reporting objectives can be met to
                    a certain degree by the statements prepared by or for one type of reporting enlrn and
                    to l l greater or lesser.degree by .the statements prepared by or for the other types of
                    reporting entities. For example, the objective of budgetary integrity can k best met
                    with the program and financing schedules prepared for individual budget accounts
                    The objective of operating perfotmance can be best met with financial statements from
                    organizations/suborganizations and programs (although financial statements at thtr
                    level can also help readers evaluate the repotting entity’s budgetary integrity). The
                    objective of stewardship can be best met with a financial statement for the enttre
                    government. Meeting the financial reporting objectives in their totality requires        .
                    linanciol itatements from all of the types of reporting entities. .


                    57.       The financial reporting objectives are also met with different types of
                    financial statements. A financial statement that presents financial information for an
                    entity as of a particular point in time, however the information is measured, i.e.,
                    budgetary, cash, or accrual, is often characterized as a stock statement. An example of
                    a stock statement is a balutee sheet. It presents the total balances of assets, liabilities,
                    and net position of an organization as of a specific time.

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        FLOW STATEMATS                                               ”                I’           ,,:”        ..,.     ‘.
                                                   58.        Another type of f&ancial statement provides information on an entity’s flows
                                                   ofrevenues, receipts; expenditures, expanses, gains, losses, and/or other changes of the
                                                   ent@!s net resources during a.period. however they are measured, i.!., budgetary,
                                                   cash, or. accrual. This type of financial statementis fmquently characterized as a flow
                                                   statemenL,.,The traditional now statement is a statement of operations and changes in
                                                   net position issued by I&ate sector, profit ie&ing orga@tiorts. it presents the
                       ..                          resuiu of an entity’s operations for a reporting period, including the changes in the
                      .-i                          &thy’s net position from the end of the prior riporting:p&iod. This type of statement                     \
                     ‘s,..                          is particularly useful for private sector, profit seeking organ@@+ a.&te ,their ,,
                      ._                            objective is to generate earnings and returns on investment. The statement of
                                 ;’             : operations~and ,changes in net ,,R+tion ,pres@r ,$e revenues the entity receives, the
                                                  .-.expensesincurr&~~ generate the @wenues,.the  ‘. .’ pniount left for the entity’s owners,
                                                    and the resulting effect on the owners’,equtty. ,,        k’ ,&

          :       ,’ .                         ,.     $9.; ,., .,, ,,The +kra! @yrrgertJ            and most of the other re+ting entities ‘in the
                                                      Fedem Government are ‘spinding entities whose objective is to provide services, some
                                                     .of $ii9h,are financed by revenues,received from the recipients of the s&vice. and
                                                      sot&of. which   _, :+M.’if._ not,ailor, most ,of .$iich. are tinanced by taxes and other unearned
                                          *.          revenues.! Thus, the most, useful ~ir$otmation a flow, statement could present is the
                                                      total and net ‘costs of the services, i.e., how much of the services provided by, the
                                                      e,ntity ,~wasfinanced, .by.the taxpayers.. This type of statement, which would be a
                     :;                               statement ef net ebrts, would support the, achievement of Federal financial reporting
                        G’.                           objective,t& Gbjective.24 ~tates,that,,“~e,deral financial reporting should provide

                     ,I..*                            info@ation: that. helps &~ye&r to detetrnme~ the cos&;of providing specific programs
                  ,.’4.                               andaotivities,and the oornpo&ion of,,@ changes, in, these costs.”                                 I/

u                                                    ar...,

                                                              ,,                           ‘&:.’          ),
                                                                ~@x&ated, revenues provided ,k exA+tge. for the services, i.e.; eorned
                                                       revenues, are not the only manner in which a Federal Government entity finances the
                                                       setvices it .provides. Other sources of. financing .are,the ,appropriations received from
                                                       the Congr,ess,,and
                                                           Congnss,,and such various non+xohange revenues as fines, donations, and
                                                       transfers fromother agencies. Therefore. another useful flow statement would be a
                                                             ,.     of,c,haqer in net .pq!$tion that .pr&ents t&manner tn which the entity’s
                                                       net,costs were flnanced’and the resulting effqct on the entity’s net position. This also
                                                       would be consistent with Federal fhumctal reporting objective 2: “Federal financial
                                                       reporting should.assist report users in evaluating,. .,the’tnenner
                                                       repor&tg                                                                             effom
                                                                                                               .,the’ttmner in which these efforu
                                                       and accomplishments have been fmanoed....“’

                                                      61.      The collection of the major sources of funds for the appropriations, e.g.,
                                                      taxes, royalty paymenu. and ftnes, is the responsibility of just a few reporting entities,
                                                      especially the Internal Revenue Service, the Customs .Setvice. and the Minerals
                                                      Management Service. .These entities are functioning in a custodial capacity and are
                                                      required to tutn the taxes or other monies they collect over to the Treasury or other
                                                    I organixations. The results of these entities’ custodial activities could be reported in a
                                                      flow statement that provides an understanding of from whom the taxes or other

                                         ,.._,, .., i,_ .,       :,. .     I.
        ,’ “’ ”               ,’ I
              ..:                  .,_ r ,.,         .                      . .,,,  .
             @TheBoard is currently developing an Exposure Draft entitled “Rowwe and 0th Fin&ing Sound
        tihich addresses more ,fully the types of revenues~(i.e., exchange versus non-exchange and eatned,versus
        unearned revenues) discussed here.

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                  monies were collected and to whom They were distributed. This would be called a
                  statement of curtodial activities.
                  62.        For many reporting entities, and particularly those.engaged in reimbursable
                  activities, it is useful to have an understanding of the sources and amounts of cash
                                                                                                             ;--   3
                  provided to the entity for operating. investing, and financing purposes and the major
                  purposes for which, the cash was used. This type .of information can be displayed with
                  a statement of cash flows. in accompanying footnotes, or as supplemental financial
                  ad management infOIxl8tiOn.


                  63.      Meeting the first objective of SFFAC Go.- 4,~“Objeotives of Federal Financial
                  R+ort&      namely the ,budgetaty integrity objective,‘necessitats that the read&
                  receive assurance that     ,’

                           .          the amouqtk obligated or spent did not exceed the available budget           .
                           .          obligations and outlays were for the @rposes intended in the
                                      appropriations and authorizing legislation,
                           .          other legal requirements pertaining to the ‘account have been met,
                           .          the amounts are properly classified and accurately repotted.

                  64.       This information is’ provided in other reports, but there needs to ba auditor
                  involvement to provide assurance ‘as to the reliability of the information. The
                  assurance as to reliability of theinformation could be accomplished by including a
                  statement of budgeury resources in the reporting entity’s financial statemenu.
                  recognizing that the statement will likely be subjict to audit. The presentation of data              I*
                  could be for the reporting entity as a whole, for the major suborganization units
                  (assuming there is congnrity among the major suborganization units and the budget
                  accounts), or for the aggregations’ of the major budget accounts, rather than for the
                  individual budget accounti of the entity or other types of entities. Violations of
                  budgetary integrity at the account level occurring during the current year could be
                  disclosed on an exwpiion basis. (Many vi&itions cif budgetary integrity would also be
                  violations of the Attti-Dcficienci Act. Disclosure in the financial statements
                  notwithstanding. these violatio& would also have to ba reported as required by the

                  [The heading above and the text below were added to SFFAC No. 2 through
                  amendment by SFEAS No. 7. Text from SmAS N& 7 is inbrted to assist readers -
                  in most cases amendments are noted in the status page and amended test is marked
                   but not modli/ird in the original statemmts.J

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                                       February 28, 1997

                .,         ,_’       .:          ,, .f..:,’ .y ,,:;. us:‘,;,‘,;:‘i’.,‘. 1.;‘, “,(,: ,. :c’ ;: :,:: ‘:     .I,. 4, ,;‘: ,. : %.
                          ,‘I ,, li .,             ., ., 45:        -iTh$csecond:bbjective ,of ped@.~.finqncial repoting,
                                                                    -iThe                                                      reporting, ,states. in part, tbat Federal
                     .:                            : j fhrancial reporting~should provide infotmation that .helps.;r&ders of the tinanqial
                          *        ..:          !          reports detemme the efforts and ~acootnplisbmenu ,ass&iated with Federal programs’
                                                           and the changes over time and in relation to costs. This suggests,that a statemht                        of
                                                           pmgmu        pcr6o+nce
                                                                        per6o+nce            murum,’         i.e.; one or more statements presenting service
                                                           efforts.and,ac~oli~~u’measurcs                         foreach of a reporting entity’s significant
                                                           programs; is~necessaty.,~
                                                                        is~necessary.,~ ”                     ^
                .<                                      ,’                     ‘,‘. :.             :                    I ),,      ‘-
                                                         66.         The Federal.
                                                                            F+ieral. Government ,is increasmg its interestinmeasuring and reporting
                                                           program performance,:as evidence&by the enactment of the Government Performance

                                                           and Resulti ,+ot ,atid ~increasingemphasis :during ~budget~reviews’on pq.-am
                                                           performance. Moreover, the ability to seek and obtain maximum return from,
                                                           increasingly limited resources can be ,edianced      ,enhanced by an understanding of the results of
                                                           the programs for which budget resources have been expended. Iri the &al                    final analysis.
                                                           the objective
                                                                obj$ctive of the Federa~,Government .is.to.provide services, in contrast to the
                                                         ‘objective of private sector organizations, which,is to, earn profits and enhance, the                               .
                                                           return on investment+ bothbf ,which are monetary‘objectives. All of these factors
                                                           suggest .that. the statement. of ,program performance measures ‘is not only an appropriate
                                                           statement, but. likely to be ,the most, important statement for those persons interested
                                                           in boy a ,.Federal entity. is using us resources. ..
                                                                .f    .,,‘.         ;. ‘,                    $,.’
                                                           67.        For a statement of program performance measures prepared by an
                                                           organization-level reporting entity. the outputs and outcomes would be related to the
                                                           performance of the entity itself and its own programs. e.g., clients vaccinated, illnesses
                                                           prevented. For the government-wide report, broader measures of outcomes and impacts
                                                           that depended on, the joint efforts of several reporting entities woulci            would be appropriate,
                                                           e.g., state of the,economy, national security, cnvironment.~personal
                                                                                                                         cnvironment:personal health. social
                                   .                     ,,welfare. although
                                                                      althqugh some :natrower E’cpwer outcome measures might also bi            be included.


                                                                       . .. .               .- ,,,                       ‘I   ”    ,,.                ‘.    ,    :        .
           ,.                 ,.       II   ,._,,.   ...”   .._,.     %..

                ?he Board does not consider the ktement
                                                $iatement of Program
                                                             program Performance Measures to be a basic financial

                                                                                Volume .f, Version 1.0
                                                                                  February 28, 1997
     ,SFFAC NO. 2

      OTHER INFORMATION                                                                 ..

                                 68.       Finakial infort&o&also             oonveyed,Mth qeeempauyiug foo(noter, which        _-J-.-~
                                 arc an integral part of the financial statements. Footnotes typically provide additional             .,l
                                 disclosures that are necessary to make the fmial           statements more informative and
                                 not misleading. ”                                                .I
                                69.        It is also: neoeylty to convey more, general information about the reporting
                         ,     .entiQ. This could entaik,rwh~tnattemas a.brief .de&ipuon of the reporting entity; its
                                missions. -goala, andobjeotiver; the prognms it providerand the major recipienta for
                                 the .prow;      its. major sow       of liuyl&; the manner rt .yhioh the reporting entity is
.                               organized, its personnel resourcea; hQbhghta of .the ~sptity’~.aqoomplishmenta during
                                the reporting’ period, selected ,peasures of prOpam perfomance abstracted from the
                                statement of program performance; ‘problems encountered or targets missed and the
                                reasons why ;..finurcial .,highlights and tre        expected ‘problemmad ‘dbalki&&, fuiuri
                                targets the entity .is setting for itself; and any other information the agency head .or
                                CFO considers necessary to fully and fairly, provide an tmderstandiug of the entity’s
                                finrncibl affaira. This type of iufortnation is typically presented ‘in what has come to
                                be known a?? mmiapmint            iliscuuion wd analysir or overview of the repotting
                                entity.                      .’      :.

                                70.      The thud objeeuve of Federal fiaanoial reporting is that it “should assist
                                report users in assessing the impact on the c~uutty of ,the govetnment’s operations and
                               investments for the period and how. as a result, the government’s and the nation’s
                               f-ial      conditioti have changed.and may change in the future.“‘o This objective
                               requires a reporting of information oo&hag        investments in education, training,
                               research. and development- and certain types of properry, plant, and equipment that can
                               affect the nation’s future wealth, and to the claims on future budnetarv resources                    ,
                                                                                                     I    I

                               resulting from prior deciriona:and actions;

                              71.        The information pertaining to the aforementioned investments. certain types            ’
                              of property. plant, and equipment,“ and claims on future budgetary resources is
                              maintained in part in the entities’ general ledgers and, in part. external to ‘the general
                              ledgers. Some of the informatiotris recorded in units other than dollars, e.g., acres,
                              milliotn:of square feet. Finally. some of the information is not subject to the types of
                              controls present in a system of double entry recordkeeping; Accordingly, a mote
                              suitable way to fulfill the thud reporting objective would he to display the appropriate

         “A complete discussion of the third objective for Fe&ml financial reporting, which is called the ’
    “stewardship objective.” is contained in paragraphs 134 to 145 of Statement of Federal Financial Accounting
    Concepts No. I, “Objectives of Federal Financial Reporting. ”

          “The Board is currently considering accounting standards for Federally-owned property. plank aud
     equipment. These standards will address placement of information related to various types of PP+E. The Boatd
    is considering placing information about some types of PP&E in footnotes with information about other types in
     requtred supplemental infotmation. The Board’s proposals will ‘be presented iu an exposure draft on stewardship

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                                                    Febtuaty 28. ,I997                                                                      -!
                                                                                                                            sFFAC NO. 2

                                            information  as requikd   ruppleme~tal      information ,I   rather than attempting to include
                                            it m financial statements.”
     f-3                                                                                    :’
     v /                                    72.       Fmally,
                                                      ”         ‘&me reporting c&es desire or need to report information to support
                                            information in the overview or to enhance the tmderstanding of the entity’s operations
                                            or financial condition. That additional information would not always be appropriate for
                                            the ovetview or the f-c&l         statements or accotnpanying footnotes. Examples are
                                            .&livery times, tqrtt~ver. and wastage of inventor& condition, maintenance. and
                      1                     ei@eoted re&emeiit         of physical capital; ttnd~dtlinquency, aging, and default rates for
                                          ” loan portfolios. This,infonnation is typically reported as rupplementi flnu~cial and
                    ,y..     ‘.             tnut+&e$        infqrmation.    ‘rtcan be reportid in the form of schedules, charm, tables,
                    %I,           ‘,,       ador narrative’text.
                                                              ,. ,                 ,. )
                    0,                                                                             ‘_
                                           ‘7j.        Tiii ‘$fourth ‘Obj&i&. j&ms~and~oontrolr,         is fuifille~ in m by the act of
                           ‘:.              prep+ng” the f&tancta~ statementa. Ot&r~~avs.,the fourth objective could be fulfilled
                                            through the audited financial &ortmg’ prt$&3s’by              a management assertion that
                                            would ‘hrn@iuty the f&&i               statements and/or ah auditor’s attestation on the
                                            finartoial’ statements. ,$ie mtutttgem&tt assertion, would bean .acknowledgment of its
                                            r+pon&lity         for ‘the’ acct&y’of   the’ information in the financial statements. the
                                            comRleteness and fairness of the’pkentation’of           the i~@&tkion. the accuracy of the
                                            information in all material respects, and the ‘iepi&g ‘of the information in a matter
                                            desined to fakiy‘ presetit’ fvncial position and results of operations. The assertion
                                            cbuld ako include a statement regarding the adequacy of the entity’s systems and
                   . ?’
                                            controls, accompanied by the auditor’s conc~endi with the assertion,

             FINAPkXAL             REPORTING’FOR      AiU ORGANIZATIONAL              ENTITi
     J-           ‘Y
                                            74.       Meeting the four objectives of Federal financial reporting in the most efftcient
     GJ _.                                  manner suggests that reporting entities issue a financial report that would i@ude u
                                            followlpp; ” ;                                                                             .

                                                     .          management discusston and analysis;
                                                     .                                     ,. .,
                                                     .          state&t of net costs:
                                                     ‘9         sktient     of changes in net position;
                                                     .          statement,.~of custodial activities. when appropriate;
                                                     .          statement of budgetary resources;
                                                     .          statement of program performance measures;”
                                                     .          accompanying footnotes;

                                                            ;                            ,.‘i      ;       ,,
                  ‘*Required supplemental information is information that would’be reported outside the principal financial
             statements that the Federal Accounting Standards Advisory Board considers an essential part of a reporting
             entity’s financial reporting, and therefore recommends authoritative guidelines for the measurement and
             presentation of the information. It ‘is analogous to the required supplementary information discussed in Statement
             on Auditing Stand@s~AU Se+on 5.58..06, which addressks pronouncements of the Fitiatncial Accounting
             Stan+& Boaid and the Govetkenml Accounting Standards Board; .’‘.’                            .,    .

                 “The statemellt of program pe rfonnatke measures is not a basic frnanoial statement. Nevertheless. it is an
             important component of the financial reports.

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86                                                                                                                                  I

                                     .        requirad supplemental information pertaining to pi-ysical, human. and
                                     r&arch and dklopment       capital and selekted claims on future resources.
                                     when appropriate; and
                                     .                                                                                    :/r
                                              other supplemental f-ial     and management information, when

                                     /iXq bullet jtem bnd t&t a&w   were added 3 SFFAC No. 2 thmugh
                                     omeidment by SOFAS No. 7. T&i/km       SOFAS No. 7 is inserted to assist
                                     readers - in most cases amendwks ak noted ‘in the atatw page and
                                     amfnded text ts marked but not mod#$ed in rhr or&ha1 statements.]

                           75.       With s&e o&ttiz&jOps~~ a& even ‘subo+tixations.         the ~aotivities’of oile or
                           mqe programt’or other com*nentp are as iinpor+t 6. ‘the readers of the fmttcial
                           statements as are the1 .:,a@ties,,of ,+e entiy es, a who!“. This would be particularly true
                           for, a Department composed of’inatiy bureaus, admui$tations, agenciesi services. ‘etc..
        .-                 and pa&larly      if th&$rograms are .&similar. rd those instances, consideration
                           should be given’ to the prefembihty of .&king        the aida. liabilities, revenues,
                           expenses, etc. of’both the significant components individually and of the entity in ita
                           entirety. ‘Hence, larger organizations, and patticttkly those composed of many
                           bureaus, ~adm&tr’ations. age&es, em., womd prep&e not only consolidated financial
                           statements for the organkationai entity, but also provide information pertaining to
                           their individual significant components.” The information for the individual
                           components could.be provided with separate columns in consolidating ftnancial
                           statements” (with the mformation for the ‘less significant component& and possibly the
                           entity!s management component, ,agpgatcd into .a single separate column), in separate
                           financial statements for each significant component, or in the accompanying footnotes.               f
                           The significant components can be suborganizations or programs. If they are
                           suborganizations, information regarding programs’should be provided in some manner.

                            76.      Furthetmore. there are frequently instances when one or more of the
                            suborganizations conduct a very ‘visible or critical activity and there is a high level of
                            public interest, e.g.,.Inte,mal Revenue Service tax collectton activity; maintains
                            complex accounts with .Jarge fund’ flows, e.g., Defense Business Operations Fund; has
                            major responsibilities for the appropriate use of eatmarked taxes, e.g., Health Care
                            Financing Administration; or its finaacial viability is of,special concern to the
                            Execuuve Branch or the Congress; e.g., deposit insurance funds. In those situations, it

     “Such components are similar to responsibility segments as referred to .in FASAB Exposure Drat& ,
“Man+geriaf Cost Accounting for the Federal Governme+” (see pages 26-30). Responsibility segments are used
to’ac&nttiate   costs and outputs for major lines of activity..
      “A consolidated fmaaciai statement presents the transac~ons and balances for a reporting ,entity’s
componenls in a single column. h arriving at the consolidated amounts. the- transactions and balances among the
entitiej ue’ ilimi66ied.‘-A conroiide~~l ‘-~~Ciil ,iikm~~    pre~u ‘~, informrtion for ‘~ ‘~pbrtirig enti~i
components as well as the consolidated amounts in individual columns. The eliktination of’the inter-et&
transactions and balances needed to artive at the consolidated amounts might or might not be prc~tcd in a
separate column.

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I                                                                                                                                      87
                                                                                                                              SFFAC NO. 2

                                                 may be desirable .for the~subarganization to. prepare‘,and issue ‘a‘separate fticial   I
                                                 statement that is consistent with the concepts presented in this concepts ~tatement.‘~ In
          -.--                                   doing so, it would,need,to identify the,parent entity and describe thb sub-
           c                                     organization’s relationship to the parent;   _ ‘.
                                                  ‘%                  1,    1 : ;               I,   ;          .’
                                               77.       The components of any reporting entity arc likely to conduct transactions
                                               with other components in the.reporting entity, other Federal entities. and persons and
                                               organizations outside the Federal ,Govemment. .Likewise, they ati likely to have assets
    I.                    ii.. .a.             due from and liabilities due to other ,Eedcral components and entities and to non-
                                               Federal ~~,:ad,or~tions.,.In,m~rting                   the transactions and balances of a
                                ;              Fe&ml reporting entity iniq:entirety. it is conceptually desirable, although not always
                             ,’ ” I,          ,pnc~~ble,.to;eliminr~:the~intrsrcntity        transactions and balances. Factors to consider
                    ,’          ‘ii.    ,,    ,am  ;tbc utility of&e  ,information~~for ,the. entity in, its entircq if the intracntity balances
                       .-,           ,.    >’ arenot eliminates thdittisutidcrs@ndingthat might result if the balances are not
                                               eliminated, and the cost-benefit of making the diminations.”

                            ^               ‘/   ‘78.     ,’ Some ofa rc~rting entity’s .oorriponents are likely :to be required by law or
                                                  poliy,. to pregare andis+,, financial. statcmtntsin accordance with actzounting
                                                 .standards .othcrrthan those; reoorirmended. by FASAB at&issued by GME and GAG, ,,.
                                                  e.g., accounting standards issued,by the Financial Accounting. Standards Board or
                       ,’                         aowunting standards .&tiblishad by a regulatory agency. Those components should
                                      ’           continue to ,issue the required reports. The reporting entities of which the components
                                                  are a partcan issue .&xtsolidated, consolidating, or combining statements that include
                                                  the componen,+inancial      .infotmation prepared in accordance with the other
                                .,,                                                                                                                ,’
                                                  ac~untingstandard+ ,They need, to bl sensitive, however.- to differences resulting
                                             ’    from applying differcnt~acoounting standards that could be material to the users of the
                                                  repotting entity’s financial statements. If ,tlrese.differences are material, the standards
                                      .’          recommended by FASAB and issued by OMB and GAO should be applied. The
                                      4.-         components would need to provide any additional disclosures r~oommended by
                                                  FASABand included, in the .OMB-issued standards that would not-be required by the
                                                 other and&s;

                      ‘%tb-organizations req uired by statute to prepare and issue a separate tinancial statement would, by
                 defetion. also need to do so.

                     ‘:A reporting entity that eliminates none of the intra-entity transactions or balances and still desires to
                 preaeitt the information for its individual components in seiarate columns could do so by preparing and issuing
                 a combining financial statement. If the individual columns are ad&d to a total column without elimination of
                 the intra*ntity transactions or balances. the total coltmm would have to be labeled “Memorandum Only” to
                 signify that it is not net of eliminations.
                            Rtco8nizing that the U.S.’ Standard General Ledger does not presently provide accounts for identifyin
                 intra-entity transactions. the decision as to when the information for a reporting entity other than the Federal
                 Govemmcnt as a whole should be presented in a consolidating financial statement rather than a combining
                 financial statement would be specified by OMB in a Form and Content Bulletin.

                                                                    Volume I. Version 1.0
                                                                      Febmary 28, 1997

                    79.      Reeders of the financial statements for the entire government are likely to be    :
                    concerned primarily with whether the~govemmettt has been a proper steward. This can        13 .,I
                    best be achieved with the preparation and issuance’of the following:

                            .        management discussion and analysis;
                            .        balance sheet;          :
                            .        statementof ~operations or ,net, costs;
                            .        statement of programperformance measures;
                            .        a0cogpnyin#f00tn0tes;'
                            -.        required supplemental information pertaining to physical, human, and
                            research and dev@opment~crpital .and selected claims on future resources; and
                            .        ,other supplemental finaDoia1 and management in.fotmatiott, when
                            appropriate “.

                   so.      The readers should be ma+ aware of whether the ,fmncial statements for the
                   entire government exclude atty signtficant entities that are included in the budget or
                   inch& sigttificant ‘entities that are not inch&d in the budget.
               .   81.      Readers of the financial statements for the entire ‘government are also likely
                   to be concerned with the results yf the budget process. This interest can be fulfilled by
                   providing a comparison of budge&d and actual use of resources. presented on the
                   same basis as the budget is accounted for. and,a recdnciliation of accrual-based
                   operating results to the budget-based operating results.~The budget would be the
                   amounts included in the President’s <Budget or ‘the Mid-session Review of the budget,
                   82.      The~fmancial~ statements forithe entire government could also be used to
                   provide information on Residential initiatives or crosscutting programs that is not
                   available in financial statements for individual organizations or programs.

                   83.       Because the government is a complete and integral economic entity. in
                   contrast to the departments and major agencies whose components frequently have
                   nothing in common other than belonging to the same department. it would be
                   appropriate that the financial statement for the entire government be a consolidated
                   financial statement. However, it might also be appropriate to display selected
                   information for the components, funds, etc., either within the consolidated financial
                   statement, in accompanying footnotes, a&or as supplemental information.            ,

                                     Volttme I, Version 1.0
                                       February 28, 1997
    -   RECOMMENDElj CdNTktiTS                                                  FOR THE’               “’                   .‘,


        BALANCE                      SHEET

                                                         84.      The elements ‘most hkely, to,,bepresented in the balance sheet of a Federal
                             .                           suborgr&auon/or8a&at~on,                       pro8ramv or the entire government would be as follows:
                          ‘.f,.                                           : : :                 ’ 1,:.          ‘, ..,,., .,; .,          ._
                                                                  .‘.          :Fund Ralancc.wifh,Tre~u’ry.                           This:represents the amount in the
                                                                  entity’s accounts with .the Treasury that is available only for the purposes for
                      :     ,.‘-
                            ;il                                ,’ ‘which the~funds were appropriated,It would also include balances held by the
                                .:                ‘.     .,       entity in&e .capaoityof q,banker::or agent ,.for others. (This classification
                                                       ,.         would not& included in the. financial statements of the U.S. Government.)
                              I,’            ,,   :    :,                        <. ,:j*..,‘,,. . ‘Z,I ,_, .,:,_ ,,,i,?‘;,..,*,,, ., ..:.
                                                                    : -.j_,;, ,...                                                           c                .
                                                                                                                                     *,, !.”
                            ..’                                   .          : ,Chsb &id &her L,pone,tary .a.s.s&“Gash consists of coins, paper
                                                                  currency and rcad$y; negotiable ~jt$~e,nts,.such as money orders, checks,
                                                                  and bank drafts ,on ,hand or in, tr&tt. for..deposit, amoutits on demand deposit
                  r         -:                                     with banks or other, dnancial,~i3s!~?utions, cash held .in imprest funds. and
                            .’                                     fonign curm&s.                          .,      :’ ,.:.:
                                                                                _    ‘->   .’       ‘, ., ,:,      ‘.’ :     “.
                                                                    .          Invesimcnts. While Federal agencies have the authority to invest.
                            !,                                       they ‘are typically hmited to rinvesung in securities issued by the Department
                                                                     ofthe. Treasury. or other Fedemjentities, There could be instances, however,
                                                                  L whenan ,agency ,owns: property-or, securities issued by state or local
                                                            ,;       governments. ,priva,te .corpomtions. or 8o.venment sponsored enterprises,
                                                                    primarily for the ~ptupose.of:obtainin8 a monetary return. i’
                            ”                                                   ;.: ., ‘., ._    :I, ‘b
                                                               . . .‘. _,I R+vables:          These.are t&amounts that the entity claims for
                                                                     payment from ‘others. Receivables can result from,such activities as the sales
                                                                     of poods or services, the non-payment of taxes: the making ‘of loans or loans
                                                                     assumed from defaults on previously made loan guarantees, the earning of
                                                                     interest. the advance or prepayment of monie&etc.            ,.,’

                                                                   ‘..         Inventwies:@pd ~r&tcd..propcrtits.             jnventories consist of tangible
                                                                  _.personal-property held,,forsaie, in the process of .production for sale. or to be
                                                                    consumed in .the.production of goods for &or                  in the provision of services
                                                                    for a fee. Related properties that could be owned by a Federal program.
                                                                    &orSanixauon or organixauon. or the entire ,govemment incl,ude .operating
                                                                    materials-and,supplies.. stockpile mateeals, s+ed property. forfeited property,
                                                                    and goods held under price support and stabilixation,prog.
                                                                                         ”    ,,
                                                                    .          Property, plant, ani equipment. P&r&;                   plant. and equipment :
                                                                    (PP&E) have ‘been defined in the Fed&al Government as tangible items
                                                                    owned by the Federal Government and havine an expected useful life of.
                                                                    greater than two years. Some PP&E are held by the Federal Government but
                                                                   ,not used to provide a service. .,.. They arc in themselves a set%+ Rxamples are
                                                                    heritage asseu.such
                                                                                 ,&b..     as  monuments      and
                                                                                                            : _, ,... museiuncolledtions;the         service
                                                                                                                      :,‘*‘).ypA;*. ++.“‘““.. * ;.,p,;,. .r. .,is _the~
                                                                   &se of traditio<‘u&%&n&                 and prrde vtsttors recetve vtsrung’these
                                                                    sites. information pertaining to,,‘these assets would’ not necessarily be

                                                                                    Volume I, Version 1.0
                                                                                      February 28, 1997
SmAC   NO. 2

                                  displayed in the balance sheet, but rather as required supplemental

                                            L&bilitics.   These are the amounts the reporting entity owes to oth&s
                                  ;or goods or services received, pro8ress in contract performance, defaulted
                                  guarantees, funds hkld as deposits etc. Because no liability can be paid
                                  without an enacted appropriation, some liabilities are funded while others are
                                  unfunded. Also, because the Federal Government is a. sovereign entity, it can
                                  abrogate at any: time, many of its ,liabilities arising, ,fio,m other .thati &ontracts.
                                  This does no& however, eliminate the existence of, and therefore the need to
                                  report, liabilities iricurred by the reporting entity.

                                    .         Net position. Netfposition is the,residual difference between assets
                                    and liabilities. 11&generally composed of unexpended appropriations and the
                                 ” cumulativk results of ,operations. Included in the former would be
                                    appropriations not yet obligated or expended. including undelivered orders.
                                    Included in the latter would be the hmounti accumulated over +e years by
                                    the entity from ity financing souroe~ less its expenses and losses, which
                   ‘,.              would in&de donated capital and transfers in the net investment of the
                                    Government in tlie reponing entie’s assets: and an amount representing the
                                    entity’s liabilities for such things as. accrued leave, credit reform subsidies,
                                    and actuarial liabilities ,not covered by available budgetary resources.
                         85.        Assets the reporting entity holds and has the authority to use in its operations
                         should be displayed separately from assets the entie holds but does not have the
                         authority to us&Likewise. liabilities for.which budgetary authority has been received
                         for liquidating the liabilities should be displayed separately from liabilities for which
                         budget authority has not been received (even if the ,authority is expected). Assets and
                         liabilities arising from transactions among Federal entities should be displayed                        I ~
                         separately from assets dnd liabilities arising from tinsactions with non-Fe&ml                     ,3      ’


                          86.        The main purpose of a statement of net costs is to provide an understdnding
                          of thk net COSISof each organization and each program that the government supports
                          with taxes and other unearned monies. Another important purpose for the statement is
                          to provide groe and net cost information that can be related to the amounts of outputs
                          and ou&omes for the programs and/or organization. Thus the statement of net costs
                          should present the amounts paid, the consumption of other assets, and the incukrence
                          of liabilities as a result of rendering services. delivering or producing goods, or
                          carrying out other operating activities.

    ‘%e Board issued an Exposure DmR. Accaynring for Property, Plant, and Equipment (PPCE ED), on
Felmuuy 28, 1995 address&g those items of PretE that would be reported on the balance sheet. The PP&E ED
also propotis deftitions for categories of PPBIE that would not be reported oil the balance sheet. In a se~arata
ED, the Board will address other means of repOrtin on the non-balance sheet categories-possibly including
separate basic financial statements and required supplemental information.

                                              Volume I, Version 1.0
                                                Febnrary 28, 1997
                                                                                                          sFFAC NO. 2

                               Si.         The costs can be classified,in a reporting entity’s~statement of net costs by
                               sub-organization (assuming~the reporting entity is an organization). by program, or by
                               object"blass.   or any combination-thereof. Object class, also referred to as a “natural”
   0-.-/                       classification, ~represenw’the nature or types of goods or services .acquired without
‘.                             regard to’& orga&ttion         involved or the program for which they were used.          ’
                               Reporting of the sub-oqanixation in&tring the costs ,an/or the purposes for whish
          W’ A                 the’costs were incurred generally provides more useful information than repotting on
                               the typesof goodsor servicesacquired.                          :
                 ,@                                  ‘..             .’                 ..,,
                 -I            88.         The stat&neat of net costs should also present the revenues earned by each
                               programand drgatiiza~o&Fhe nktner~in which the earned revenues would he
                               presented would depend on the purpose of the program and the reasons why the
                 .I            revenues are present.
                                               .                      ‘,
                               89.         Son&   programs  are  established’with generauon.of revenue as a primary
                          _,   consideration or purP&& ,One example would be when-the goods or services provided
                               by the organixation are alsd~available from tlic private sector and not charging a fee
                               for the goods or jeivice&would bi unfair competition. Another example would be
                               when it is deemed appropriate that the persons or organizations receiving the goods or
                               service pay’ for the goods or setvicesi usually to be able to ascertain the true cost of
                               the’ activity king ib& goods or tin&s, e.g., the Defense Business Operations Fund,
                               ‘Postal, Service. Still~dirothei example is when revenues are imposed to limit the
                               unndessary consumption of the goods or services. In each of these instances, the
                               revenues earned by the program(s) should be considered a deduction from the total
                               costs of the program(s).’

                               90.       With othir pnqrams. the revenues are, generated from administering an
                  .;           inherently goveminental service, which means the revenues are not a ,prtmary
     :/          I,,.,.
                   I           consideration, for the program. Rather, the revenues are a means to recover all or most
Id                             of the costs of administering’ the program, e.g., the Securities and Exchange
                               Commission. in those tnstances, the revenues should be considered a dedktion from
                               the total costs of the organization, not the program.

                               91.       Instill other instances, an organization’s revenues can be generated by
                               providing a specific program. but the revenues are not a primary consideration in the
                               conduct of the program; they are incidental to the purpose of the program, e.g., the
                               sale of,maPs by the Geological Swey. .In those instances, it would bc~approptiate to
                               consider, the earned revenues as a deduction from the incremental costs that need to be
                               incurred in order to provide the goods or services that generate the incidental
                               revenues, to the extent, that the incremental costs are measurable and relevant to
                               de&ion making. Otherwise the revenues should be considered a deduction from the
                               program’s or organization’s total costs.
                               92.       Earned revenues that are insignificant in’ amount can be netted into the costs
                               of the programs with the amounts disclosed in accompanying footnotes, if appropriate.

                               93.        An organization or suborgatiation  could receive different types of revenues
                               for different purposes and/or reasons. Each of the revenues and associated costs would
                               be displayed in accordance with the concepts presented.in paragraphs 89 through 92.

                               94.      The costs associated with and displayed for eaoh,program should reflect costs
                               that can be directly traced to the program, assigned to the program based on cause and

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I   92
    SFFAC NO. 2

                         effect, or allocated to the program on a reasonable and consistent basis, consistent
                         withthe premise that any costs reported for a programshould, be controllable by the
                         program to at least some degree. Those costs that are not directly traceable.                  Y--
                         assignable, or ollooable could be considered program or management support costs               i     i:
                         that ire incurred ,by the reporting organization or another organization to administer
                         the reporting organization’s or program’s activities, For exampie, in a reporting entity
                         that provides social services, the program costs would be the cash payments and the
                         salary and other costs, e.g., rent, supplies, directly associated with persons providing
                         counseling to the recipients of the cash payments. The organizational support costs
                        ‘would be the costs of~theorganizational structure .r+red        to administer the
                       ’ organization, i.e., not direotly attributable to the programs provided by the

                        95.       Orgamzational and program management costs are necessary costs of
                        opemting. anorganization and,programs. N&displaying these costs because of a belief
                        that an allocation for -these .aotivities would ,bs el@nated or reduced in or&r to obtain
                        a reduotiott of the cost .of the entire organization or program is illogical. The
                        alternative concept, which is burying the management costs with the program costs,
                        increases the likelihood that the management aoti,vtcy will be subject to reductions   .’
                        imposed on the program ,&livery activities. Separately ideatifying the ‘management
                        costs enables the use of resources for these activities to be justified on their own
                        merit. The oosts for managing the organization and/or program can therefore be
                        displayed on the face of the facial        statements or in accompanying footnotes,
                        patticularly when it would assist in, evaluating operating performance and is cost-
                        effective. Disclosure of what the support costs entail would be appropriate.

                         96.        The total costs displayed in a reporting ,entity’s financial statements should be
                         the same as the total costs recorded by.an organization in its cost accounting system.
                         If, for financial reporting purposes, the organization does not allocate organizational
                         management costs among the programs. the total costs displayed for any one program
                         in the.entity’s financial statements could be different than the costs recorded for that
                         program in the cost accounting system.

                         97.      Other earned revenues would include revenues not attributable to a specific

                         98.     Costs and revenues arising from transactions with other Federal entities
                         should be displayed separately from transactions with non-Federal entities.

                         99.      The decision as to how to display total program costs, earned revenues, net
                         program costs, and organizational and program management costs should be based, in
                         part, on a consideration of what the Congress, management, and others might want to
                         know about the costs of providing an organization’s programs.


                         loo.     The appropriate elements for a statement of changes in net position would be
                         as follows:

                                  .        Net eests display the amount that had to’ be fwnoed       by other than
                                  earned revenues.

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                                              February 28, 1997
                                                                                                                              SFFAC NO. 2

                                                       .           Appropriations used represent the amount of budget authority,
                                                        includin@ transferred budget authoritjr; used by xhe organization to finance its
                                                                                ,’       :’                /’        ., ;:‘.’
‘0        ‘._ c                                         .          Non-esch+ge revcnuis include              dedicated taxes, fines, and other
     t.                                                 revenues the Government is able to obtain due to its sovereign powers.
                                                        .          Donations are monies and materials given by private penor~s and
          r*:                                           or&nizati~m to the Government without receiving anything in exchange.
                                                                   Trinsk~       in are aniounr~~of-cash or other capitalized assets received
                             .,.I                      ‘iy one ,G overameat entity from another Government entity without
                            .:;rr                                                                                      :
                              .‘.                     . +hfsement.
                                                        .          Transfers out are amounts of cash or other capitalized asseta
                                                        provided by one Government entity to another without reimbursement.
                                                        .          Imputed flmncing seurc&-;iicSfa two 4y$&:~amo3inti i*l                 to&e.
                             1..                        costs that have been incurred by the iepoating entity but ftnanced by another
                                                        entity; i.ij.. retirexntit ‘2 odsisf and amounts representing costs that are
                                                        attributable to th&&po&g            ~&t&$‘s aotivities.but that da not require a direct
                                                        ourgf-pocket payme+, e.g., the interest cosuassociated with car&g
                                                        in&to+        dr inveatiitg iri phyiical a&s.”
                                                        .’         Prtor’piried       idJustments qre corrections df ‘phbr penod resulu of
                                                        Yperatioas.         ‘-
                                                        .          kicrruc (decreti)’ in ancipended a,pptipriations is the change UI
                                                        ;pprq%iated tipital, in&d@             traxisferred budgetary resources, that does not
                                                        affect the net cost of operations b&does affect net position.
                                                        .          Net poritioi-beginning        of the period is the total unexpended
                                                        appropriations and oumulative~results~of operations held by the entity at the
                                                        bim,of            the rep&&g $eriod.           .
                                                        .          Net position-end of the period results from adding and nettmg the
                                                        various qmounts associated with the operations of the entity during the
                                                        reporting period, including the   net      position-beginning of the penod and anv
                                                        priOr period adjustments. The-amount will thus equal the total unexpended
                                                        appropriitions atid cumulative results of operations held by the entity at the
                                                        e.nd of the p&d.

                  STATEMENT         OF CUSTODIAL           ACTMTIES

                                                101.     A separate statement of custodial activities would be appropriate for those
                                               eatities wliose prig     omission is, collecting taxes or other revenues. parucuiariy
                                               sovtii~    revenues that are intended to fmance the e&e Government’s operations, or
                                               at leaat the programs of other entities. rather than their own activitic+ The revenues
                                               should be oharactirizcd by those agencies as custodial revenues. The statement should
                                               display the sources and amounts of the colleotioxkof custodial revenues, any .increases
                                               or de&&es in amounts collectable but not collected, the disposition of the collections
                                               throw transfers to other ,entities, the amounts retained, by the collecung entity, and
                                               any increase or decrease in the amounts to be transfemd.

                                                102.    Custodid collections do not include &posit ,funds, .i;e., amobnts held
                                               texnely     by the government (e.g.. bidders‘ earnest moneyior guarantees for
                                                 .;    ,_ ,” ,,,. .._                                  .
                                       ,. ,.

                       ?‘he 60&l plans to undertake a prdjeect on tdc inteiest cost associated with investing in operating assets. At
                  this time, no decision has been made on the recognition by individual entities of these types of costs.

                                                                  Volume I. Vetion    1.0      I
                                                                      February 28, 1997
    SFFAC NO. 2

                        performance) or amounts held by the Government as an agent for others, (e.g., state
                        income taxes withheld from Fe&ml employees’ salaries that are to be transferred to
                        the states). Both of these types of collections can be considered assets and liabilities
                        until they are returned to the depositor or forwarded to the organization entitled to the       :?     ,

                         103.    Orga&ations that collect custodial revemtes that are incidental to their
       r.                primary mission do not need to report the collections and disposition of these revenues
                         in I aqmate ~statementr.‘I’he diaclostxe of .the .sour+es and amounts of the collectiona
                         and the amounta distributed to others could be disclosed in accompanying footnotes.


                         104.      ne appropriate elements for a itatement of budgetary resottmes prepared for
                         a reporting entity would be as followa:
                                 .                             :.
                                   .                                     l
                                             ,Budptmy resettrees made vnii&ie is the amount available to
                                   enter into obligations that wil!, result in immediate or future outlays involving
                                   Federal Government ftmda. The resourcka should be relevant to the,.reporting
                                   period. The componentsof budgetary resources would include budget
                                   authority (i.e.. appropriationa. borrowing ,au@ority, and contract authority) and
                                   unobligated~balances of multi-year and no-year money remaining from prior ’
                                   reporting periods. .Budgetary resources would also include reimbursements
                   b               and other income (i.e., spending authoricy from offsetting collections credited
                                   to an appropriation or fund account) a,td adjustments (e.g., recoveries of prior
                                   year obligations).

                                  .        -St&us of,Budgetyy Resourcea displays the disposition of the                 8’ -
                                  budgetary resources ma& available. It consists of the obligations incurred:          i&h
                                  the unobligated balances of multi-year and.,no-year budget authority that are
                                  available; and the unobligated balances of one-year and multi-year lapsed
                                  budget authority that are not available, but have been ‘carried forward to be
                                  used only to record, adjust, or liquidate obligations chargeable to the
                                  appropriation. The total amount displayed for status should be equal to the
                                  total amount displayed as being made available.

                                   .         Outlaya are payments to liquidate obligations, net of offsetting
                                 ’ collections. Obligations are usually liquidated by means of cash paymen&
                                   (cumnoy, checks, or dectronic funds transfers), but in certain cases
                                   obligations are liquidated and outlays recorded even though no cash is
                                   disbursed. It would be appropriate. in displaying outlay information, to tie it
                                   to the oblig&ions incurred by also displaying the transfers of obligations and
                                   the obligated balances ,at the. beginning and.end of the period.

                          105.     Budgetary resources, obligations. outlays. and receipts are reported in the
                          Treasury’s w               and wm                             and in the President’s
                          &&g& although not all these jkblic@ions report all these measures. These documents
                          are usually issued prior to the issuance of financial statementa prepared in accordance
                          with. generally accepted accounting principles applicable to the Federal Goventment.
                          In preparing these statements, significant differences should be noted between amounts
                          reported in the former documents and amounts repotted in the subsequently prepared

                                             Volume I, Vemiorl 1.0
                                               Febtuaty 28.1997
                                                                                                                                SFFAC NO. 2
                                                                                           i       ,‘.       I!    ,,i,,,,I!,      ,
                                                     financial statements. Such differences should be adjusted in the records of the
                                                     reporting entity andin the related rqcordr maintained by the: central agencies, and the
                                                     ComCt amounts,reported in the, financial statements; It would,also be desirable to
                                                ,’   provide a.reoonciliatioti for significant differences appearing in the two types of
                                                     statementsi.                                                                                                                 y.
                                                               ,’                              -,.     ., ,.        ,’,.I,,

.I                    :i5’                                                               ,
                      ‘ii              ‘,                 g       &.heading   abiie and the text brlow were add&to SFFAC No. f through
               :!               ‘,‘,        :             j       amendment by SlF’..No;   7. .Textl$rom SFEAS,Nq., i is inserted t6 assist
               ,’                                         ’ :      reoders -. in. most‘eases amendmin,~;qh     noted in ihe status page and
           ‘_‘:,c : i I .;..,                ..
                                            .,*.,         :*I;,: ,.‘am&ded text is #marked but not,,modifiediin the.,,origi@ statements.]

                                                     Statement of$inanc~lirauld                      be as mdrc ated in the followinn anqg&s.                        Thev
          ,.        ,,*                                                                                    ,’ .;   >i I
                        ‘,                                    /                 .’      ,:; : ( ., , ,, _,    A      ),;; I.’ J,>’
                                                                      &~lk&s         incirrcd -are-amounts of new orders &ced.                           contracts awarded,

                                                                             ,, . . -.’                i,.                            :
                                                              plonbudottwv      rtsourtts reDresent the net mources                 rec&ved bv
                                                     the        that are not mcluded m.buQpctarv resourcw                      could lnciude
                                                     donattons of assets. .transfers of-asretsfrom t to) other federal tnttties. and financtnn
                                                     wuted    for cost subsidies. This amount .would alsci~tnclude decreases 4rncreases) ‘it-t
                                                     recetvables related to: r&&te accrutd~from the mtblic because. while the ca&

                                                     <            ’       ‘ou ‘TV.’‘. oods ,s          ‘c 1.a                                         t et ec ‘ve

     ..                                              caoitalized on the balanie stittt                     s.                                      ), ., .?,   (._    ;
                                                                                                     ._(        :                         ,,        ,"
                                                                      Costs that do not &auk                resources art most ce                         the result a

                                                                                          .I    .‘      . .. .
                                                                      m                   of thts recqg&&~~                   would be the net cost oi ost’mtion tl.
                                                                                     ,.              _,.               .,.                     I

                                                                                Volume I, Version 1.0,
                                                                                  February 28. 1997


                            1061        The statement of program performsnce measurei should include measures for
                           each of the major programs the reporting entity.operates. The preferred types of
                           measures are(l) output measures, i.e.. the quantity of a.setice or product provided or
                           the percetitage of the target group provided the service or product, and that i&ally                       ,
                           meets a certain quality requirement; and (2) outcome measures,            i.e., the
                           accomplishments or results that occurred because of the services or outcomes
                           provided. Outcome measures could address either the ultimate program outcome or
                           intermediate outcomes, e.g., accuracy of, timeliness of, or satisfaction with the services
                           provided. Workload, process, and input measures~should be in the minority.
                           Explanatory information that helps the readers understand the reported measures,
                           assess‘the entity’s ~perfotmanoe, and evaluate the sigrrificance of underlying factors that
                        : may have affectedthe report&performance          is,appropriate. Comparative measures
                           from prior years or similar programs and industty standards are also appropriate. They
                          ,help.to provide a better understanding of the ieve! of the reporting entity’s
                          pidontl@nce.”                          i,;                  ‘.
                              :-,:;. ,i:-../.  ‘81..            ,;                 ‘7,,:
                           107. . The measures selected for repot&g ,shou!d reiqm to the programs’ purposes
                          and goals. It would be particularly useful to include measures previously included in
                          budget documents and other materials released to the public. It would also be useful to
                          bass the selection of ,measures on discussions with budget examiners, Congressional
                          staffs, and other users of the entity’s f-cial      statements.

                           108.    .Th+atement of~progmm8erfotmance measures should not be cluttered with
                          trivial measures. Measures seleoted should be, considered .important by decisionmakers
                          and particularly the resource providers that are likely to use the fina,rcial statements.
                          &lso. ~relevant measures should be repotted, without regard to whether they portray
                          positive or negative perfotmatyx..The .most..significant measures should be extracted          / --)
                          for ~highhghting~ in the management disoussion and analysis.
                                                                                                                         ‘Wr     .:
                          109.      Other characteristics to consider for reporting program performance measures
                          are as follows :

                                   .        Completeness. The measures. in the, aggregate, should cover all
                                   aspects of the reporting entity’s mission.
                                   .        Legltimaey. The mea&s        should be accepted as relevant both inside
                               ’   the reporting entity and by the external stakeholders and others, e.g., the
                                   central management agencies, Congress, interest groups, the public.
                                   .         Undentand~bility.   The measps should communicate the
                                   performance of the entity in a’ readily understandable manner to any
                                   reasonably informed and interest& party.

     %e acceptance of a statement of program perfotmance wiU increase in relation to the users’ perception of
the relevance and reliability of the reported information. These perceptions can be enhanced to the extent there
are independent assessments of the appropriateness of the mc(isuIcq the completeness of the data. the actual
occurrence of the reported events, and the values assigned to the data. Auditors of Federal agency financial
statements are &rently required (by an OMB Bulletin) to evahrate the underlying control structure for program
performance measures in&ded with the finaitci‘dl ‘s&em&s. The ‘extant to which auditors will be expected to
expand the scope of their involvement with program performance measures to’include the aforementioned
independent assessments would be specified by OMB consistent with government audit standards.

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                                               February 28, 1997
                                                                                          .,        SXfFAC NO. 2

                                    .         Compwability. The measures should provide a frame of .reference
                                    for asF+ng, an4 comparing, if appropriate, the performance of the entity and
                                    entities with similar progiams.for’b&h the iqmed$te Mqod and over time.
                                    .         Ability to relate to cost. The measures should be such that a cost
                                    can be defined for each unit of output,.outcome, input. etc.
                                    .         Timciiness. fie ‘measures should be available to users df the
                                    financial statements bitfore they lose theii capacity to be of value in assessing
                                    accountability and niirkjng decisions. The value of timeliness should not
         4. ,.                      preciude the use of important measures for which results are not immediately
          : -I”.                    available. ,:./. .’    j.      ;.
                                  ,’          Cqa@stency. The..measures should be reported consistently from
                II                  period. to pqiod to allow ,users to have a basis for comparison and to gain an
             ,.                     understanding of @e measures being used and their meaning (recognizing that
         ,:, Lt.;                   ihe qa+ej-;&o$d       %e-reviewed re&rly      and modifications made toI. reflect
                                    changing circ&stanc&I.                                                      ,..
                                     .        Rtlhbiiity. The information should be derived from systems thai
    ,’                              produce controlled and verifiable data. althdugh a( times it may be necessary
                                    to rely on secondary sotices of data.”
                                                                                                         1, :
                          110.       Since many Federal Gdvernment programs have counterpart programs ,at, the
                          state and local government level, for those programs, it would also be appropriate to
                          consider the measures states and local governments use to report performance.

          ::              lib      Numericai measures are not the only way to report program perf&anc:    In
         .                some instances, it may be more meaningful and practicable to report performance with
                          other then numerical measures.
                                                                    l *...
          .    (.
         ,.    .-

                          112.      Exampliformats for displaying the recommended elements pre brovided iq
                          acmendix~1. They formats are illustrative and provided solely to help readers of this”
                          document, betlei ^ understand the recommended concepts for displaying linakial   and
                          related inf&natton. In exposing proposed standards. the Board might por@ay other
                          fomrJ; The’ultimatc specltication of the form and content for financial statements for
                          Federal agencies IS defined by OMB.


     “The Public Management Committee of the Organization for Economic Cooperation and Developmtnt.
which is comprised of the twenty four democratic nations with advanced market economies, has been studying
p#formance management systems. It has concluded, based on the experiences of countries that have
implemented such systems, that performance measures should’reflect three important characteristics: validity,
coMuaity. and legitimacy. These characteristics. while intended to guide management systems in their totality,
rather than simply inclusion in financial statements. have nonetheless been incorporated into the above

                                            Volume I,‘Version 1.0
                                              February 28, 1997
   SFFAC NO. 2

                                             APPENDIX                   1- A

                         EXAMPLE         FINANCIAJ,      STATEMENT                             FORMATS
                                             BALANCE     s=
                                          as of SetSember 30. 19x4

                                                      ‘SU.                          sq               subarsani-    TOt8l          TOtd

                                                        x8lionA                     Z&ioIiB          UtiOthC      FY 19x4        FY l?xJ
                                                                                      , ‘,

                                                                               ,,      :
Fund balhce with Treaswy                                     sm                       sm                 SXXX       SXX           SXX

 Cab (8od other monetary assets)                             XXX                         xxx             xxx          m            xxx

                                                                                                         xxx          xX)(         m
  Iatmgov&mlt8I                                              xx

  With’the public                                             xxx                        m                xxx         m            xx

 Receivables      ‘-

  Intr8govmrment8l                                            m                          m                xx%          xxx          m
                                                                                                          xx           m            m             ‘.
  With the public                                             xxx
                                                              xla                        m                xxx          xxx          .xn    :kiJ        i
 Inventi       8nd rebed pmpeftia
 Pbysicd asets                                                m                          m                m            XXX          xxx

 Total entity rsscts                                              xxx                     xxx             xxx          xxx          xxx

Non-entity assets:
 Fund bnlaacc with Treasury                                       xxx                     xxx             xxx          m            xxx

 Cash                                                             xxx                     xxx             XXX              XYa      m

   Intr8#ovetam8atel                                              m                       xxx             m                x#c       ma

   With tbi public                                                ma                       m              xx               m         ma

  Total eon-entity rsscta                                         XXX                      xxx             xx              m           m

Total assets                                                  Sm                         Sm               Sm          Sm           Sm

                                               Volume I. Version 1.0
                                                 Febnmry 28.1997
                                                                                                                                              SFFAC NO.’ 2
                                                                         A6PEkIiJX               1 ‘, i

                                                                                  .‘.: ‘, \,              ,)_:‘;,    .-
                                                                                    - ’                      ,
                                                                                     s&&*                      /&,.&
                                                                                                                                 ~suborgaai- TOtAl    Total
                                                           .,                         z&m             A   :        zatioll B       zatiollc FY 19X4 FY 19X3
                                                                                 ‘;        !‘>            “,:-,:‘,
                                                                                                              ,;,: I, ”,.
              xx            1
 UBII;&&                                            .

             -. __                      bu&omy          ras~urca:              ,; :‘: ,,,. ,,,             ,-:,:‘:‘,. *,
   htqmpma+l                         liabfitios:

      hY-                                                                                 s=                           sxxx         sxxx      sxxx    ,I   sxxx
   GOVUIXIM& hbifi&

      W-W              :                ,.      .: ,,                                       xxx                            xxx       xxx    .*’ xxx        .xXx

   Total liabilities              covered       by budgetay         tesoarca                xxx                            xxx       xxx       xxx          xxx    ‘,,

 Liabilitkr        not covered               by budgetry      resoarces:
                             .!                *,,A”..’  ,I,,                                    ‘”
   h-wvemmental                      liabilities:
     Payables                                                                               xxx                            xxx       XXX       xxx          rocI
   Govemae+                     liabilities:
     Am&               held for others
  Total liabilities not covered
  by budgetary ,m~ources       ,’

 Total    lirbilitkr


   Uaexpe&d                 approphations                                                   xml                            xxx       xxx       xrac         xxx
  cl0lulative mlllts of operationr                                                         xxx                ‘J           xxx       w.                     xxx
                                                                                             :                                                 T
 Total    net positiom                                                                      xxx                            xxx       xxx.      xxx         3q
Total liabllitias               l od act positios                                       ‘8xX                          ixx           sxx       Sm           sur
Noto: TIE above balance her fomt is for an organization composed of three significant subor8anizations. An
organization d&dillg to forego pmmting the information perking to the subortymixations would provide only the

                                                                       v&me 1: Versioll 1.6
                                                                         Februaay 28, 1997
si?‘AC      NO. 2

                                                     APPENDIX                      1 - B

                               EXAMPLE           FINANCIAL             STATEMENT                      FORMATS
                                         For the year ended            Setamber 30. 19x4

                                                  SW-                 $ub.org8ni-
                                                   zationA             z&n         B       28tion c              Total               Total
                                                                                                               FY ,19X4            FY 19X3

 cp!m:                                                                                     s.                                              ‘,
    Inaagovemmental                                  sxxx                s-                     s-                sxxx.,            sxxx
    With the public                                   xxx                                        -

         Totil                                        xxx                                        -’                     -     _:
    Less earnedfevcnues                               xxx                                                              XXX

    Net program costs                                 xxx                                                              XXX           XXX

    With the public                                                      xxx                    xxx                    XXX            XXX

    Less earned revenues                                                 XXX                    xxx                    XXX           xxx

    Net program costs                                                    XXX                    xxx                    XX..           xxx

 ,Pfogmnl c:
    Intragovernmental                                 .xXx        *          xxx                                   .xXx               XXX

    With the public                                   XXX                    xxx                                       XXX            xxx       ,,
    Netprogram costs                                  xxx                    XXX                                       XXX            xxx

 Pmgram D:

    Costs with the public                                                    xxx                                       xxx            xxx
  Cost    not    allocated to programs                XXX                    xxx                 xxx                   xxx            xxx

  Less other earned rgvenucr                                                                     ux                     us            us

  NET COST OF OPERATIONS                              $XxX               Sm                     Sm                 Sm                Sm

                                                                                                      ,Jy:‘a&“i ._._

                                                      v01utne I. version 1.0
                                                        February 28.1997
                                                           APPENDIX 1 -‘.C

                                             AMPLE FINANCIAL          STATEMENT FOR+TS

                                           STATES        OF QJAI’JGES p NET POSITION
                                               For the vcar ended Sebtember 30.’ 19X$

                                                          SW-              sub-organi-   s*-
                                                           ZuicQA           ~ZOtiOItB      AOttC         Total     TOtOl
                                                                                                       FY 19x4   FY 19X3
                                                                                                                     . ;. ,,.’ ‘.

               NST COST OF OPERATIbNS                        S(m)                                                 S(m).;,   i”.
                                                                             S(m)              Se=)    Sam

               FINANCING        SOURCES:
                 Agpmpriationsuscd                             xxx              xix             m        XXX        .=‘I          ,,
                 Taxes ~tm-exi~~e     rcvcnti)                 xxx              xX)(            xxx      X)[x       x#c
                 DonatioIls (non-exc&nge revenue)                               xxx             XXX      XXX        xxx
                 1m~miltS                                      xxx.             XYa             xxx      xxx        m
                 Transfers-in                                  xxx                              xxx      XXX        xx7t
                 TrUlSf~Ut                                                     (xx7ij            -      c=)          -
,”   :.        NET RESULTS OF OPERATIONS                       xxx              xmt             XJot     xxx        xxx
               PRIOR PERIOD ADJUSTh4ENTS                       xxx              xxx                      xxx        xxx
               NiZi’ CHANGE IN CUMULATIVE
               RESULTS OFOPERATIONS                            XXX              xxx             XXX      xxx        xxx
               INCREASE (DECREASE) IN
               -ED         APPROPRIATIONS                      XXX             mw               XXX      xxx       .xla
               CHANGE IN NET POSITION                          xxx     .        xxx             xxx      XXX      ‘xxx
               NET POSITION-BEGINNING            OF            xxx              xxx             xxx      xxx        xmt
               NET POSITION-END        OF PERIOD              SXXI             SXIX            SXII     SIXI       SXXX

              Note The above statement of changes in net position fotmat is for an organ&ion comprised of three signihaai
              soboqaniaiotts. An organization decidh to foxego presenting the information pertaiuiq to the subotgaaiz~tioas
              would provide only the information conuiacd in tbc lest NV0 col-

                                                          v01uatc I, versioa 1.0
                                                            Februuy 28, 1997

                                                 APPENDIX          1- D

                                                                             FY 19x4     FY 19x3

colkctku:,,”                          :
  Incomiuxsr :                                                                              sxxx

  .Estacdgiflwcer                                                                m           m
    Exciiuxes               ‘-                                                   xxx         xxx

    Employment taxes                                                             xxx         xxx
    PeMltiestiinterrrr                                                           xxx         XJa “’   .’
       Total collections                                                         xxx         xxx
    Refunds &      other payxhnts                                                mo          Mm
       Net collections                                                           xx          xxi
    Accrud adjustment                                                            xx          o=)
       Toto1 kveauea collected                                                   xxx         xxx
 Disporitka   of revenues colkcted:
    Transferred to others
     Deportment of the Treasury                                                   xxx         xxx
      Department of Labor                                                         xxx         xxx
      ETlvimmultelRotitionAg~                                                     xxx         xxx
       Total transfti                                                             xxx         xxx
      Rem&d by the entity                                                         xxx         xxx
      hcroue @lecmse) iu amouuts
      tobe&ansfured                                                               m          om
        Total dkporition    of meyea      colkctcd                                m           xxx

 Net custodid collutioas                                                         ‘so00

                                                     Volume I, version 1.0
                                                       February 28, 1997

                                                                                                                              SFFAC NO. 2

                                                                      .,   $- E

                                                                              STATEMENT FORMAkS
                                           STATE&W                 OF BUDGETARY, RESOURC@
                                                    For the vear     endedSeDtember30. 19X4

                                                                         sub-orgluli-   sutmrgani-   suao&-
                                                                          zationA        zation B     ixtion c    Total FY             ,Tot&FY
                                                                                                                    19x4              .I,: 19x3

          Budgetmy mo~ms              mwie rvrilrbk:                                                                                       ,:
              Budset.aulhority                                              SXXX           sxxx        sxxi            sx#<,,              ~Sxxx
            Unobligkd          bhnces-begiaiting      of period              X)(x           xxx         xxx             xxx                     xxx
              Reimbursements and other income                                xxx            XXX         XXX             XXX                .:xXx
              Adjustments                                                    xxx            xxx         xxx             xxx.                    xxx,
             Tot+          budgetary resources mrde rvehble                  XXI            xxx         xxx      ,_     xxx       ”         -xxx

          Status o.f budgetay        resourcea:
             ObIipions         ,incurrrd (gross)                             xxx            xxx         XXX             xxx                     xxx
     .i      Unobligated balances-end of period                              xxx            xxx         xxx           .xXx                      xxx
             Unobligated balances-not available                              xmc            XXX         xxx             xxx                     xxi
             Total, stabs of budgetey              resources                 xxx            xxx         XXX             xxx                     kXX


             Obligations incubus& net
             Obligated balance transferred                                   xxx            xxx         xxx             xxx                     xxx
             Obligated balance-beginning of period                           xxx            xxx          xxx            xxx                     XXX

             Less qbiiited         balance-end of petiod                     xxx            XXX          XXX            XXX                     xmt
             Total, outlay8                                                 SXXX           sxu          sxu            sxu                  sxrx

I’A-l                                                                                                                                                  Ij
                                                                  Volume I, Venioti 1.0
ii                                                                  February 28. 1997

        SFPAC NO. 2

                                                      APEFNDIX         1 - F
                                   EXAMPLE FINANCIAL STATEMENTFORMATS
                                       For the vear endedSeDte
                                                             mbei 30. 19X4
                                                                               FY 19x4     FY 19X3      FY 19X2

         Sob-org8nia8tioa A

              progmm       .
              P8rfotmance Measure                                                xxx          xxx        kx
              P8rf~8rlc8   Mc8aue                                                xxx          xmt             XY-
              Polfoxm8nc8 M88sur8                                                xx%          xx%          .xX%
              PelfonnPnc8Me8surc                                                 xxx          xxx             xxx
              P8tforIn8ac8M-                                                     xxx          xxx             xxx
              ‘Performance Measure                                               XX%          XX%          xx%
              Perfonnancc Measure                                                xxi          xxx             xxx             1’
              Perfgmnance Measue                                                 XX%          XX%          XX%                ‘J‘    i

              Forfonnancc Measure                                                xx%          XX%          Xi%
              Perfomwnce Measure                                                 XXX          xxx             xxx
         Subwgraizrtion        C
              Pelfomlancc Measure                                                xxx          xxx             xxx
              Pclf6rmanccMcasluc          .                                      XX%

        NOTE: Sub-org8aiz8tions A, B, and C axe equiv8lcnt to responsibility segments for which cost and ftnancial data are
        collected. (See FASAB Exposure Drafk Wanagetial Cosr Accounting for Fedeml Government”, pages 26-30.)

    .        “Al&@     this example cantains only numerical measures, the performance for some programs might be
        reported with otherthannumeric01 measures.

                                                                                                                              ’’ \
                                                      v01umc I, vcrsioxl 1.0
                                                        F&uary 28, 1997
                                                                                             sFFAC NO; 2

                                                          APPEND=       1 wG

. j..&.
           /The appendix was addedto SFFR’Cn’o. 2 it@kgh amendmentby SFFASNo.’ 7. Textfrom
          SFFASNo. 7 is insertedto assistreadeh - ‘in &si ca!es:amendnierits are noted in the status
                 page and amendedtext is maykedbut not modi,Fedin, the original stateyents..]
                                             ,.‘.,     _,’ :y
                                     EXAMPLE FINANCIAL STATEMENT FORMATS
                                             STATEMENT OF FWANCMG
                                         For the vear ended Seitembtr 30. 19X4

          Obllgotioas rod Nonbudgetary Reroiwcer
          obligatioln%mnrtd                                                       sxxx       .1 .
          Spending ruthority for offsetting collections
           and o&r budgetary adjustments                                            00
          Donations not in the budget                                                 X
          Financmg imputed for cost subsidies                                         X
          Tninsfers-in (out)                                                          X
          Exchange revenue not in the budget                                        00
          Other                                                                     -x
            Obligations, as adjusted,
            and Nonbudgetary Resources                                             XXX

  -.’     R~MWC~S
            That           Do Not Fund Net Cost of Operations
          Chayge in amount of goods, services,and benefits
 ‘91      ordered but not yet received or provided                                   00
          Cost capital+ed on the balance sheet                                       F)
          Financmg sources that fund costs of prior periods
                                                                                     00                         I
          Costs That Do Not Require Resources
          Deprectation and amortization                                                  X
          Revaluation of assets and liabilities                                          X
          Otha                                                                           X

          Finracing Sources Yet to be Provided
          Net Cost of Operations                                                  SXXX

                                                          Volume I. Version 1.0
                                                            February 28. 1997
    SFFAC NO. 2

       T OF ACPOtiMS
~   FASAB              FederalAtcounting StandardsAdvisory Board
    OMB                Of&e of Managementand Budget
    SGL                StandardGeneralLedger
    StiAC              Statementof FederalFinancialAccounting Concipts

                                      v01umo I, Version 1.0
                                        F&wry 28. 1997


                                ! --. )’
.Volume I,Venion 1.0
  Februq 28, 1997               3
         STATEMENT OF FEDERAL FINANCIAL                                                                    .
       \   ACCOUNTING
               ,, ‘. ‘, ST~DARDS. NO. 1
6-J               AcCo&&g           for Sekcted, Assets and Liabilitih

         ‘... .- “, Lc _           March 30, 1993

       Effective .Datk              for fiscal yeti ending September30; 1994,‘andthereafter.
                                                      “..              ‘,I,. i _‘,-,     ::’
       Volume I References:         SFFASNo. 5, Accotint&gfor Liabilities of the Federal
                                    Government(providesdefinition of.a liability)                              I
                                    SFFASNo, :7, &counting for Revenueaitd Other Financing
                                    Sources(providesfor recognition’ofreceivablesfrom
                                    nonexchange    revenue)                                                    L
                                                 ;.    ..,_                                                    1
       Volume II References:        AccountsPayable(Al,O), AccountsReceivable(A20), Advances                   1
                                    andPrepayments(A30), Cash(CiO), Entity and Nonentity                       I
                                    Assets(E20), Fund Balancewith Treasury(F50), Governmental
                                    and IntragovernmentalAssetsand Liabilities(G60), Interest
                                    Payable(160),Interest Receivable(180).Investments.in Treasury              I
                                    Securities(II lo), Liabilities (L40), Other Current Liabilities
 /                                  (040)                  .-                                                  I
                                                                                          ‘.                   1
       Interpretations:        ’                                                                               i
       Affects:                     No other statements.                                :,                     i1
       Affected by:                 SFFASNo. 5 amendsParagraph96 by providing a definition of                  I
                                    SFFASNo. 7, Paragraph53 amendsParagraph41.


             This statementdefmesendillustratesthe distinction’betweenEntity Assetsand
       Non-entity Assets,as well as Intragovernmentaland GovernmentalAssetsandLiabilities.

               Assetsavailableto an entity to usein its operationsare entity assetswhile thoseassets
       not availableto an entity but held by the entity are non-entity assets.While both entity and
       non-entity assetsare to be reportedin entity statements,the standardsrequirethe segregation
       of entity and non-entity assets. In addition, a liability (due to Treasuryor other entities) must
       be recognizedin an amount equalto non-entity assets.

                                              Volume I, Version 1.0
                                                February 28, 1997

        Intragovernmental   assetsand liabilities arisefrom transactionsamongfederal entit@.
Governmentalassetsand liabilities arisefrom transactionsof ‘drefederalgovernmentor an
entity of the federal government with nonfederalentities. The standardsrequire that all
selectedassetsand liabilities addressedin SFFASNo.1 be reportedseparatelyas
intragovernmentalor governmentalassetsand liabilities.
        The statementalso establishesspecificstandardsfor six assets:Cash,Fund Balance
with Treasury,Accounts Receivable,InterestReceivable,Advancesand Prepayments,and
Inv+tments in Treasury Securities;tid three liabiiities: AccountsPayable,Interest Payable,
and Otkr Current Liabilities. -Thestandardsprovidedefmitions of eachassetand liability as’
well as recognition,measurement,anddisclosurerequireinents.

                                                TABLE &.~=~NTENTS
                                                     . n’.

                                               Paragraphs in
content!K                                Original Pronouncements:                                                                              Page:

 Explaoation’ . . . s . . . . . . . . . . . . . . . . . . 1617       ..b....................................                                        205
 Oeneral standards . . . . . . . . . . * . . . . . . . 18-26         . . . . . . . * , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,206
      Cash........................                         27-30     ..:............;.......................                                            208
      Fund Balance with Treasury . . . . . . , 31-39                 .......................................                                            208
      Accounts Reoeivible          . . . . . . . . . . . . 40-52     . . . . . . . . . . . . . . . . . . . . . . . ., . . . . - . . . . . . . ‘. . .    210
      htmst Receivable . . . . . , . . . . . . . . ,53-56            .......................................                                            212
      Advances and Prepayments , . . . . . . . 57-61                 ........... ............,...,...........                                           2 12
      Investments in Treasury Securities . . . 62-73                    . . . . . . . . .’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    2 13
      Accounts Payable . . . . . . . . . . . . . : 74-80             . . . . . . . . . . . . . . . .’ . . . ,. . . . . . . . . . . ,. . . . . . . . .   2 15
      h&s1 Payable . . . . . . . . . . . . . . . . 81-82             .............................. ........                                            215
      Other Current liabilities . . . . . . . . . . 83-86             ..............;........................                                           216

Appendix A: Basis of the Board’s
Conclusions . .‘. . . . . . . . . . . . . . . . . . . . 87-161 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Appendix B: Illustrataon of the Interest Method for Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Paragraphsl-1 5 omitted

                                                          v01uaM I, version 1.0
                                                            February 28.1997
                                                                                  L.,. ,,.
                                                                                       ., ~         ',    ;-
                  16.       The Board’s focus in this Statement is on settiag accounting st@atda for the
                  individual federal entity levil, b;f repking. In, this Statement, -,tl!e stand@ are .also; ,,
                  applicable to fqncial reporting by the U.S. government as a whole, except for those
             ‘, &d&is        related tiinttagovetiun&t~l         assets:and~~liabilitiea, which arc ‘defined in the
                 ‘ge&al sta&tds        and   poted   in:&pcoific  standards.
                              ,. ~.             ‘/       -; _,      ,,”
                   17.      m     word  “entity”   refers  to  a unit’within the federal government, such aa a
     .$y,,        depumfsnt, agency; but&, or program, for which a set of finrnoial statements will be
      i:          h,$.       The word entity alsokncompmsea-a group of related or unrelated
,.                co&i&ciil ‘fundtions; revolving %ds, kust funa; Wor,:,o@r accounts for which
               ” ki,n&ii jirti&ti         ti~prcpakd in accordance with OMB guidance on the form and
      :           content of financial statements.                                   “’ i ‘C _

                                                              ,,   .‘.


                                       v01uIlle I, varaion 1;o
                                         Fobauuy 28, 1997

Intragovernmental       vs. Gwcmmcnkl        Assets and Liabiiities                                                            t“, .
                             18.        +umgtwemmentai       asset and fiabiliriu arise fern transactions among
                            federal    entities: Intragovernmental assets are claims qf 4 federal entity against other
                            federal    entities. Intmgovemmental liabilities are claims against the entity by other
                            federal    entities.                  ,,

                            19.       Among the assets covered by this Statem++ infzago+unental         assets include
                            an entity’s ,fund balance with Tr~astuy, .invcstments in Tr~ssury securities, accounts
                            and interest recrivabli from federal entkes. and advances and prepaymenu to federal

                            20.        Intm~ovemmental liabilities include accounts and interest payable to federal
                            entities: and o&er current liabilities due to fedeml entities, such as receipt of federal
                            advances and prepayments.

                            21.       Govemmenref (ISSCU’and fiabilirirr arise from transactions of the federal
                            government or an entity of the fedeml government with nonfederal entities.
                            Governmental assets are claims of the federal government or an entity within the
                            Federal goriemment against nonfederal entities. Governmental liabilities are amounts
                            that the federal government or an entity within the federal government owes to       .,-
                            nonfederal entities. The term nonfed&+ entities encompasses domestic and foreign
                            persons and organizations outside the U.S. government. The term public is also used
                            in this Statement to represent nonfederal entities.

                            22.      bong the assets covered by this Statement, governmental assets that would
                    .       be reported by a federal entity include cash, accounts and interest receivable from                             1
                            nonfederal entities. and advances and prepayments made to nonfederal entities.

                            23.       Governmental liabilities include accounts and interest payable to nonfederal
                            entities. olher liabilities due to nonfederal entities. and advances and prepayments .
                            received from nonfederal entities.

                            24.      Intragovernmental assets and liabilities should be reponed sepamtely from
                            governmental assets and liabilities. This requirement applies to all of the selected
                            assets and liabilities Tddressed in this document.

Entity Asset8 vs. Non-entity    A~rh

                            25.       Enrirp uswu ere those assets which the reporting entity has authority to use
                            in its operations. Non-cnrirp aweu are those assets that are held by an entity but are
                            not available to the entity. An example of non-entity assets are customs duty
                            receivables that the Customs Service collects for the U.S. government but has no
                            authority to spend. A similar example is federal income tax receivable that the Internal
                            Revenue Service collects for the U.S. government.

                                                   Volume  I, version
                                                     February  28, 19971.0                                                   (’3       0
         ,   +.
                                                                          iFlUS   NO. 1

26.      Both entity assets and non-entity assets under an entity’s cust&~q     ; ‘..,. ‘1
management should ba reported in the entity’s financial statements. Non-entity assets
reported in air entity’s financial statements should be segrepted from entity asseta. An
amount equal to nonentity assets should ba $cognizqd as a liability (due to Treasury
or other entities) in the entity’s financial statements.

                     v01utM I, vision 1.0
                       Febtwy 28. 1997

SPECIFIC STANDARDS                             -


                        27.      Gush, ir@uding imprest funds, should be recognized as an asset; Cash
                        consists of:

                                (a) coins-paper currency and readily negotiable instnmrenta, such as money
                                orders, checks, and bank drafta on hand or in transit for deposit;

                                (b) amounts on demand deposit with banks or other financial institutiona; and

                                (c) foreign currencies, which, for accounting purposes, should be translated
                                into U.S. dollars at the exchange rate on the financial statement date.      .

                       28.      &M&J tush. Entity cash is the amount of cash that’the reporting entity holds
                       and is authorized by law to spend.

                       29.      Noua@y tush. Non-entity cash is cash that a fedeml entity collects and
                       holds on behalf of the U.S. govenunent or other entities. In some circumstances, the
                       entity deposits cash in its accounts in a fiduciary capacity for the U.S. Treasury or
                       other entities. Nonentity cash should be repotted sepamtely ,from entity cash.

                       30.        Rutrkted’cah.  Cash may be restricted. Restrictions are usually imposed on
                       cash deposits by law, regulation, or agreement. Non-entity cash is always restricted
                       cash. Entity cash may be restricted for specific purposes. Such cash may be in escrow
                       or other special accounts. Financial ‘repotts should disclose the reasons and natum of

Fund Balance with Treasury

                       31.       A federal entity’s fund Munce with the Treasqv is the aggregate amount of
                       funds in the entity’s accounts with Treasury for which the entity ,is authorized to make
                       expenditures and pay liabilities. Fund balance with Treasury is an intragovernmental
                       item. From the reporting entity’s perspective, a fund balance with Treasury is an asset
                       because it represents the entity’s claim to the fedeml government’s resources. However,
                       from the perspective of the federal government’ as a whole, it is not an assac and
                       while it represents a commitment to make resources available to fedeml dlpaqmenta,
                       agencies, programs and other entities, it is not a liability.

                       32.       A federal entity’s fund balance with Treasury includes clearing account *
                       balances and the dollar equivalent of foreign currency account balances. Foreign
                       currency account balances should be translated into ,U.S. dollars at exchange rates
                       determined by the Treasury and effective at the financial reporting date. A federal
                       entity’s fund balance with Treasury also includes balances for direct loan and loan
                       guarantee activities held in the credit reform program, f-ing,     and liquidating

                                          ‘Volume I, Version 1.0
                                            February Zg, 1997

                                                                                                                   ,SFFAS NO. 1

                                       33.        An entity’s fund balance with Treasury is increased by (a) receiving
                                       appropriations, reappropriatiolu,~continuing~,resolutions; appropriation restorations, and
                                       allocations,,and (b) receiving transfers and reimbursements from other agenkies. An
                                       entity?+ fuird balance &ii Treasury is ,also increased by amounts borrowed from
                                      Treasury, Federal Financing Bank or .other entities,. and amounts collected and
                                       credited to apprbpriation or fund accounts that the entity is authorized to spend or use
                                       to offset its expenditures.
                                       34.        An entity’s fund balance with Treasury does not include contract authority or
                                       unused authority. to borrow. Conrract aurhoriry is a statutory authority under which
                                       contracts or other obligations may be entered into prior to receiving-an appropriation
             ;                         for the payment of obligations. The later enacted appropriation provides cash to
                                       liquidate~obligations.‘-Thus,: $ontract authority merely permits a federal entity ‘to inour
             III_                      oeruin obligationsbut does not, in itself, add funds to the agency’s accounts with
                                                                   ,: :y .:          _.,,’ ,; ‘:
                                      ‘35.        ~Airrhon’l)iro &row is-r statutory .authority that permits a federal agency to
                                      ‘inct obligationsand makepayments -for,@ecific putposes out of borrowed fun&.
                                       Authoriq’ to borrow adds funds to an jrgenoyls accounts with Treasury only after the
                                       agency actually. uses’the authority to borrow a s&if& amount of funds. Thus.
                                       authority to borrow is included in an entity’s fund balance with Treasury only to the           I
                                       extent that fundsare actually borrowed under the author&.
                                       36.        An  entity’s   fund   balance with   Treasury is reduced by (a) disbursements made
                                       to pay liabilities or to purchase assets, goods; and services, (b) investments in U.S.
                                       securities (securities issued~by~Troasury or other fed&al govemment agencies). (c)              I
                                       canfNation of expired appropriations;, (d) transfers and reimbursements to other
I   ‘,
                                       entities or to the Troasuty,. and .(o) sequestration. or rescission of appropriations.          ~
    : ( --   2                                             :, .,                                       ‘,
       WJ                              37.        Disclosure ,should be made todistinguish ‘two categories of funds within the
                                       entity’s, fund balance :with Treasury: the obligated balance not yet disbursed and the
                                       unobligated balatike. The,obligated balance:not yet disbursed is the amount of funds
                                       against which budgetary obligations have .been .incurred. but disbursements have not
                                       boon made.

                                       38.      The unobligarfd   boloncr is the amount of funds available to an entity against
                                       which no claims have been recorded. Unobligated’balances are generally availabie to a
                                       fodenl entity for specific, purposes stipulated’by law. Unobligated balances may also
                                       include balances in expired/canceled accounts that are available only for approved
                                       adjustments to prior obligations. ‘Certain unobligated balances may be restricted, to
                                       future use and are not apportioned for current use. Disclosure should be provided on
                                       such restrictions.

                    ‘Source of deftition:   OME Circular A-34.

                                                           Volumo I, Version 1.0
                                                             Februaty 28, 1997

          sFl”AS NO. 1

                                   .39. ,: Federal entities should explain any discrepancies between fund balance with
                                    Treasury in their general ledger accounts and the balance in the Treasury’s accounts         ,
                                    and explain the oauwa of the discrepancies ,in foottiotes to financial atatements.           3;
                                    okepancies      due to time lagshould ba recottcibd and discrepancies due to error
                                    should be cotreoted when fmancial reports are prepared.) Agencies also should provide
                                    information on tmused funds in expired appropriations that are returned to Treaawy at
                                    the end of a fiscal year.

         Accounts Receivable

                                   40.       Accoamu nceivu6le..ariw from olain~~~to cash or other assets The l ccotmting
                                   smndard for l ccotmts receivable is set forth below.
    ._   x’.*:                     41.       Recogd&n     of receivabk’      A  receivable should be recognized when a
                             .,.   federal entity establishes a olaimto cesh or other assets against other entities. either
                                   hased on legal provisions. such ,as’a payment due date-                   received bv tltg
                                                       ‘or g&.or     ,services provided If the exact amount is unknown, a
                                   reasonable estimate should be made.
                      .,                               ‘,
                                   42.       Sepsute ~r&g.        Receivables from federal entities are intragovetamental
                                   receivables, and should be reported separately from receivables from nonfederal

                                   43.’      Eat&v k. Norwn#@ receivable% Receivables should be distinguished
                                   between entity receivables.and non-entity receivablea. End@ cecefvuM&s are amotmts
                                   that, a federal entity claims for payment from other federal or nonfederal entities and           _
                                   th$ ,the federal entity is authorized by law to include in its obligational authority or to   ‘1. _ *’
~                                  offset its expenditures and liabilities upon collection.’ Non-e-       ncrive&s    are         L
                                   amotmts that the entity collects on behalf of the U.S. government or other entities, and
                                   the entity is not ,authotixed to spend. ’ Receivables not available to an entity are
                                   nonentity assets and should be reported separately from receivables available to the

                   ‘The word recognition used in this document bears the same meaning as used by the Financial
         Accounting Standards Board (FASB) in its conceptual statements. It means the process of formally recording or
         incorporating an item into the financial s’ftatements ,of an entity as an asset, liability, revenue, expense, or the
         like. A recognized item is depicted in both words and mtmbers, with the amount included in the statement totals.
         Recognition comprehends both initial recognition of an item and recognition of subsequent changes in or
         removal of a previously recognized item. FASB Statement of Financial Accounting Cotme9ts No. 5, par. 6.
                   ‘An entity may have receivables that, once collected, can be used as offsets to the e&y’s budget
         authority and outlays only when authorized by Congress. Before receiving the authorization, however, .thor
         receivables are nonentity receivables.

                  ‘Governmental receipts include collections arising from the sovereign and regulatory powera unique to
         the federal~govemment, e.g., income tax receipts, oustomr duties, court finer. certain license fees, etc. A federal
         entity may be responsible for collecting these receipts on behalf of the U.S. government, but is not authorized to
         use the monies collected to offset its expenditures.

                                                       Volume I, Version 1.0                                                               1
                                                                                                                                 3        i
                                                         Februaty 28. 1997
                                                                                                            .                                SiFti       NO:1     .

                                                   W        Rewgnition of iosses.dne.t&~co&aibricollrcriblr
                                                                                                       ~~WUUS. ,Losser on receivables
                                                  ;should.be recogaixed when it is more likely than not tbat the receivables wili not be
I                                                  totally colle+ed. The phrase mwl likely Yhm nor mea03 more than a SO percent
       0 .-
8                                                  chance of loss occurrence.                            ...~,~~~
                                                                                                           .. ..

                                                   45.       An alIowaaoe for,estimated &collectible amOunts should be recognized &
                                                   reduce the gross am&t ,of receivables to its net realizable value.‘ The allowance for
                                                   uncolieetible l mouots; should be reestimated .on each anaual fmmoial reporting date
                                                   and what ibfognatiog .indicater that the latest .estimate~iq no -1oager comeef
                                                  . “: I        I, / : 1,: ‘.:.:.L ‘_,                1.::.                  ..: :.,    ‘.
                                                   46. : I,t~M#rwnmrru,of haa. ‘Losses &e,$&‘&o~le&e                                    amouats should be
                               .,        . .      ;v           thri&~a ry~~c~~~~logy..The.ys~~~c,~~etbo&logy                                         should ‘be
                     :,, .,                ,’     ,bs@‘On.&i$sis          of&M .&tdivi&sl~roco~~+and * grov.of                 1         &counts as a whole.’
                                                                                                      ,.“. ^,’ ( ” ,, / ‘.      ,T’I , t,,:-
                                                   41.       Ind++Lacco~                w@vsis. Accounts that ‘&present significant amounts
                                                 &ouhj:bi iadivid~lly~aiAyzed,to                 determine the:-lo~~al~oti~n&: boss estimation for
                                    ,.             indiyid~l~&&&hould,                 be::,bssedon (a) ti. debtor’s::a~iWy to pay, (b) ‘&e &b&r’s
                                                 ~‘payment:raco@:aadAvil~pe&to                  pay, andi (c),$he pr6bable .mcoyery,of amounts from
                                                   seo+ty<so~es,             i+ding      lieas,!,gamishments, gross illr&jons                and other &cable
                                                   collectidn%ods., ‘. ” j.          j                               .,‘ti,.

                                                  48. ‘1 The.rllowance ,for. losses generally otiot be based ,solely ott w results of
                                                  inditidurl ,aecouut~silysis. ,ln any WSOS,~infonngtion may.not be available to make
                                                  a reliable ass&sment of Josser on an individual accdwt %t+sisor the nature of the
                                                  receivables may not lend itself to individual account inalysh. In these cases, potential
                                                  1ossesshouJdbeassessedoaagroupbasis.               ._,        .,;
                                                               )’     ,‘,“,       ‘.            ,I,.       ,.. .
                                                  49.       GAP l w&sis,To dete@ae ihe loss allowance on i group basis,
      LJ                                          reoeivables should be sepatitad into groups of homogeneous accounts ‘with similar risk

                                                ? 50.        The groups shoul+. @cot the operating environment. For example, accounts
                                                   receivable, qax~b+gfoupqd by? (6) debtor catigoy (buqiqs firms. state and local
                              ,-.                 .go!qameqs.:and       iadividurls), .Jb) reasotq that G& rise to,the receivables (tax
                                                 .&hr~qvq~jes,: krmeous~ benefit pay,mqs. @de; +ccountq&ased on goods and se&s
                                                   soid. .qd $ansfers, pf defaulted loans ,$o,accaunt$ pceivab!c), or (c) geogephic regions
                                                   ~fO!F~gSC~Iptri~?, aad dOIq+tjC r+hS). wit&q a grow. Fqeivebles are further
                                                   stratified b risk chaiacteristios. Examples of risk fact& ire economic stability,
                                                   PIymcnt .histoty, &ernqivc repayment sources, adrging of, the receivables.
                                                                 1..                     .L
                                                   51.        Statistic@ estimation by modeliag or sampliqg is oae ~‘~pproptiate method for
                                                   estimatiag:‘loss6? on gr&ps of vceivables.; Sta~ial       estimation should take into
                                                   coasideration factors that are essential ,for estimating the level of losses, ittcludi&
                                                   l+rical     loss experience, recent eGpnomio events, wmnt and forecast economic
                                                   coaditioas, aa&inhererIt Ii!+

                       ,‘b the Board’s Expkre, Drab &counting/m       D&r LOW end LOUPIGUUFWC~S, september IS.                                                _
               1992. receivables are accountedfor oa a net present value basis.

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                          52.     D&omwe. Agencier sbould disclose the major categories of receivables by
                          amount and type,.the methodology used to estimate the allowance for uncollectible
                          amounts. and the total allowance.                                                                  i

&west    Rmivabk

                          53.       Interest~reoeivable~should be ncognixed for the amount of interest income
                         ‘earned~but not,received for an l ccounting~period. ‘Interest receivable should bt
                          recognited as it is earned on investments in interest-bearing aectuities. Interest also
                          should he recogaizad ou outstand@ accounts receivable and other U.S. govenunent
                          claims against petsons and entities in 8c@ance with.provirions io 31 U.S.C. 3717,
                          Interest l ndPenalcy~CZtns. (SeealsoFederul Claims Colleotion Standar& 4 CFR
                          Part 103. paragraph 102.13.)’
                                            ;.    ,,‘..j ,,.    ‘r
                          54.       No interest should be reoognixed.on accounta receivable or investments that
                          are determined to be uncolle&ible unless the interest is actually collected. Payments
                          received from the debtor are re&ircd to be apPlied fitat to penalty and administrative
                          cost chargedsecond to interest receivable. and third to outstand@ debt principal, per
                          Federal Claims Collection Standards, 4 CPR. ‘102:13(f).

                          55.     However, until the interest payment requirement is officially waived by the
                          government ‘entity or the related debt is~writtenoff, interest accrued on uncollectible
                          accounts receivable should ‘be disclosed.
                       56.      Interest receivable ,from federal entities should he accounted for and reported
                       separately from interest receivable from the public.                                     ...:.....(:“i>. _
                                                                                                                             \_   ,’
Advu&a    and Prepaymean

                          57.       Advances are cash outlays ,made by a federal entity to its employees,        ‘.
                          contractors. grantees, or others to cover a part or all of the recipients’ anticipated
                          expenses or as advance paymenta for the cost of guods and services the entity
                          acquires. Examples include travel advances disbutsed to employees prior to business
                          trips, and cash or other assets disbursed under a contract, grins or cooperative
                          agreement before servikt or g&&s are provided by the contmctor or grantee.

                          58.      Prepoyrnrnu are payments nude by a federal entity to cover certain period&
                          expenses before those expenses are incutred Typical prepaid expenses are rents paid
                          to 8 lessor at the bee     of a rental period. Progtess payments made to a contractor
                          bssad on, a perknuge of completion of the contract are not advances or prepayments.
                                                                                                           i .,
                          59.      Advances and prepsytuents should be recorded as assets. Advances and
                          prepayments are reduced when goods or services am received, contract tems are me:
                          progress is made under a contract, or prepaid expenses expim. A travel advance, for

         ‘Accounting for imputed interest, interest on long-term leases. interest on loans, and in&test on
amounts deposited in credit reform accounts will be addressed when the Board considers accouittirq stan&&             in
these arms.

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                                                February 28, .1997
                                    by federal e~&ties in~urities    (debt and equif~) sn+other firtgacia~ksttuments     M

               *        ,,                                                                            .’
                                   ,iy b*    ipi,:le.@;    p&y,           ‘( ,,
                                    63.       N&&&tobl~“j&&e             iirt&    k~liritie~ at& special series debt ~cunths
                    :              .,tlut the U.S. Tnasuty jssuef .to f+ieml c&ties nt face value (par value). The secwwes
                                    are ,&deer&d !t faci vale on demmd, thus investing entities recover the full amounts
    Q^,                             iavc#@d.

                                    64..     Ma+based      Treaswy hwitie~ kre dibt seduhties~t&t the U.S. Treasury ’
                                    issues to f&l+, $htie~jwithout statutorily determined interest rates. Although the
                                    searities e not ma&table, their tcrms.(prices and inter& rates) mirror the terms of
                                    muketa~le Tmiw       hriui~s.
               L.                   6s.       hf&r&    Trwwy sqritier,   including Treasury bills, notes, ad bonds,
                                    are ini+lIy.,of,f+ by Tr+ury to the’mhke@ac& and can tJi& be bought and sold
                                    on ‘kuitics ikehang hkets. Their bid and ask prices arc 5publicly quoted by the

                                     iiaecuritics &&ected tb b; b&d ;O kmrity +ly if ti investing entity has ihe
                                     intent and’ l biiity to hold those icurities to maturity: Ari itkestmcat in,Treastuy
                                     socuritiea &ould tit be cotuidcrdd u expked to be held to pwarity if the. investing
                                     entity is likely to sell the seouritiis in respogw to short-tatr~ crsh needs, chnages~in
                                     market interest ntis. or for other reasons.
                                   *; :‘,,/,,.i ., I .ll.._ .,,hr.‘: ,‘, ., ..( . .’ :/4,,,i I .._.t

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              67; Sepia&l cowyting l d reyodtg for federal ,iaii ronfederul secycicicz
              h,iv~ents     of,a feder$ entity in U.S. securititk (sec~iios~iasued by Trcanry and
              heral agenqios) are intragovetnmen~l investments. Thep ,U.S. securities also                                       i
              represent intragovemmbal        liabilities of the Tieakxy Depawent or other federal
              entities that issue the securities. Investments in securities ii&d by the U.S. Treasuty
              or otJwr federal entities should + accounted for and +rted               separately from
              hfestmcnu in shrities iywd by nonfederal e&ties.
                                                 ‘I.                            ~
              68: 1 ‘In&&l re+@gi            The.tbrw: typ? of treasury sec+ities covered by this
              itwdard (notuwrkeirb~o pu valw Tw                  se&&s.       et-based         ,Treasmy
              securities expected to k hild *‘rnati@y, and &rketable~Tksuty                   securities expected
              to bo hold. to rwturity) sh@d~ + ,e@xed             at t+,acqitisition      cost. If the acquisitioq
              is au&, itt c$&e        for ,&a~*           ‘i?&., ,ee rbw           securities should be
              rocopiwd at the fsir twrket vaiw of eithir the se#ritios l c&ired or the l sssts @en
              up, whichever is more deftiiively determinable.

              69.       If *e acquisition cost differs from the fete (par) Mlw, the sec@ty should be
              recorded’at the, acquisition co& which equals the se&rit$‘s ‘f&e value plus or miniu
              thc.prcynium or d&owy on thi in$e$ywn~ A discbunt is the excess of the security’s
              face ,a&ouat, qver iti p&chase price. A prettiikn is’the exe? of the purchase price
              ovor do sow&y’s free value. The balance in the valwtion account is -ted       as a
              conws l cwwt      to tho dobt sshurity.

              70.‘      V&do~                        l
                                    snbrrqwrru lo quisiho+       S&e&W    to their acquisition,
              invktments in Treasury securitieb should bk carried at thkir a&uisition GOSSadjusted
              for, amortization, if appropriate, as explained el,ow.

              71,.      I! an amount of premium 0; discount exists. ,the carrying amount of,the                            1
              investments should be ,adjusted in each rep&tit@ pehod to reflect the amortiution of                             - 1
                                                                                                                           kJ ._
              the premium or the discount. Premiums and discounts should be amortixed over the
              lifo of tho Treasuy securily -using the inte+ method. Under the inter&t method, the
              effective, inmst rate (the act@ iliter+ yield On,amo+ti invested) multipliod by the
              carrying.amount of the Trsasury security at ihe ‘?tan of the accounting period equals
              the brwt      income recognized during, the p&d ($e ving          amount changes each
              period by the amount of the amortixed discbunt or prkaiuin). The amount of
              amo+ation of discourit or premium is, w diffeqnce between the effective intorost
              twogniwd for &e period ad the nomiwl ti~st           for t& period as stipulated in the
              Treati      security. (be Appondix B for an illu+ra$on OFthe interest method of

              72.     _,Qischqwe of mu&et w&a For investments in msrkct-based and marketable
              Treasuy seourities. the market valw of the i&e&mepts should bs disclosed. For
              pittposes of detemiia@ I market vel~~~investinknti should bs grouped by type of z- :                   ‘,.
              security. such as marketable or market-based Treasury securities. The twrket value of
              invwtm~th in a group is calculated by the market ptice of securities of that group at
              the fmncial rrporting date multiplied by the number of notes or bonds held at the
              finrnGia1 reporti+ate.

              73.      In~ltmcnr &sa@c&m              Ik r& iwtawos, sigkant       unforeseeable
              circumstances may cause a GhanBe in an entity’; intent or ability to hold to auturiv
              certain securities that are mitially dassified as expected to be held to maturity. In

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                                                                                                         SPAS NO. 1

                       these ~ircumatances. the affected sec,uritiqs should be reclassified as securities
                       avaibblc for sele or eitrly“ndemption .(redemption &fore the ‘security’s maturity).
                       Onoe a security is reilaaaified it is no longer subject to this standard.

                                                                                                                        1. :
                         !4.        &eotqta payible are amounts owed by a federal en&y for goods end                      ”
                        hrvic~a reoeived’ from, progmas in contract peifonnance made by, and rents due to
                         other entitiei.
                                               ;    ..,‘,
                         k          Aecoitnta Payeble are not intended t0 in&do liibilitiea related to on-going
                        continuous expe&a such’ u employees salary and benefita,‘%vhich are covered by
                        othqourry~ liabtiitiea.  ., :: ,, (See
                                                          :    recommended standard for O&r Ctttzont LiabWea.)
‘,                            _, ,‘,
                         76.1,,, ~,&n$n&“&d               for gooda’or aervicea~~oeived’frdm federal entities represent
                         irqqp    vetamental
                                     , .,1 ,,,    ‘@aao~ona      and ahould ba reported a&ai&ly from amounta owed . .,
                      , .to the ./publ=:.-                         il        :         ._: ,_i;.,~

                      -;n.        &on ‘in entity a&epta title to gooda, .whether the,gooda are delivered or in
                       tranaik’ the ~&ity should recogt& a liibility for the unpiid ~amount of the gooda. If
                       iavoioda for,ihoae gooda ue‘not ‘&&able when ftnancial~ata~menta are prepared, the
                       atwunta owed ahould be estimated

                       78.        Fen a contractor provides the government with goods that are alao suitable
                       fir aalo,,to othera. % liability uatielly irises whin the contractor physically cielivera
                       the, ge,    and ‘the gove&iont &eiver’ the&and takoa ‘fob1 title. Howover, when a
               ..’     dontn+or t$i,&ormanufa&iea           facilities. or oquipment’to the govemmeat’a
                       apeeificationa.’ for& &eptance of ‘the producti by th& gov&ent            is not the
                       determining ‘f&or for amounting re&ognition. Conatitive          or de facto receipt occurs
                       in eioh l oi@titing
                                       /;    period, in ac&ordan&.withthe following.,paragraph.

                       79.       For facilities ‘or equipment constructed or manufactured by contractors or
                       grantees according to agreements or contract apecificationa! amounta recorded as
                       payable should be baaed on an estimate of work, completed under the contract or the
                       agmmeti~‘The’oatinik         of aueh amounts should be based primarily on the federal
                       enticy’a engineering end management evaluation of actual performance progress and
                       incurred coats.

                       80.      The reporting entity should disclosa accounts payable not covered by
                       budgetary reaourcea.

     Mwest   Paymbk

                       81.        Intereat payable ahotdd ba recorded for the amount of intereat oxpenae
                       incurred end unpaid. Interest incurred results from borrowing funds from Treasury,
                       Federal Financing Bank, other federal entities, or the public. Intereat alao should be
                       recorded on late payment of bills by the federal entity (see provisions in 3 1 U.S.C.
                       3901 through 3907. Prompt’ Payment) and on refunda (see provisiona in 26 U.S.C.
                       661 I,). Intereat payable of an entity on borrowed funda andunpaid bills should be
                       recognized at the end of each period.

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                              82.     Interest payable to federal entities is aa intragovernmental   liability and should
                              be accounted for sepsmtely from interest pyable to the public.

Other Current   Liabilities

                              83.      The term orhrr cuww liubilities is used to report current liabilities that are
                              not reco@ed in specific categories~ such as l %otmts payable; interest payable; debt
                              owed to the pubiic, Treasury, or other entities; and liabilities for loan guarantee losses.
                              Other current liabilities may includa unpaid expenses that are accrued for the fiscal
                              you for which the f-Fiat      sta@ttems are prepared and am expected to be paid
                              within the f&al year following the rrpOning, date.
                                                                              :   ‘,)
                               84.        Typical examples of other current liabilities to be tkco@ed are: (a) actrued
                               employees’ wager. bonuses, and salaries for services rendered in the current fiscal year
                               for which paychecb,will be issued in the folloWi& ye, ,(b) accrued entitlement ”
                               benefits pyable, such is Old Age Smviion lmumnce (O@l) and Vetemns
                               Compensation and Pension benefits applicable to the current period but not yet paid,
                              .and (c) aanuitiy for the current fiscal year admiqistered by, trust, pension, or insurauce
                               programs for which payment ‘would “be made iti, the following f&al year. Such
                               liabilities may be presented oa the face of the fWia1       ‘re$orts as Other Cumnr
                               Liabiliries or as one or more separate categories de.Pending on the materiality of the

                              85.         Federal entities may receive advances and prepayments from other entities for
                              goods ,to be delivered or services to be p&formed. Before revenues are earned, the
                              current portion of the advances and prepsyments should be recorded as other current

                              liabilities. Afk the revenue is earned (goods or ski~es’are delivered, or performance          ‘Z
                              progress is made according to engineering evaluations); ‘the entity should record the
                              appropriate amount as a revenue or financing s+rce and should reduce the liability
                              accordingly. Other current liabihties due to fedeml entities are intragovernmental
                              liabilities that should be reported separately from those due to employees and the

                              86.     The reporting entity should disclose the amount of current liabilities not
                              covered by budgetary resources.,,

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           APPENDIX              A:   BASIS       dF THE BOARD’S             CONCLUSIONS
                                             si. .’ This’ ,A$pendix, provides a discussion on the substantive comments that the
                                             Board received from respondents to Exposure Draft No. ,l.“Financial Resources,
                                             FundedLiabilities, and Net Financial ‘Resources of Federal Entities” (November 18.
                                              1991) ‘and from testimony at a public hearing on the Exposure Draft held Febnntfi 28,
                                              1992. The ,Appendix explains the basis of the Board’s ,conclusions on issues raised by
                          :?’                therhpondents.
                                                                                                             ’ *.
           BASIC coi&rs,.-’
                                        ‘,                                                               :
                                             ,88.      Netfiudol       resou~e& In the Exposure Draft, the. Board proposed the
                                             concept of net financiil’resoumes L ,The term net, financial resources was referred to
                                              as,an entity’s total fioancial resources less its total funded liabilities (Exposure Draft,
                                              pii& ‘11): The Exposuii Draft stat&that the amount of net financial resources
                                             pi&ides a ‘S&ten1 measure of an,etitity!s financial sufficiency before new
                                             a$kpriations ‘are provided. The Exposure Draft further stated ,that information on the
                                             com$onents ,of an entity’s net financial resources, (obligated. and, unobligated balances
                                             of bttd8et authority and other,items) can provide additional iitsight into an entity‘s
                                              financial situation.
                     I.                       89.      Many iespondents do not see~conv&inS evidence thot the concept of net
                                             ‘fmmdiil resources is useful. .They point out that there are no concrete examples to.
                                              ill~te    how the information canbe used. Some respondents also do nit believe that

    /                                         the measure of net financial resources is well defined, They point out that one of the
                                              elements missing from the Concept is the amount of unfunded liabilities. They state
    d                     1.1.
                          (,                  that without mea&in8 unfunded, liabilities, the measure of net financial resources is
                                              incomplete and can bemisleading.

                                             90.       The Board has decided to postpone consideration of the net financial’
                                             resources concept. The Board believes that the usefulness of the concept can be
                                             further explored after it completes its project on users’ needs and objectives for
                                             fmancial accounting and reporting.
                                             91.       &n#&~f%tunc~l resonrc& In the Exposure Draft, the Board discussed the
                                             concept of’ entity financial resources. The concept was defined as assets of a federal
                                             entity that consist of (a) the entity’s cash and funds authorized and available for
                                             disbursement (excluding contract authority and unused authority to borrow), (b)
                                             resourcesof the entity that are expected to be converted into cash to satisfy liabilities,
                                             and (c) conversion of cash into another form (for example prepayments) that would be
                                             consumed. Under this definition, the Exposure DraR identified as financial resources:
                                             cash, f&is with Treasrrry, claims to cash (for example accounts receivable and loans,
                                             receivable), claims to goods and services (for example advances and ~repaymcntsj,
                                             inventories held for sale, and investments.

                                             92.       As indicated in the Exposure Draft, financial resources are a subset of assets
                                             that provide liquidity (cash and assets that can be converted to cash) to meet a federal
                                             entity’s operational needs. The concept was considered useful because federal entities
                                             obtain resources from the budget to finance their operations and are held accountable

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    SiTAS NO, 1

                              for the use of the fmaaciol resources.

                               93.        The Board has decided not to use the term financial resources in this
                               docutuent: However, a deftition of the term fmoial resources aud its usefulness will
                          - be fit&r tins&red by the Board in its ~~cptual. fratueworl’projec~ In the l bsenoe
                               of the term, the items that would provide future ecottotnic benefits to the government
                               and its entities are referred to as assets. The tee asset as used in this document
                               means an item that embodies a probable fern econo~c be&fit that can be obtaiued,~
                               or ~nuolled by the fedefel government or a. repom               entity asa result of past
                               musactions or eveuts. (The definition of assets will be considekd by the Board,iu the
                               94.         Fun&d    liabilities   The  Exposuw    Dd’t  pniposed    tile deftitiiin   of ‘ftmded
                               liabilities” as ‘liabilities. for which the federal entity has ieceived budget authority to
                               cover the relate&expenditure or expense.”                       ..
                                                               ‘.    ..,.     ,,:         ,,
                               95.         ThetenuYfundcd~liabihties’      .w.ould~lixuit~,;hcrec&iit&n of,liabilities to the
                               extent that they .are funded. The.&mrd believes.t@ the, liabi@es addressed iu this
                               &unent~should.be          reooguixed when they are jncuqed, regardless of whether they are
                                -‘The          Board therefore deoided,not to use .the terq.“funded liabilities” iu this
                                documetun However, the Board recoxuumds that dkclosure be made for liabilities
                                that are not covered by budgetary resources.

                              liabilities iu @netal. However, this document addresses on!y those selected liabilities
                              that routiuely recur in notmal operations and that are due within a fiscal year. These
                              liabilities~ are ,accouuts payable, interest payable, ,and other current liabilities. The
                              category of ,other current liabilities includes salary and entitlemeut benefit expenses
                              that ap accrued and would be paid within a fiscal year.

    GENERAL     STANDARDS                                                                 .’

                               97.       The recommended standards apply to reporting by the federal government and
            1                  its e&ties for both govenunental assets andliabilities aud intragovernmental assets
                               and liabilities reported-at the entity level.

                               98.       An entity may have two categories of assets and liabilities
                               iatragovetutnental and governmental assets and liabilities. The differeuce between
                               intragovemnental and governmental assets and liabilities is explained below:
                                         (1) IxfmgovemmeuJ        CUCLI urd fiabilitriri; These assets and liabilities arise       ~”
                                         from intragovermnental transactions. For exauiple, investments held by a
                                         federal entity in Treasury securities are repotted by the entity as an asset.
                                         However, the Treasury securities also are liabilities of the Department of the

               ‘A qompreheusive deftition    of “liabilities” is being bonsidered by the Board in its projmt concern&g
    liabilities in general.

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                TIZMUIY. Thus, the securities represent intragovernmental assets and
                habibties. Another example is fund balance with Treasury. An entity’s fund
               balance with Treasury of an entity will be reported as an asset by the entity.
               However! it iskt an’ asset of the federal government; rather, it is a
               commitment of the U.S. government to provide funds to a federal entity. (See
               dia&sion, which foliows, on Fund balance with Treasury.)
               (2) Go&qe~el         assas and liabilhiu. These are ‘assetsand liabilities that
               arise from .tqtiaWions of the fedeml’governktent ,with’nonfederal entities
               &emons and orga+tiotts       outside the U.S. government, either foreign or
               domestic). ‘Foi example, income taxes to be collected from, the’ public are
               reported on, TRSfhtancial statements as receivables. The& receivables are
,              aiyu of thcfedsnl
                            .L._’    govetlmlenL                      :
      b9.        The reconunended rtdiiduds require that, intmgover7trnental assets and
      liabilities he reported sepamgly from gOVC~tttAi       a,ss$s andliabilities.

      100.      Assets
                   ”    report& by ‘kt entity also are distinguished betkeen entity and
      aondxttity assets.
                          :; -1                                          !;
                (1) &I&& use&. Entity assets are assets that are a&able to an entity for its
                use. Entity ads include both intragovernmental and governmental assets.
                Supplies inventory held by an entity for consumption ‘in its operations is an
                entity asset as well as a governmental asset. A receivable of a federal entity
                from another f&ml entity is an entity .asset if the receiving entity has
                authority to use the amount collected.                                                   I

               (2) Non-~@ assea An entity may have assets under i&custody and
               management that the entity is not authorized to use. In this Statement, these
               assets are called nonentity assets, as distinguished from entity assets that the
               entity is authorized to usa in its operations. For example, customs duty
               receivables to be collected by the Customs Service is a non-entity asset that
               would be reported by the Customs Service.

      ‘101.’     The Board recoiitrnends that both intity’ass&“and non-entity assets under an
      entity’s custody or tiknagemetit be ‘kognixed in the~‘entity’s’fiiumcia1 statements.
      l’$onentity asp should be separately reported in an entity’s financial statements.
       102.      The following exhibit, using receivables as an example, illustrates the
      relationship ktiveen entity and non-entity assets on one, hand and intragovernmental
      qnd gdVimbB@i
               ‘.          assets on the 0th~ hand.


                         Volume I, Version 1.0
                          Febnrary 28.1997
SP’FAS NO. 1   .

                                                      Accounts    Rem tiv fable
                            ,,   .’                 ENTITY ASSETS         NON-ENTITY

                    INTRA-                         Amounts receivable     Amount!4 to be
                    GOVERNMENTAL                   fkomrfede#             collected from a
                                                 t entity for ++    or    &dcral entity that
                                                   selviiu de@d           yql not be
                                                   tbatvqili      ”       ru;rilnble, to the
                                                   b ;vailabl; to ,tik    Teiving entity to
                                                   reoeiving entity to    m

                    OOVERNMENTAL                    Amounts               Amounta (such as
                    ASSETS                         receivable from (I     taxes) to be
                                      ‘,I.         nonfedenl entity       collected f&n a
                                                   for goods or           nonfederal‘ entity,
                                                   uwicu delivered        that will not be
                                                   that~llbe              available to the
                                                   available to’ the      receiving entity. to


                   103.     The Board has retained from the Exposti ‘DraA the requir&nent for separate
                   reporting of restricted and uureitrioted C&L However, after c.onsidering comments on
                   the Exposure Draft, the Boa hr’modifrcd the &f&i&ion ;:of restricted cash.
                    104.    The Exposurk Draft proposed thai unrkstricted cash include amounts in
                   demand deposits. Hoover, whether an amount of qrsh is regtrioted does not depend
                   on where the orsh is kept. &or &tip~e, federal entities may hold cash in demand
                   deposit accounts on behalf of Treasufy. +ce the e+ities hve no authority to spend
                   the cash, from the entities’ perspectiin, these amounts of cash are restricted.

                   105,     The recommended standard in this document redefmes restricted cash u (1) : ”
                   amounts of crsh that an entity holds on behalf of Treasury or other entities and dw+- ‘.,
                   not have authority to spend, and (2) 8mOunts of cash that ue legally restricted to
                   specific purposes.                                             .

                                             volume I. veraion 1.0                                             /” -
                                                                                                                      I   ?
                                               Februuy 28, 1997                                                ‘LJ
                                                                                                                        SFFAS NO. 1

             Fund B&me            with +sury
       1                                    106.    The recommended standard provides’guidance on tbe composition of tid
                                           balanq~ wjth Treasury. Events that cause an entity’s fund balance to increase include
                                           n&&g      appropri&&s,‘alloc&tions,     transfers, receipts t&t thi entity is authorized to
                                           spehd (6r to use to offset ita expenditures) and bonowing from Treasury. A0 entity’s
                                           fund balanoe is redkc+d by amoets disbursed40 pay liabilitiei and expenditures,
                                           amounts invested @ ‘secur$iis, amounts of appropriations canceled or rescinded, and
                  *‘I                      iinouks tr&sfemd to other agencieS or to the Treasury.

                                           107.      Wi& respect 9 fund balance with Treasury. the Board has considered the
                                           following  ‘isa&
                                            . .

                                                   .: (1) I8 l&pe            ~lth’+sU~        all uictt          .,
                                                              :                  1, /             A_ ,,’
                             _.            108.     The B&d &iiet& ‘kha; &ii the i;ersjkCtive if a fkderal entity (such as a
                                           bureau, a prOgram, or a ftind), f&d balance &th Treaniry is;in asset. In fact, it is the
                                           *ost hp*nt      souro; &au      &j&l&   entity. & mb, expenditurts afid hcur

                                            109.      Hotikver. the Board recognizes that a fund balance with T&my        is an ’
                                           in+govemmental item. It represents a entity’s authorized claim to the federal
                                           gotiinm&‘s      nsburces on one hand. and the g&kunen~‘s commitment to supply.
                                           re&+r@& to’ the ‘entity ‘in the othir h&d. The claims &d commitments would not be
                                           rep&d &hen f&&f            repoits df hdividital en&es are consolidated on a
                                           government-wide lekl: Th& froiir, tlk pkpktive         af the federal government as a
                                           whole. ;’fund balances with .”Treasury are not pssets of the federal government.
                                                                                 . . ..I.    ;’
                                                   .’ (2j How dk       hind’balinqe   tiit~;Treasu~   relate to budgetary resources?
                                            110.     A fund balance is created by budget authority. An appropriation is the major
                                           form of budget authority that creates a fund balance with Treasury for an entity. Thus,
                                           ihe relationship between fund balance’ with Trekuy and budget authority cannot be
                                           ignored.                                 ,”

                                            111.      However, an ‘entity’s fund balance with Treasury does noOtnecessarily equal
                                           its budgetary resources. The difference between these two concepts may be clarified
                                           by sxahning’ thhi definitions. A fund baltin& rep&w            the sumof amounts that is
                                           acnially available in an entity’s accounti with Treasury. Budgetary resources on the
                                           other hand encompass all airthorities for an entity to incur obligations. Some of the
                                           authorities do nol ii~ iheximelves pio&     funds to the entity. Contract authority, for
                                           example, allows an entity to incur obligationsunder a contnct. However, it does not,
                                           in itsklf. provide funds to &e entity’s acdounu with.Treasury. An appropriation is
                                           necessary for the entity to hake funds to ‘li$&iate obligations incurred under contract

                                           112.      Authority to borroti does not in itself place. funds into an entity’s &counts
                                           wi+ Treasury. In order to .i&rease its fund ,balance with Treasury, an entity must
                        ,.                 actually-&mowunder      itj bo+ing,   authority.. .’ .

                                           113.    For these reasons. the ncom@ended standard states that fund balance with
                                           Treasury does not include contract authority and unused authority to borrow.

                                                                    Volume I, Version 1.0
                                                                     February 28,1997

                                  !3) Should   the thd   bAaace   exclude   Lnds   dcsl@mted   for speciil

                        11;.      Some respondents -to the Exposure Drag +lieve that the standard should
                        identi@ funds held with Treasury tbat are not available ,to the entity’s operations. For
                        example,. the Department of Energy collects f-s ‘levied under the Emergency
                        Petroldutn AEacation Act of’1973. deposits those fundsin an escrow accouut with
                        Treasury, and,‘ultimately dishtnser the* funds to injured parties or for other uses as
                        directed by court decisions.        ~

                        115.’     It is dot unusual that funds in oertrin l c&tttr are held and restricted to
                        spwific   purposes.  Amotmts of trust funds, for example, are held for the specific
                        purpose of making bet@ payments ,to eligible, recipients. The restriction on funds
                        held for the ‘&artment of Energy to pay, gersotts injured by oil pricing and allocation
                        violations is. ~+r     example. ‘fhe Board believes that the ,fund balance of a reporting
                        &thy should, it&de luttds held in all accounts of the entity regardless of whether
                        they am desigtiated ‘for speoifio purposes.’

Accoaots   Receivable

                         116.     Respondents raised, issues related to the ‘ncdguition and measurement of
                        losses de to uneolleotible amounts. Before addressing the, Board’s actions in relrtma
                        to respondents’,,~otmttents, ‘however, the terins recognition $pd measurement as
                        used in .this Statement are explained below:            ..t,
                         117.    Recogdo~ means formally recording or incotp&ating an item into the
                        recordsand finrncial,,statements as an asset, liability, expense, revenue, or sitruler
                        element. For assets or liabilities, recognition encom@assessubsequent changes to the
                        amounts of assets and liabilities..

                        118.      Meesxremen# is. the process of expressing an asset or liability in monetary
                        units. Measuring an item requires selecting an appropriate measurement attribute such
                        as historical cost, current market value, net realixable value, or present value of future
                        casb flowt.         ,,

                        119.      In the proposed standard and the dircussion of accoints receivable, the term
                        recognition concerns the timing of recording an asset or .the impairment of an asset in
                        the finrnGia1 records. The tetm measurement concerns the vaiuation basis and the
                        dollar amount of the asset that should be repotted.
                        120.      Detailed discussions of respondents’ comments and the Board’s actions are
                        provided in the following paragraphs.                                                 VI..

                        121.      7iiig   o/nccia&&      ~cog&ion.   The Exposure Draft states that a receivable
                        should be recorded when events (e.g., payment due dates) or transactions occur that
                        entitle an entity to accrue revenue or receive a reimbursement or fund transfer. Some
                        respondents questioned the use of payment due dates as a criterion for recognizing
                        receivables. These respondents stated a receivable should be recognized when an
                        entity is owed an amount or eatns a revenue, and that due dates are itrelevant.

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                                                 February 28, 1997
                                                                                                                  Sl?FAS NO. 1

                                      .!22*,    Some receivables
                                                           ,,         result from exchange transactions. For example, receivables
                                      u@y result from goods and ?ervikei provided 16 othk entitiei. However, claims to
                                ‘.    cash or ot&r’Ueti       ‘also resujt f&in the f@eral’&fenjment’s   legal authority to levy
                                      taxer and impose duties. fees and fqer. These n&eivables are ‘not related to
\                                     rtivenye-eiining functions or e&at@ tritnsactiot& but are based on the-&Ieml
                                      govomment’s authority to.‘cbllect the ~&+hs          apd a p&k iihbility to pay cash &
                                      pfovide other assets to coy&, the da&i. Foi‘ the accnml of’taxgs, the tax due date
                                      r@oseats lb;c da&, @at the goyeynhit &i@*              payment. The payment due date is a
                                      deftitivk ariteritin for accruhik tax&.
                                      123.     The Board,’ therefore, recommends &at a reeeivable’be reco8nized when a
               ‘i,’                   claim to cash or other,asseij is established based either on goods or services provided
               ;.                    ,or$the gfp~mmei& leljr! &uthody -to fyf#lii      @led. Tj~e Bqa@ is not
                                     ,~~omminding’~i~ rhiue ‘recognition standard ‘,  at this time.

                                 ;    tt’24,
                                       .(,     tlri +&&ha       In &i’Ei~&,ix;fk,
                                                                         .’ ..:,,‘.<;‘:ai. ii &IS pr6pdsb;ed@aata loss be
                                      reeo@xed when it ‘is h&e likely thtta’not thaf a r&iv&e           h& been impaired,, me
                                      phrase more likely than not means a greater than 50 @&ut $robability of
                                      125. LSeveral respondents questioned why the Board used the more likely than not
                                      criterion for loss recog&bn instead of the probable criterion used in the private
                                      sector under gene,mlly accepted account&& ‘phciplis (GM).’
                .L                                              <
                                       126. : The Bdard may refer to the,pronotuicements and statements issued by other
                                      st&ard settin bodies in deiibirating accounting standards for the federal
                                      govermnent. However; the Board is not bound by these pronouncements and
    ,,/ ‘--,
    w           >I,                   statements, especially when’accounting standards piomu@Qd for other sectors are not
                                      relevant to the federal government.

                                     127.      In the case of’loss recognition on receivables, the Board believes that there
                                     should be a definitive guideline for recogriizing 8ov&timent credit losses. The word
                                     probable is subject to broad interpretation (often b&8 interpreted as meaning a
                                     virtual certainty of occurrence) and could allow for belated recognition of losses.

                                      128.     The Board proposed the more stringent ,ctiterion of more likely than not,
                                     whtch requires’the reoogrrition of losses when there is’ more than a 50 percent chance
                                     that some receivables will ,not be collected. In reoommeniling the more likely than not,
                                     criterion. the Board’s intent is to achieve unbiased, consistent, and reliable loss
                                     recopition in federal ghiemmcnt accounting.

                                       129;     The more likely than not qriterion can be applied to both individual
                                      ac&nts and groups of;aceounts. Both significant individual accountsreceivable (e.g.,
                                      unusually large refunds due from contractors, medicaid reimbursements from third
                                     ‘parties, substantial tax delinquencies, or other lhrge claims) and groups of small
                                      accounts should be analyzed and losses reoognitcd if it is more likely than not that
                                      some or all of the amounts owed will not be collected.

                    ‘FASB Staknent of Standards NOS. Accounting        for   Contingqwies.

                                                         Vohima I, Venion 1.0
                                                           February 28, 1997

                    130.     When applying the loss recognition criterion, the Board believes it is
                   appropriate to ncognite ,the nature of federal receivables. Many of the federal
                   govquyent’s r+eivabies, ‘unlike me.: s’cco,nntsof, private fiis or loans made by            1i-,
                   banks, are not created through ondir ;;;creening procedures. These receivables arise
                   be&e ,of l ctivitieq, such as. fmes from regulatory violations, refunds from erroneous
                   benefit payments, reimbursements, and overdue taxes and duties. In these
                   c+tmstan&       hi&&l     experience and economic factors indicate that the receivables
                   frequenily are not fully collectible. These receivables meet the ,,loss recognition test
                   because of theirinhercnt risk. Therefore, an appropriate amount of allowance for
                   losses ,rhould be reco@xed at their inception.
                    131,     Losa~+L              Because of the large volume of federal transactions,
                   acknts re&vable geneklly eiist ‘in large ‘&ups. Some &nips may consist of
                   sevenllmitd&d.thou&td      accounts. In such cases, losses on tm~ollectible amounts
                   should be assessed.on,a group basis using statistical sampling techniques. Statistical
                   sampling ‘should besupplernented by ‘historical
                                                                ,:, trend experience;   adjusted for current
                   COt$itiOp&     ,,.I     .,
                    132.     On the other hand, some government receivables arise from transactions of
                   signifcant amounts. These receivables should be individually analyzed to assess losses
                   due to risks specifically attributable to ,the individual accounts. The assessment of
                   impairment of individual accounts may not always provide a’valid basis to estimate
                   the impairment of the entire group. Often, losses may exist for the group that are not
                   currently identifiable on an individual basis. The Board.believes that the federal
                   gove~cnt’s     receivables are generally subject to losses due to inherent risks.
                   Therefore, allowances for receivables should be viewed in the context of the overall
                   riskof the receivables being assessed.
                    133.     Based on the above considerations, the recommended standard provides that,        3 *=   f
                   for reporting purposes. losses on aocounts..receivable should be determined by
                   eval~ting accounts on both a group .;:’
                                                        and .:an individual basis.

Interest Rmivabk

                    134..   In the Exposure Draft, the &op&ed standard requires that interest be
                   r&nixed     on a receivable until the receivable is repaid or &itten off. At the same
                   time: the proposed standard requires that ‘an allowance for uncollectible interest be
                   provided. The intent of the proposed standard is to establish the debtor’s liability for
                   the acctued inter&t.

                   13%       Some respondents expressed.concem that then.is usually a lengthy period
                   from the &me a reoeivable‘is determined t&bi ‘uncollectible until it is written off. It’,
                   would be burdensome to reco@ze interest on the uncollectible receivable and, at the
                   same time, offset the amount of interest recognized by an allowance for uncollectible

                    136.     The initial intent of this procedure was to maintain a correct amount of the
                   debtor’s liability. This purpose ‘can be achieved by record-keeping procedures rather
                   than financial reporting. Therefore, for financial reporting, the Board has conoutred
                   that (a) interest receivable should be recognized only on collectible accounts, and &)

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                                           February 28. 1997
                                                                                                                                       sFP+     NO. 1

                                                           interest receivable on uncdlleotible accdunts should be .recognized only when it is
                                 ,..                       actually received.
/   f-7
    ? _-../

              Advaneas and Prepayments
                                                           137.       There Were no comment; on the substance of the recommended accounting
                            $.                               standard for advances and ,ppay,ments since the standard does not contain significant
                        ’ &>                                 ohanges .from the currant~~aooounting practice within federal government agencies.
                           ,I          I
                                                             Some respodents requested that the @o&clarify that ~payments do not include
                                                             ~progtaaspayments made ,.~a:lopg-term c,c+acts, Since’ progress payments are made
                                                             based upon percentage of completion of a contract, the Board concluded that progress
                          .’:. :. :                                                                                           ,.       I
                          IS                      .- . :.i.) payments are not,advances,or, prepayments. :          ):
                                                                                               1,: -,:-
                             1.                              J38.,.:’ Comm&ta wm, & nceived cluestionibg whether advances and prepayments
                                                             should, he included within the &fiition    of f&ncial~r&o~&es”(as proposed in the
                  .,,                                        Exp6sur.e~Draft)~~sincaadvances+d Fpymentsare            not usually converted to cash or
                                       .:                    budgat,authority a&labla for use by the an$ty. 1             j
                                            ,(,             ..I,    ,.I       .-,    ,,. .,
                            : ,’                           139:     The ,Bpard &o&ms     that, ‘es in: the case of in&cries held for consumption,
                                                           advances.and .pnPayments convert into go+& and services, but do not convert into
                                                           cash. Ho&aver, since @ ,@m .financial resources is not used in this Statement. the
                                 .                         issueis now moot. Advances and prepaym$nts normally benefit current operations
                                                           and; thenfore. are norqally considered current asset+,
                                                         ~                             :
                                                                                         ‘;         .’
              bvesti~nts                in Treasury        Securities

                                                           140.. +The ncqnmemied stand+            applies to investments in Treasury securities,
                                                           including (I)..nonmarketable par .valv Treasury se&ties, (2) ‘market-based Treasury
                                                   “_.     securities held to eturity..,and (3) marketable Tr&asuiy securities held to maturity.
                                                           141.      In the future, the Board will address investments that are not covered by this
                                                           standard. In the interim. federal entities-should qntipue their Furrent accounting
                                                           practices for those investments n?! .covered by this standard.

                           ,.~                    K’       142.      Federal entities, particularly the Social Security and the retirement trust funds,
                                                           invest #ailable funds in cxcc~ of their c,urrcnt needs in special Treasury securities
                                                           issued in the goverriment account s&es. The tem~ of the Treasury securities are
                                                           usuilly d&&d       to meat the &ash nieds of g?vemment accqunts. The vast majority of
                                                           the irivestments are in nonmar&etable Tnasury securities issued exclusively to federal
                                                           agencies. Most of them are par value se&ties, and some are market-based sepurities
                                                           whose prices and inter&t rates reflect tiiaricet terms. Thtis, although the scope of th&
                                                           recommended standard is limited, it covers more than 90 percent ol%deral entities’

                                                           143.      A few federal entities aA permitted to by and sell marketable Treasury
                                                           securities on the open market. Sonic fe,detil entities which conduct business with the
                                                           public or provide insurance #o,the prt@e sector, may quig      marketable Treaw.
                                                           securities as a part of a &cue ad takeover transaction. This standard applies to
                                                           marketable Treasury securities only to the extent that they are expected to be held to

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i                                                                                F&ruary 28. 1997

                144.    In the exposure Draft, the Board proposed that inyestrnents in par value
               nonmarketable Treasury securities be reported at cost. The.Board also proposed that
               marketable securities and market-based Treasury securities be reported at rnsrket value
               kS Of the rCpOXtill8 date.

                145. ’ A numbar of respondents, however, expressed concern with the recognition of
               i~reaser and decreases in assets bswd ‘on market valtqand the reco8ttition of
               associated grins or’losses. These respondents believe these am unrealized grius and
               losses.whicb dfxtit represent~aotual incmase8~or .&creaser id assets. Some
               rwpoadm~ also indicated that market value.fluctlaations 8elMm11y do not affect an
               entity’s investments in securities intended to be heWto their maturity.

                146.      ln this Sutamant, the Baud continues to use the cost based valuation f&
               nonmuketable par value Treasury secourities. The cost basis is l pproptiate for this
               ‘ijpe of sscurity because the invested amounts vsiitl he fully recovered at redemption.
                147.      The Board also re&iunends the co&or amortized cost basis for the vahratiott
               of market-based T&uty        securities and mark&able Treasury securities that are to be
               held to nuturiry. The Board kliiver that the ‘cost basis is appropriate because the
               ibuted imounts can he fUly recoinred wkn the Treasury ;securities mature. During
                the’ time pekds wlhen the securities am outstand&      the msrket prices ,of the secut%icr
               may fluctuate due to interest mte chan8es or other tetttpomry causes. However, so
               -loo&as tbxebritierare      not tobe sold~tothe market, theinvesting entity would not
               be affected ‘by iuchmsrket price fluctustions. For this reason, the Board decided to
               recommend the cost based approach rather than market value approach for marketable
               Treasury se~tities expected to be held, to maturity.

                148.     The Boardconsidered the valuation issues related to securities not covered by
               this standad The’Boardhas con&ied thattheuse of a fair value approach pertains
               to a broad Ooneeptual issue that needs to bs addressed in ,its &onceptual fmtuework.    :
               Until the Board reaches decisions on the conceptual framework, it is premature to
               recommend a valuation bssir for securities beyond those covered by this stat&r&

                 149.     ihe Board believes that ‘the criteria for classifyiq an investment as expected
                to be held’to ‘maturity should be based on the intent and ability of the invest@ entity
                to hold the security to its maturity. Intent and l bihty differ from a mere absence of
                an iutent to &I1 the security. An eirilustion of whether an entity has the .intent and
                ability to hold its investments should be based on the entity’s cment and projected
                furanoial coadititi and its recent psttein iu buying. Selling, and marqiq      Treasury
                securities. A security should not be classified as expected to be held to maturity if
                 for cash needs or other investment msnagement ,masons the investiq,cntity in not able
                to hold the security to its mat&y.
                       .                           ‘3                                       ,.L
                 1so.      At each finurcial reportin date. the l ppmpriatwess of this classification
              . should be reassessed. In mm instances, an entity’s originally stated intent or ability to
                 hold a security to maturity tnsy ohan8e due to significant unfomseen changes in W
                entity’s cash needs or @,other oire umstanws. When’this owurs, securities initially
                classifW as expe!ted tobeheld to maturity sh0uld.k feclassified to securities
                available for ule or early redemption.

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                                                                                                      *                                        SF’FAS NO. ’ 1

                                          ./     151.     ACM+S payqblc a~ set up to record an entity’s liability for goods and
                                                sctvi;oes,ticivcd or work progress made by a contra$tor for which payment has not

<’         * ‘.-                                   152.         $o& rcsp&tdc@s qu&iooid the timing of.rcco&zii                            a liability in accounts
                                                  payable. 4 f-1               >&t&j, under budgeiay acotiuating, ,~cords an obligation when the                             -
                                                  cqtity pl&cs l pttrcbm@ o+ or sig& a contmoi ;Ao’bblig&o& once incutmd,
     I<                    x‘T,:, /               rcdums l cn$ty$ fe~~cs,avqQu~blc for obligation. Budgetary accounting cntrics arc
1,                         a?.’.,-’     L         &irc@ b record w +nouttts ?bli&cd and .io .&iucc the-&&blc                                    b-et     authority.
                                                  For f~jal’rc$orti@                @trp&, liabilities arc &o&t&cd whh goods ‘&-I scrviccs arc
!:                                                rce&c&or‘irs             r&o@&“”                  on ih”F.etcT,bf    C?rk
                                                                                                                          , oomplctcd~tutdcr~a
                                      ;; “1 >t:,,              *: ,:                            ,,:,ve                                                   contract
                                                                                                                               i,. ..:
                                                  or WC--                       ‘.    ‘,             ”                               .,0.r;
:-                            ,/., “.          /, :‘;.‘: *,h’,‘.,‘.,
                                                                ,ti,.,,( fediiirl’&;;..
                            .,“,’           ., &lb.           i                         tttt&cli&c       it ii iepria&     to.&&izc           a liability in        .
     A:&                                                                                                                                                                ‘,
     *-                                          ‘.&outi~
                                        I,,/ “Z‘&..,;.i’L<        ‘$&lc
                                                          ,.- , ./,, C’”     ‘til@n:a.+&*             ord&is~$lttd&L   The  thc&y      of  this  practice  ii that
                                                        puroe           .o& , ,&&&“r.            & Of ‘jh&?&#s :b~&@-.msources                    and that
                                 !’       ,      ~$@I&           ,& l&bility“*o&d           :‘&&tly       ‘i&cc   ti   entity%4available budgetary
                                                                                       >i                                ., 5. .:,

                                                 Is.    Proponents fG thi+ @m&ice rlio tiguc &in           tmity cam, goods produc8d
                           .\ ,)’                t&q #oYcn&tt     tit&s     bcu uniqti+ spcdifications for govcrrrment needs and. an a
                          .,,’                   rca@, &n@ot bc sold,to bthcr oust&&s. Thiu. $cy ugw”that it is virtually ccrmn
                            , .                  th$i @ goMtmcnt haS i&@          a lirrbilit$ tiwartWhti~&oiitractor.
                                                                        ‘,,    1‘                    ,, :.      ,:-
                                                 155. ” The B&@l r&&z&              that there isia need to rc&itcile budget cxccut1on
                           J,                    results and financial effects., In budgetary *accounting; When a purchase or&r IS paced.
                                                 an obligation is rcoordcd to cnsurc budgetary control. However, rccognitiod of the
                                                 claim from (L financial accounting standpoint does not occur until goods arc delwcrcd.
                                                 work progress is rctually ma& by a contractor. or scmiccs arc performed since thee
                                                 cvcnts ~cncrally trigger a cash outlay that liquidates the ob!!gatioo; The Board does
                                                 not bclicvc thmt rcoogaiz~ a liability prior to a actual receipt or constructive recclpt
                                               ’ of good!+ or scrviccs should bc adopted as a fmncial accounting standard. It also does
                                                 not bclicvc that it is appropriate to erase the distinction between recording obligations
                                                 for budget purposes &td recognizing a liability for finaodial acc&tnting purposes.

                                                 156.      SOme rcspood&tts question whether a liability should bc recognized for
                                                 multi-year contracta that arc to bc fuumccd through appropriations over a number of
                                                 ycam. As has been discuss4 carlicr, when a contract is cotcrcd, ati oblightion is
                                                 rccogniz.cd in budgetary accounting. However, until goods or services arc rcccivcd or
                                                 work progrcrr is ma&. the Board doer not believe that nn ob1igqtio.o should bc
                                                 rccognizcd as a liability. When goods,or scrviccs arc received or work progrcss is
                                                 uudc under c&r a short or lon@ctm contract, a liability ‘ior unpaid amounts should
                                                 be rccogoizcd.

                   Interest Pqabk

                                                  157.    Thcrc wcrc tto substantial oomntcnts on the rccommcndcd accounting
                                                  standud for intcrcst pairblc. The rccommcodcd standard does not differ f&n the
                                                  omcnt acoou&ittg practice within federal goirctzuncnt agencies.

     i’ i*- )                                                                                                                                                                    I
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/   Other Current :Liabilitier

                                  158.    The .&mmended        Standard covers the current liabilities that are not
                                 specifioall~ deftned in other’standards. Cur&t liabilities spicifically defined in +
                                 Statemeat are accounts payable and interest payable. Acoduats payable and iaterei
                                 payable represent liabilities l risin8 from discrete tra~ctiqng. The Board also plans to
                                 &sue statqnents to define other specific ‘liabilities m&as liabilities incurred under a
                                 loan 8uaraatee~coa.mc~ and borrowings f&n othti entities.
                                  li9.   Other iurr& liabifities geneqlly are ilat&l to’&gGng and ooatiauous
                                 expapes, u+ibh .& typic+lly re~q&ed.t$roti&W’e$          acqountiq period rather ’
                                 w on an @i@dual ectioa           “&is. 9 typi,cal,&a$@i ii the liability for
                                 imployees salary that is l cc&d at the &d of a fisd ied ii& is not paid.
                                                                                        I. _.
                                 #lW. .’ The Expo+ue Draft indicated that g ,liability was gq~idered hmAr?A .if the
                                 relate+ expense ,yas ,jacumd uqdir ‘bt@q! at&&g.          So,me ‘respondents mested   that
                                 the tgm b-et      a$hority be chqnged to budg’ttijl fi%c$@s . They argued that
                                 btidgetiy resov      eacompais not only new bitd& l ughoti~, but also other         I
                                 risources available ti incur liabilities for Specified. pss&“in     a given year.

                                  161.     The Byrd agrees that a liability (of a portion of the liability) should be
                                 conside+ hdgd from the rqportin8 entity’s pers@ive, if it is covered by available
                                 bud8etaq.resources. Hqvev&i the recommended standard takes the position that a
                                 liability should k recogniied whep‘it is incti&i.‘re&dless      of whether it is covered
                                 by available budgetdry resources. The recommend~d~staiidai also requires that
                                 disclosure should be made’for liabilities .Jhat,are not covered by available budge~ty

                                                                                   I   ,.I

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APPENDIX      B: ILLUSTRATION                       OF THE INTEREST              METHOD
FOR    INVESTMENT      DISCOUNT                     AND PREMIUM
                 ;                            ,‘:


                                   ‘This Appendix p&ides. an. ~lhrstration’ of the interest method for amortizing a                .
                               discount or premium of an investment in a marketable or a market-based Treasury
                               s&rity,,such as a Treasury band. The inwst method,is required in the                                                  1
                               recommended standard for mves,tments, Before explaining. the. interest method itself,
                               &e concept of discount +nd prqnium will be explainep.


BOND DISCOUNT               AND PREMIUM.                :        ..:,;:. _,,         _                                    1”
           ,.                                                                               ‘, _/,.,:
     ,.,                               ne’p&e of a bond equals the p&em vaiue of ‘the bond’s net ‘future cash flows,
                                 including principal and interest payments, discounted to the time of its issuance. The
                                 discount rate:$referred tq ag,th~,.$Y@ve @rest rji+ Since the effe@ive’ interest
                                 rate ‘usually equals the market interest.mte, it may differ from :the stated interest rate            ’
                          ,i ‘. ‘(the,doupon -rate) ,of the bond. The. diffcrenhe betWeenthe effective -interest .rpiteof a+
                                 bond and its ‘stated interest rate causes thebond price lo be different         from its face       ”               b
                     _,,,        irn&&i.,’                                        ,, :                      I.  .‘_     ,’
                                           ,,’.,              .‘> ‘,      ; ,, ‘.:r:           ..,       ‘.
                                      ‘.A Treasury bond ‘may be purchased at a.price’ higher’ or lower than the bond’s kaie ,. .I
                 ,                                                                                                                     ,
                                  arndtmt (par amount). The difference between the purchase price and the face, amount
        .:       .,.              is a  discount if the price  is lower than ,$e.  face amount;    or a apremium   if the  price -is
        (,I                       higher than the face amount. The‘ investa; initiaily r&or& the: bond’% its f&e ‘amount
            -,ji :.               and records the discount or the premium inavaluation allowance ‘account. Thu$‘ihe’,
         ,,       .I      ;       car@ng amount of the bond equals its faie ‘amxnt minus or plus the discount or the
                                  premium. The discount .or the premium is amortized over the life of the bond; so.that _.;
                                  ‘the bond,would be redeemed at its face amount at its,maturity.                                      r
                                                            ‘.                 _‘)
THE INTEREST               METHOD”

                                    AUnderthe interest method of amortization. an amount of interest equal to the
                                 carrying amount of the,.investment times the,,,,cffective interest rate, is calculated for
                                .each,ac,counting pqiod. ,_This cal6ulated,.interest is the effective interest of the
                               * investment ,(refe,rred to as effective yield in some lite,rature). The amount of
                                 effective interest is compayl with the. stated rnterest of the, investment. (The stated
                                 interest is the interest that is &able to .the investor according to the stated interest
                                 rate.) T,he difference between the effective interest and the, stated interest is the
                                 amount by which the discount or the premium should be amortized (i.e., reduced) for
                                 the accounting period.

        .,lo?he interest method of amortization is described in several FASB statements
                                                                                ...)I”.”      and APB
                                                                                     .,.I-,._.~..,    *I Opinions.
                                                                                                   ,,.._             ...I..,For
                                                                                                         ,,,_ .,.A.,?..GV_   ,,. _
example, see paragraph 18, FASB Statement No. 91. Accounring for Nonrefundable Fees dnd Costs Associuted
with Originating o~‘;4cqrri& Lams and Initial Direct Coszi: ofLcoses, and paragraph 16 of APB Opinion NO.
12, Omnibus Opinion.

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                                                        February 28, 1997
 SF’FAS NO.. 1


                               In the fmt.example, which shows the amortization of a discount, Treasury bonds             i
                          with the face amount of $100,000 were purchased, by a federal entity on the bonds’
                          issuum date, Jarwry 1.1992. The bonds' stated interest kte is 7 percent, and interest
                          is payablk at the mid of each year. The’ bonds will mature in 5 yea-, on December
                          31, 19%. The oost of $e investments is~S96.007. with a discount of 33,993, which
                          reflects ‘in effective interest rate of 8 percent.”      >

                          In Table 1 below, the annual discount amortization is in column 4, which equals

                                 TABLE    1: DISCOUNT     AMORTIZATION

                                                                                                                   - -j

                             In the second example, which is the amortization of a premium, Treasury bonds
                         with the face amount of S-100.000 w&e purchased by & federal entity on the bonds’
                         issuance date.‘Januay 1. 1992. The b&k’ stated intenstmte is 7 percent, and interest
                         is payable ‘at the end of each year. The bonds will mature in 5 years, on December
                         31, 1996: The cost of the inv&m&t        is S104.212, with a premium of 54,212, which
                         reflects an effectiie interest rate of 6 percent.

                             In Table 2 below, the annual premium amortization is in column 4, which equals
                         column 2 minus colulm 3.

         “The examples are adapted .from Glenn A. Welsch and Charles T. Zlatkovich, latermediate
Accou&g,     8th ed. (Boston: Richard D. I*n, Inc., 1989). p. 656.

                                            Volume I, Version 1.0
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                                                     SPAS   NO. 1

                TABLE 2: PlZEMIfJ’M AMORTIZATION


      I Ll                 yoiulne I. viersion 1.0
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         Volume I, Version 1.0
    .’     Febmmy 28.1997

I                 STATEMENT     OF FEDEIUL  l?INANCm
                     GCCOIJNTING   ,STANDARDS NO. .v 2
    / 0c_,’                ,’
    ,                  Accounting           for Direct Loans and Loan Guatiantebs
                 STATUS.                                                     .
                 Issued-.                       August23, 1993
                                                  .                                    ,’
                 Efktive    Date:               for f%cai yearsendingSeptember.
                                                                             30, 1994and,thereafter.

                 Volume I ‘,References:         SOFAS NO. ,?, Accounting    fot~,Inventory   and fWat@   fropef?y
                                                (seeforeclosedproperty)                                         :

                 Volume II References:          Direct Loans (D40). LoathGuarantees(L60), ForeclosedProperty
                                                (F40)            :    i,          *;.   ,’


                 Affects:                       No other statements.
                 Affected by:                   No other statements.

             1   SUMMARY
        LJ              The Statementprovidesaccountingstandardsfor federaldirect loansand loan
                 guarantees.The standardsrequirethat direct loansobligatedand loan guaranteescommitted
                 after September30, 1991,be accountedfor on a presentvalue basis.The useof the present
                 value accountingmethodis consistentwith the intentof the FederalCredit Reform Act of,

                           The standardscontainthe following essentialrequirements:
                           - Direct loans‘disbursedand outstandingare recognizedas assetsat the’present
                           value of their estimatednetcashinflows. The differencebetweenthe outstanding
                           principal of the loansand the presentvalueof their net cashinflow%:: is re,cognixedas a
                           subsidycost allowance.
                           - For guaranteed loans outstanding,the presentvalueof estimatednet cash              T
                           outflows of the loan guaranteesis recognizedas a liability. Disclosureis madeof the
                           face value of guaranteedloansoutstandingand the amountguaranteed.
                           - For direct or guaranteedloansdisbursedduring a fiscal year, a subsidy expenseis
                           recognized.The amountof the subsidyexpenseequalsthe presentvalueof estimated
                           cashoutflows over the life of the loansminus the presentvalueof%stimatedc&h ,’

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                                                                  233      ,+

            -- The bubsidycost allowancefor direct loank.snd,@ liability for loan guarantees
            are reestimated ee year, taking into accountall factors that may have affected the..*
            estimat$ c+shflows. Any adjustmentresulting from the reestimatesis recognizedas a                                                                                  .p           i
           subsidyexpense(or a ,reductionin subsidyexpense).                                                                                                                     ._j
           - When direct loansor loan guaranteesare modified, the cost of modification is
           recognizedat an amountequalto the decreasein the presentvalue of the dir&t loans
           or the increasein the presentvalue of the loan guarsnteeliabilities measuredat the
           time of modifkation.                                . .’
           - ,Upon foreclosyn of dire or guaranteedloans,the acquired-propertyis
           recognizedasan assetat the presentvalue of its estimatedfuture net cashinflows.

        Th6’standardsp&nit but do not require restating-prekreditrdbrm direct 10~ and
 loan guar+nteesat presentvalue.         ”             :

                                                   TABLE Ofi CONTENTS

                                                         Paragraphs in
Contents:                                       Original Proxiounciments:                                                                                          Page:
INTRODUCTION             ....................                 4-19 ........................................                                                             235
THE ACCOUNTING STANDARDS ........                              21         ..........                ; .......................                                 : ....   239
  Post-1991 Direct Loans .......                  ........     22         ........................................                                                     239     c’.*-‘   ’
  Post-1991 LoanGuarantees ... :. .. .;. :. 23                            ............................................                                                 239      -
  Subsidy Costs of Post-1991 Direct Loam
    and Loan Guaraatecs ..                                 24-29               ...........................                       .................                       239
  Subsidy, Amortization and Reestimation
                                     ............          3032’          ::                                        .........              .............                 240
  Criteria forDefault Cost Estimates .....                 33-36          .....        .:. s::::::::.                  ..............                                    240
  Revenues and Expenses .....                  : ......    37-38          ................................                                                 : : : : : : : 241
  Pm-1992 Direct Loans and
   Loan G-tees          .................                  39io           .......................................                                                      241
  Modification   of Dirwt Loans
   andLoanGuarantees            .............              4136           ..........................                                      .............                241
  Foreclosure of Post-1991 Direct Loans
   and Guaranteed Loans ............                       574            ............................                                         ...........             245
  Write=offofDirectLoans             .............            61          .......................................                                                      245
APPENDIX A:                                                      .
  B&is of the Board’s Conclusions .......                62-128           ............................                                         ...........             246
 ‘Technical Explanations aa&Ihtratiom                 ...............................................                                                                  259

Paragra@ts13 and 20 omitted

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                                                           February 28, 1997                                                                                                            2
                                                                                                              SFFAS   NO. 2

          INTRbJCTION’                                                                                                     .
( .0\
            ,i.;                  4.        The. federal government, in discharging its responsibility to promote the
                                  netion’s gend welfare. ‘makes DlRECY LOANS’ and guarantees loans to segments of
                                  the population not adequately served by nonfederal fiaancielinstitutiona. Examples of
                                  federal CREDIT pRoGRAMS include fanners’ home loans. small business loans,
                                  vetetans’ morigege loens, and student kkts.‘For those unable tc afford credit at #te.
                                  market rate, federal credit programs provide subsidies in the form of direct loans
                                  off&ccl at ‘in’Wer&t mte ,lower than .the market ‘rate. For those to whom nonfederal
                                  fmancial institutions would be &ctant to grant credit because of the high.ri&
                   /.::1,     . ” involved, federal-cr&Iit’pro~        guaranteethe ~paymentof4hese nonfedekl loaar.
                                  ,b#&f&      tj&‘w$t$of&f;&$.       : ‘): ‘Yi               ‘,                                 9
                                                                            ,.      ‘_
                                  5.        Because federal credit programs provide interest subsidies and sustain losses
                       .’         cawedby‘ ~&faults, tliecostWof these programs are significant. It is crucial. therefore,          I
                                  thmt the. actuul~and expectedcosts ‘of federal credit programs be fully recognized in
                                  both budget.8dfinanciel      r@xting;‘, :/ :          “. /
                                   ,,            .                                                                                  t

          THE FEDEIUL       CREDlT     REFORM          ACI’ OF i990                 .’
                                                    3, ._/          .                                                               [
                                     6.       ,,The primary intent of the Federal Credit Reform Act of 1990 is tc ensure that
                                     the SUBSIDY COSTS ot’diroct loans and.LOw GU ARANTEES are taken into
                                     account ,in making budgetary decisions. To achieve thkgeneral result, the Act has the
                                     following specific purposes: (a) ensure a timely and accurate measure and presentation
                                     in the President’s budget of the costs of direct loan and loan guarantee programs, (b)
                                     place the cost of credit programs on a budgetary basis equivalent to other .federal
                                     spending, (c) encourage the delivery of benefits in the form most appropriate tc the
                                     needs of baneficiaries. and (d) improve the ,allocation’of, resources among credit .
                                     programs and betwben credit and other spendeg programs.
                                     7.         Themajor provisions of the Act, whichis effective for fiscal year 1992 and
                                     thereafter; are to:                                    ‘,

                                          - hquire that, for ench4iscd year in which the direct loans ‘or the loan
                                     guarantees are to ba obligat&committed,.or    disbursed, the President’s budget reflect
                                     the long&m cost to the government of the subsidies associated with the direct loans
                                     apd loan guarantees. The subsidy cost estimate for the Resident’s budget is tc be
                                     beed on the PRESENT VALUE of specified cash flows discounted, at the average rate
                                     of rturketable Treaswy securities of similar maturity.
                                               ,’   Y,,
                                          - Require that, before direct ioans are obligated or’loan guarantees are
                                     committed, annual appropriations generally be enacted to cover these costs. (However,
                                     mhndrtory programs &vi pemanent indefinite appropriations.)

                  -‘Tetms included in Appendix C: Glosssty are printed in CAPITAL LETTERS when they appear for
          tk fist time. (NO%: See conaoiidated Glossary - Appetidix E.)      ”

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                                                             Febtuaty 28. 1997

                              - Provide for borrowing authority from Treasury    to cover the non-subsidy
                         portion of direct loans.

                             - Establish budgetary and financing control for each credit program, through the
                        ‘use of three types of accounts: the PROGRAM ACCOUNT (budgetary), the
                                                                                                                    .f 7
                         FBWNCINCl ACCOUNT (non-budgetary), and the LIQUIDATINCl ACCOUNT

                         8.       Acwunting information on credit programs provides the basis for evaluating
                         pmgmzn perfomsnce by cotnparing.actual rcoounting data +th estimated budget dam.
                         Budget analysts l nddeoirion-makers c,an usq rccot@iirg information to compk
                         actual cash flows with projected cash flows and rctual.ogsts of direct loans and loan
                         gusmntees with their estimated costs.

                         9.        For credit program mansgen, information on estimated default losses and
                         related lirbilities, when ‘recognized in a timely manner. cirn be an important tool rn
                         evaluating~credit program performance. The information can help determine a credit         .
                         program’s ovemll financial condition and identify its financing needs.

                         10.      Furthermore, cost and performance infonn+on on loans and loan, guamntmea
                        maintdined by COHORT and RISK CATEGORY can .hi&ht                those groups that M
                        not .expccted to meet budget estimates bccause’of increased.risk. Based on such
                        informsti6n; program managers can take timely dction to reduce costs, control nrtr
                        where possible, and improve credit program pcrformance~

                        11.       The Federal Credit Refotm Act of 1990 requires that effective October I.
                        199 1, the cost of direct loans and loan guarantees be estimated at present value for the
                        budget. The objectives of using the present value measurement in fedeml credit rcforcn
                        are to measure. recognize, and control subsidy costs of direct loans and loan

                        12.      For direct loans, the effect of using the present value measurement is to
                        estimate the extent of the disbursed amounts that would be recovered, and the extent
                        of the disbursed amounts that is a subsidy cost. The portion that can be recovered is
                        the present value of projected net cash inflows discounted at the Treasury mtc of
                        similar maturity. This portion is not considered a cost to the government because it is
                        expected to be returned to the government in future amounts. The remaining portion
                        of the cash disbursement represents a cost to&c government, resulting either from
                        lending at a mte lower than the Trehsuty inter&t mte, or’ tim’defauh    losses, or both.”

                        13.      Under credit reform. the subsidy portion of direct loans is financed by
                        appropriations, and the unsubsidized portion of the loans, which equals the present

         2Congressiomtl Budget Office, “Credit Reform: Compamble Budget Costs for Cash and Credit” (Dco.
1989). p.33.

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                                              Februaqt. 28. 1997
              I                                                                         ,,                 sFFAs~.Z
         ,.             ./’ I
                  .,,           (, v&e ofthe g&&me&        collections~~fidin the borrowers; is, financed with funds
                                   b&&Wed fkoxn Treastiiy: The subsidy o&of loana muatbe :EEESTIlvlATED and
                                   updated muaily.                           i .. ’ ? , :1    ,,                             t-
                                                                                           ,’ -::..‘.
                                  14.      The present value measurement basis is also applied to loan guarantees.
                                 Before credit reform, as in the case of direct loans, loan guarantees were measured for
                                 the budget on a cash basis. Thus, loan guarantees could appear to be virtnaliy cost
                                 free, since cash payments by the government wsic ,001 required unless and until the
      .+i.                       guaranteed loans defaulted at a future date. ,Under.credit reform, the future cash
                                 outflows required by LOAN GUARANTEE COhMDMENTS                   must be projectid and
                                 discounted at an appropriate Treasury interest rate. The present value of the cash
      .,>’’                      outflows is the cost of the loan guarantee+ Before loan guarantees are committed,
       .                         annual appropriations generally, must be enacted to cover the cost of the loan


        ruId REPORTING

                                   l$.      The Board believes that present value measuretnent shouldbe adopted for
                                  financial, accounting, and reporting on .direct IO&IS and loan guarantees that hhve been
                                , or will be obligated or committed after September 30, 1991. Since the Act requires
                                  that the costs of these POST-1 99 1 DIRECT LOANS AND LOAN GUARANTEES be
                                  estimated at present value for budget ptuposis, fman&ti reports on actual results
                                  me&ed at present value can be used as feedback to compare with budget estimates.
                                  Such comparisons can be used as a basis to improve futura estimates and

                                  16.       The Board recognizes that effective use of the present value accounting
                                  method depends on accurate projectioni of future cash flows over the life of direct or
                                  guaranteed loans. The efforts to. make accurate projections should begin with
                                  establishing and using reliable records of historical credit performance data, and
                                  should take into consideration current and forecasted economic conditions.
                                                         ‘.                _. .‘,.
                                  17.       The Board recognizes the value of having financial accounting support the
                                  budget. it endorses the logic underlying credit reform, and it recommends that
                                  accounting standards for credit be consistent with budgeting under credit reform. The
                                  Board is aware that as more experience is gained, some modifications may be made in
                                  budgetary requirements. It is the intention of the Board that so long as the
                                  modifications are made on a credit reform basis and do not materially affect the basic
                                  rihognition and measurement principles embodied in the accounting standards.
                                  accounting practices for direct loans and loan guarantees should change as needed in
                                  order to be consistent with the budget.
                                   18.      The Board considered the expected costs and.efforts that would be required in
                                  restating PEE-1992 DIRECT LOANS AND LOAN GUARANTEES at present value.
                                  Based on this consideration, the standards permit but do not require restating those
                                  loans and loan guarantees on a present value basis.

                                  19.      The standards~em proposed in an Exposure Draft issued in September 1992.
                                  Comments were received from 36, organiiations and individuals. t%ai comments were
                                  also presented at a meeting by representatives of federal agencies with major &edit
                                  programs: The Board considered all the cotnrnents received and incorporated changes,

                                                      Vohnne I. ‘V&on 1.0
                                                        Febnury 28, 1997
    as appropriate. Issues raised by those who responded to the Exposure Draft and the
    Board’s conclusions ae presented k Appendix A, “Basis of the Board’s Conclusions.”
    [Paragraph 20 omjtted.]                                                              : ? 1



                                                                                            # --
                       volume I, Yenion 1.0                                              /,
                         Febiuary 28, 199;                                               i))

                                                                                                                 SFFAS NO. 2

THE ACCOUNTING                         STANDARPS’                .;                  ,,

EXPLANATION              .,                         ’ ,_ ,                   ._    ,,
                          21:       These &I&&I      ioi{em’ the &@ion           and measuremint of direct. loans, the              ’
                          liability associated with loai’guaranties, a& the c&t of direct loans and 10m
                          8Frantees. The, s@n$ards apply. to direct. loans and loan guarantees on a group basis,
                          such as b: cohort or a r&k &kegoj ofloans a&i loan 8uamMees. Present, value
                          accou&ng does not apply to direct loans or loan 8tiamntees on an individual basis,
                          except for a direct loan or joan guarantee : +at constitutes a cohort or a risk category.
  ,                 ,( 7.                                j. ‘r     1 .‘.
                                               i. .      b: )/ ‘~, :: I‘ y.;, ,,      .(

                  I            : 22.          Dincl;iosns,.disbur34d and outstanding are recognized as assep at the present
           _’ ,, ‘.           .’; V&E $f       Wir &&+d        net cb&‘i&W$       ?he diherence between the outstanding
          _<S’.                   M&pal        o~,th~:lo~$s ayi ttje prr,$ni’,valw of their net cash inflows is recognized as a
                                  subsidy     cost allowance.                 /                I.

Post-1991 Lo&&&ees,                        ;                       :
  ‘.             :                ‘Y’..,,
                                   23.      For guaranteed loans~&&ndin@.’ the present G&e of estimated nit cash
                                   outflows of the loan guarantees is r&co&cd as a liability. Disclosure is made of the
              _I          ‘r:j_,, facf ,value of guaranteed loans outstanding
                                                                   ,’         and the amount guaranteed.

S&idy   Cor!s bf Port-199! Dhect~Loani‘and”Ldan                       Guimntk
                                      24.       For d&t or ,g~mtit+d loans diibursed d?+I8 a’fiscal year, a subsidy
                                      Lx&&e ii ‘&co&&d. ‘$e amtilint @f the, subjidy expense equals the present value of
                                      estirpaied..cash’outflows ptie; the life of the, loans minus the present value of estimated
                                      &a+ inflows, discounted ai the.inteiest mte df marketable Treasq securities with a
                                      si@ilaiii@ri~      i&i, iipplicablb to ‘& p&M durine tihich, the loans are disbursed
                                      (her&after referrid .m’is the bpplicabl&‘Treasuj i&erest rate).

                                  25.       For the fiscal year dulin8 which new direct or 8uaranteed loans are disbursed,
                                  the components of the subsidy expense of those new direct loans ad loan 8uamnteCs
                               ‘, are reeo&ed      separately among interest subsidy costs, default costs, fees and other
                                  coll&tions, a$ other stibsidy do&.

                                      26.        The i&rest tibsidy cost of dir&t loans is the excess of the amount of the
                                       loans disbursed oLer ,the present v&e of thl inteiest an+ ,principal payments required
                                      6 the loan contracts, discounted at the .applicable Treasury rate. The interest subsidy
                                      ,cost of loan guamntees is the present value of estimated interest supplement payments.
                                                                              .I ._
                                      27.       The defailt cost of direct 1Sansor loan 8uarantees results frbm any

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                                                             February 28, -1997

                           anticipated deviation, other than prepayments, by the borrowers from the paymenu
                           schedule in the loan contracts. The deviations include delinquencies and omissions in
                           interest and principal payments. The default cost is measured at the present value of
                           the projected payment delinquencies and omissions minus net recoveries. Projected n?t        I
                           recoveries include the amounts that would be collected from the borrowers at a later         ,.‘? ;
..                         date or the proceeds from the sale of acquired assets minus the costs of foreclosing,
                           managing, and selling those assets.

                           28.      The present value of fees and other collections is rccognixed as a deduction
                           .from subsidy co+.

                           29.       Other subsidy costs consist of cash’ flows that are not included in calculating
                           the interest or default subsidy costs, or in fees and other collections. They include the
                           effect of prepayments within contract terms.

 Subsidy Atytization     and Reestimatioa

                            30.       The subsidy cost allow’anoe, for,dircct loans is amortized by the INTEREST
                            METHOD u&g the intcrW rate that wasoriginally used’to calculate the present value
                            of the direct loans when the direct loans were disburs&d:The amortized amount is
                            recognized as an increase or decrease in i&rest income.

                            31.       Interest is accrued and compounded on the liability of loan guarantees at the
                            interest rate that was originally used to calculate the present value of the loan
                            guarantee liabilities when the guaranteed loans were disbursed. The accrued interest is
                            rccognixcd as interest expenses

                            32.       The subsidy cost allowance for direct loans and,‘ihe liability for loan
                            guamntees arc reestimated each year as of the date of the financial statements. Since
                            the allowan& or the liabilityrepresents the pmsent value of,lae net cash outflows of
                            the underlying direct loans or loan guarantees, the reestimation takes into account all
                            factors that may have affected the estimate of each component of the cash flows,
                            including prepayments+ defaults, delinquincies. and recoveries. Any increase or
                            decrease in the subsidy cost allowance or the loan guamntec liability resulting from
                            the reestimates is recognized as a subsidy expense (or a reduction in subsidy expense).
                            &porting ‘the subsidy cost allowance of direct loans (or the liability of loan
                            guaran@cs) and nestimates by component is not mquircd)

 Criteria   for Default Cost Estim.tm

                            33.      The criteria for &fault cost estimates provided in this and the foUowing
                            paragraphs apply to both initial estimates and subsequent reestimates. Default costs arc
                            estimated and reestimated for each program on the basis of separate doho+ and risk
                            categories. The reestimates take into account the differences in past cash flay
                            between the projected and realized amounts and changes in other factors that canbe
                            used to predict the future cash flows of each risk category.
                                                                                  . :
                            34.      In estimating default costs, the following risk factors arc considered: (1) loan
                            performance experience; (2) current and forecasted, i+national,     national, or regioaal
                            economic conditions that may affect the performance of the loans; (3) f-Gal         and

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                              othei   relevant characteristics of borrowem;     (4) the value of dollateral to loan balance;
                              (5) changes in recoverable value of collateral; and (6) newly developed eventi that
                                    al&affect     the loans’ perfotmance. Improvements_ in methods to reestimate defaults.
  . . sue,                             ‘.,,.1,                                            .’
                              3s.       ‘Each dndit program shoulduse a systematic methodology, such as en
                              eo&tome& model,’ to ‘project default Costs of each risk category. If individual
                              &ounij &h sigeiifioant amounts ‘cairy a high weight in risk exposure, an analysis of
                             the, individual accounts is warranted in inaking the default cost estimate for that
                             ‘ca,*goty .t.,*,,
                                        .         . 7’: >..
            “.I                                                            <     .“‘.
             .-                 i4. 1’:,,~‘A&al hi&ioal’~experienSe’of ‘the pCrformanee of a-risk oategoy is a
                                p$Gty fabtor ‘upon ,w+ich an~estina~~n of default costis based. To document actual
                                experience, a data btisi sh&ilcl be matntiiirted-to, pi&id& historical infotmation on
            .*                  actual payment+ prepayments,            lateI_payments, defaults, recoveries. and amounts written
                                                            :, ‘.‘,.            ,,s_      ,/
                                tiff.           ,, -I,       ,ii .’     ,, : ,’
                            ,,.,,                 ‘,’                                                          :    ‘.
may           =d gx&&             “’ ““,, ,,,‘,       ‘; ‘.            :         li                   ,,
                 I.               : ,. .“’                                                          ,.
                                37:        Interest accrued on direct i&w,includiiig~amottized interest, is recognixed as
                                interest income. Interest accrued on the liability of loan guarantees is recognized as
                                interest expense. Interest due from Treasury on uninvested funds is recognixed as
                                interest income. Interest ‘accrued on debt to Treasury is ‘recognized as interest expensa
                               38. .,’ costs for administering-credit activities,-such as salaries, legal fees, and o!T-
                              ‘co&$ that are i&&d.      for credit policy..evaluation. loan and loan.guarantee
           ‘,‘I’               origination. closing, servicing, monitoring, maintaining accounting and computer
                               systems, and other credit administrative purposes, are recognized as administrattn
                               expense. Administrative expenses are not included in calculating the subsidy costs of
                               direct loans and loan guarantees.
Pee-1992 >Did Loansand hn                Gumantem
                                                                                      ,,      .’
                              39.      The losses and liabilities of direct loansobligated and loan guarantees
                              committed before October 1. 1992, are recognized when it is more likely than not that
                              the direct loans will not be totally, collected or that the loan guarantees will require a
                        ’     future cash outflow to pay default claims. The allowance of the uncollectible amounts
                              and the liability of loan guarantees should be reestimated each year as ,of the date of
                              the f~cial~statements.    In estimating losses and liabilities,,the risk facton discussed
                              in the previous section ‘should be considered. Disclosure is made of the face value of, ,%
                              guaranteed loans outstanding and the amount .gmininteed.                            ,‘.   .
                              40.       Restatement of pm-1992 direct loans and loan &arantees on a present value
                              basis is permitted but not required.

    ._       of Direct Loam
                                and       Lo--        Gummteea.
                                                 ..     :..                                ,I,,                               .
                               41.       The term “modification” means a federal government action, including new
                               legislation or administrative action, that directly or indirectly alters the estimated

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  242                                                                                                       .

                            subsidy cost snd the present vslue of outstending direct loans, or the liability of loan

                           42.       Direct &d&ati&        are actions that change the subsidy cost by altering the      \9   1
                           terms of existing contm& or by selling loan assets. Existing contracts may be altered
                           through such means rs forbeaknco. forgiveness, rcductioas in interest rites. extensions        .
                           of maturity, and prepsyments without .penalty. Stih actions are modiflortions unless
                           they are considered reestimates, or workouts as defmed below. or are permitted under
                           the telBls of existing contracts.,
                           43.        Idiroot modifications an actions thst change ilk’ subsidy cost by. logisldion
                           that rltcn,.theway in which.an outstat$ing portfolio of direct loans or loan gusmntees
                           is administered. Example: .includ+ r,.now method of debt collection prescribed by law
                           or a atqtutory rust+tion on debt collection. 1
                           44.        Tbo term “mbdifltition”   does not i&de    subsidy oost reestimqtos, the routine
                           administrative workouts of troubled loans, and actions thst & .pennitted within the
                           oxistiq contract terms; Workouts are actions taken to maxirr&e icpryments of
                           existing direct loans or minimize clrims u&r existing loan 8uaqntees. The expected
                           effects of wor+tts      on cash flows are included in the original’ ebtiaiite of subsidy
                           costsandsubsequentreestimates.                 ,

                           45.       With respect to a direct or indirect modification of pm-1992 or post-1991
                           direct loans, the cost.,of modification is the excess of the PEE-MODIFICATION
                           VALUE’ of the loans over their POST-lkDlFICATION             VALUE” The amount of the
                           mod&at@       cost is reco8nixod as (Lmod&cation expense when the loinr are

                          46.       When post-1991 direct loans ‘UC modified. their existing BOOK VALUE is
                          changed to an amount equal to the present value of the loans’ not cash inflows
                          projected under the modified terms from the time of modification to the loans’
                          maturity and discounted at the ORIGINAL DISCOUNT RATE (the rate that is
                          originally used to calculate the present value of the direct lonns. whoa the direct loans
                          worn disbursed).            ,,

         %-he term “pm-modifioation,v&e”       is the present value of the not cash inflows of direot loans
estimated rt the time of modification under pm-modification terms and discotintad at the interest rate l ppliaablo
to the time when the modification occurs on marketable Treasury securities that have a.comparable maturity to
the qhing      mrturity of the direct loans under pm-modification terms (simply stated, thepre-modikation
telma at the Qurmllt rate)

          ‘The term “post-modiflcrtion value” is the present value of the not cash inBows of direct loans
estimated rt the time of modifkation under post-modification terms and discounti at the interest rate applicable
to the time when the modification occurs on marketable Treasury securities that have a oompuablo ~turity to
the remsiniq maturity of the direct loans under post-modifloation terms (simply stated, the post-modifloation
terms rt the current mto).

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                         4.7. : When b-1992 $irect lo& &e d&oily m&i@d, they are transferred to a
                         finuroing acco~i and. .t@rbodk &~lu&,is ,bl&ged to +n +o,uat equal to the&
                         posttmodifiWion~,~~~.      Any tibsequent x&iifi&ti&is       treated as a modification of
                         post-1991 loans. WI&a pre-1992 d&et, loans a= indirectly modified, they are kept in
                         a liquidating aocount. Their bd debt allowance is r+ssessed and adjusted to reflect
                       ” amounts that would not be,oo!lecte+ dy.to the mo@ification.
                                      .; ,,‘__.
                         48.      -Theqhqnge
                                    “’          in book valus of 6oth prs-‘lr)?i and post-1991 dimct loans
                         resulting tjom a, diyw! qr ii&& .mq@atiob ai@ tlf& ‘Otiyt of modification will
                         normally>   din)&dt+ to @e: u;d Of d@&; $&+o@ ra?S or fhe use of different
                         qeuummeng, mqhods.Apy. ,@‘f~@.,.~w~a                .,qe hi@~ ,$ +k value and the cost       ”
                         of mo&floatioa is recogaiz~b & ‘; e;i& &‘i&. For p&1991’ direct loans, the
                         MODIFICATION ADJUSTMENT TRANSFER’: paid or received to offset the gain or
                         baa is recognized as a finrnoiag source ,(Ora redytion, in f-ing         sour@
                                                                    :“;.. . _I

                                                 .’        9; .   , ,.&,
                      ::-. ‘3;. c,:\” J&&&t        & i&&i      o~~~@&&&*&             of *I992   of p&.l?91
                            10~1 gwrai&,      the 008i ‘oimohatki        ii’ t& C&3
                                                                                0f the POST-MODIFICATION,
                          LIABILITY‘ of the loan guarantees over their PRE-MODIFFCATION LIABDLITY.’
                          The modification cost is recognixed is modification expense When the: loan guaraatetia
                          am modified.                      .

                          so.      The existing book value of & .l~a&l& of modified post-1991 loan guati,tees
                          is changed to an am&t eq& to the @se& value ~$ne~‘~caahoutflows projected
                          under the modified terms from the time of ticidifi~~tiion‘to the loans’ maturity, and
                          di+ount+ at Ed ,origi@ diyo+t .yte ($e ra& that is orig$ally used to calculate the
                          pres+at vahie of w liabiliiy .w@ &i guaranteed loans wee disbursed).

                          51.       When pm-1992 lo+ g&nteei       are direotly mod&$ they are transferred to
                          a, frnaocing rcoount and thy’ &@ting book value, of the liability of the modified loan
                          g+rantees is, ohanied to an q&mt equal to th&r pb+&dification
                                                                                      :.         liability. Any’
          ‘OMB insauctions provide that if the decrease in &ok v&e exceeds fhe cost of modification. the
reporting entity receives from the Treasury an amount of modification adju&ent transfer equal to the excess;
ark that: if the cost of modificationexcoedythe decmane ,in book value, the reporting entity pys to the TreaUy
an amount of modification adjustment transfer to offset the exo&s. (Sci OME Circular A-l 1.)

          crhc term “post-moditicati& liability’ is the present value of the net oath outflows of the loan
-tees        estimated at the time of modification under the pqst-mod$ication @ms, and diseoypd at e
interest rate rpplieable to the .time ww the mod&&on        occurs on marketable Treasury seounues that have a
coalparable matuiv, to t&: r&i          maturity of thi 8uua&ed loaris under port-modificatiob terms (simfily
stata& the poat-modifiwtion teim at the eurreat rite).

          ‘The tcnrP~n@ification        liability’
                                           - -.-. %.is _,___
                                                       the present
                                                           .._     yalue of the net cash outflows of loan -tees           .
estitwtacl at the time if’ modif&t&n under the pm- modifi0atio~‘fiint’-~~‘~~~untad             at lhe-intemst rate
applioable to the time when the modification occurs on marketable Treasury secutities that have a oompamble.
maturity to the vining      maturity of the guaranteed loans u+r ..;pre-modification terms (simply stated, the pre-
modification term at the cumnt mte.)

                                                 Vohtme I, V&ion 1.0
                                                   Februuy 28.1997

                                subsequent modification is treated as a modification of post-1991 loan guorontets.
                                When pm-1992 dim&t loanguairmtees are indirectly modified; they are kept in a
                               liquidating account. The liability of those 1oan:guamntees is reassessed and adjusted to
                               reflect any change in the liability resulting from the modification.
                                52.       ?he &up      in the ‘;maunt of liability of both pm-1992 and port-l 991 loan
                                guarantees resulting from a direct orindirect modifiortionand the cost of modifiortion
    9‘ ‘,,                      will norrnalIy differ, due to the use of different discount rates or the use of different
                     -I         measurement     met&ds~ .Any difference ktween the change in liability and the cost of
                                modifIcatiott is, recognized as a gain or loss. AForpost:1991 :loan guarantees, the
                                mqdiIIcation.rdju+ent      transfer’ paid or received to offset the gain or loss is
                                recog&d as I financing jouroe (or a reduction in finanoing source).

                               f.   Sfis     OF I-0-Q

                               53.       The sale. of post-l 991 and pm-1 992 direct loans is a direct modification. The
                              ,oost of modification is determined on the bnsis of ,the pre-modification value of the
                               loatis sold. If the pm-modifioation value of the loans sold exceeds the net proceeds
                               from the, mle, the excess ‘is the cost of modification. which is recognized as
                              modification      :

                              54.     ‘For a loan sale with RECOURSE, potential losses under the recourse or          ’
                              guarantee obligations are estimated,.and the present value of the estimated losses from
                              the recourse is iecognixed as subsidy expense when the sale’is made and as a loan
                              guarantee liability.

                              55.      The book value loss (or gain) ‘on a. sale of .direct loans equals the existing
                              book value of the loans sold minus the net proceeds from the sale. Since the book
                              value loss (or gain) qnd the cost of modification an calculated on different bases,,they
                              will norm&ly differ. Any difference between the book value loss (or gain) and the
                              cost of niodiftcation is redognized as a gain or loss.’ For sales of post-l 991 direct
                              lo&. the modification adjustment trbnsfer” paid or received ‘to offset the gain or loss
                              is recognized as a financing source (or a reduction in financing source).
                                                                                                 i,               ,-
                              56.          Disclosure is made in notes to fmncial      statements to explainthe   nature of

                                                     (, ,I

         “OMB in&ctions       provide that if the increase in liability exceeds the cost of modification, the
repotting entity receives from the ‘f&my       an amount of modification adjustment transfer equaf to the excess;
and that if the cost of modification exceeds the increase in .liability, the reporting entity pays to the Treanty an
amount of modification adjustment transfer to offset the excess. (See OME Circular A-l 1.)

          sIf there is a book value ,pin,      the gain to be recognized e&ls        the book value gain plus the cost of     ..
                                                   ,...                      .“.^,

             “See footnote No. 5 for an explanation of “modification       adjustment transfer.g

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                                                                                                                         slqw    NO. 2
                                                                ,.             _.
                                                                     ,,.            -’
                                            the modification of direct l&s or loan guarantees, the discount ‘rate used in
                                            calculating. the modification expense, and the basis for recognizing a gain or loss
                                           related to the modification.

    Foreebaare       of Post-1991 Direct Loui;, and Guaranteed- hna                               ,.,

                      I                     57.          When property is transferred from borrowers to a federal credit program,
                     ‘S                     through FORECLOSURE or other means, in partial or full settlement of peal-1991
                                            &mct loma or as a compensation for losses that the govermnent sustained under
                     ..a111                 pcrrl-1991, kyr gtyan@ea. the foreclosed property is recognized as an asset at the
                                           ‘pmmnt:v&te ofits e’&tttated,ftiturenet cash i&Iowa        discounted at the original
                                                                                                ~.,      : ._
                      .,                    ev-tc.,l.., .*.,         i _ _ :; .,, (,.,,I’  ,,,;.    ,. ,,;,,

              !                             59      At a foreclosure of guaranteed loans, a federal ‘guarantor may acquire the
         .                                  lo& mvolved~~The acq@ed lokts’hm ,mc&gntied at the present value of their
                                           .e&tated :net c&h itklo& tim iii&g the loans or from ‘collecting payments from
                                            the bokwers,   discounted ‘at the:original discount rate.
                   . ?;j                    60.      When &s&s are acquired in full or partial settlement of post-1991 direct
                    .‘.                     loans or g&anteed loans, the present value of the government’s claim against the             _
                                            botkwers is r&ced’by’,the amount settled
                                                                                  .,. as a result of the foreclosure.                        I

                                   ,‘.,                                                     .,.
    Wdteoff        of:Di&          Lo&a            ;’   ,, ‘”

                                            .)l61:”       Wertpoat- 1991 direct loans are u&ten ‘off; the ‘unpaid principal of the loans
                    ’ ,,                        is removed from the gross amount’of loans receivableCon&rently,           the same amount
                     /   .’                   ‘is charged ‘to,,the allowance for,subsidy costs. Prior to the WRITE&OFF, the
                                          ‘. ” un&llectible.,ktoutits     should have been $11~ provided for in the subsidy cost             ,
                    .:.                        ‘allo&atke ‘through
                                                             ).       the  subsidy cost estimate or reestinkes. Therefore, the write-off
                                                would:: l$v$  no effect  on’ e~peitse~.       ’                                              I


                                                                       Voliiine ‘I, Version 1.O
                                                                         February 28. 1997
tiFFAS NO. 2


                                   This appendix discusses the substantive comments that the Board received
                          from respondents to the Exposure’Draft, Accounting for Direct Loans and Loan
                          Guarantees. issued in September.1992. The Appendix explains the Boa&
                          conclusions on’issues raised by the respondents.

                          62.       Several respondents were opposed to ,using present value accounting.for
                          direct loans and loan guarantees. They pointed out that although the Federal Credit
                          Refotrn Act of’ 1990 requires the use of present value to measure the subsidy costs of
                          direct loans l ttd loan guarantees for the budget,‘the law does not require using present
          ,,.   ”         value for facial   repotting. They believed that since there are no legal requirements,
                          the adoption of present value accounting should ,be based on cost-benefit.‘+

                          63.       These respondents emphesixed the bomplexity and cost of implementing and
                          maintaining present value ac&nting. Because of the need to separately account for
                          the direct loans or loan guamntees’obligated or committed by each credit program in a
                          fiscal year by cohort, as years go by, the number of’cohorts would multiply. An
                          agency witlra number of, loan and loan guarantee programs estimated that within 3
                          years, there would be more than 200 cohorts, one for each year and each program.
                          Since most of its loans are long&m, maturing in 30 or mom years, the number of
                          cohorts would be staggering.

                          ‘64.      The respondents who were opposed to present value accounting doubted
                          whether there would be any sign&ant improvement in financial information on loans           1,
                          and loan guarantees reported on a present value basis compared with infotmation
                          traditionally repotted on a nominal value basis. They contended that both present
                          value accounting and nominal value accounting rely on historical experience and
                          management judgment to evaluate risk as the primary variable in determining a default
                          allowance. They further argued, that since present value calculations involve cash flow
                          estimates over. future years, information based on the estimates is not necessarily more
                          reliable than information reported under the nominal value l cCounting method.
                          65.       A number of respondents expressed support of the Board’s proposal to use
                          present value accounting for direct loans and loan guamntees. They believed that it is
                          a positive step to bring budgeting and financial reporting together. They also believed
                          that implementation of the proposed standards would present useful information for
                          monitciring programs with direct loena and loan guarantees.
                          66.       In proposing present value accounting, the Board’s primaty considerations
                          were to carry out the intent of the Fe&ml Credit Reform Act of 1990 and to make
                          finanoial reporting compatible with the budget. (See Exposure Draft, Vol. 1. par. 15.)
                          The Board believes that one of the objectives of financial reporting is to enable the
                          reader to determine the status of budgewy resources, and whether those resources

                                              Volume I, Version 1.0
                                                Februuy 28.1997
                      were acquired and used in acbordkncc with the enacted budejettt

                I 67.. ,, ,,The~~Fcder,al,        ~r+it,~Refotm +ct of. 1999 requires using present value for the
                   budget. l’he,Boird~c$k~ ttot,,b~&e~ ihat tlus reqt@ment ,should be ignored for
                   f’iil         .r\eporti@..,,since bttdgetsry m$kes ‘for’ d&t loan ‘and loan g-tee                         ...
                  subst~es. ars provtdid ,o,n a *sent value basts, ‘f&&al                   repotting on the acquisition,
                  us,e,,.ar$ +>p: of the ‘~aot+b: $+d ,a ,?a thy Frn6 basis: My by using the same
                  bssis,can fecial             infopnatjon
                                                       .,I   bk~used
                                                             ;,     ,,‘1to comparc:~liek&l....,. results with the budget.
 <’,                   A,~.,
                  $8.:’        ,Inde$d, a~~~~o~,~,~,,~~rrrmtibn would result if,$t&nt value wcr~ noi used
                  ms orn ditk~.
                       &J$               1,~ ‘$by&riihe.,@$w!$           tldi be budgeted
 ,1..,1                          & illustrrtcd             fdl16&iri L&J&&               .. ‘,;&.a
                                                                                                 /:, present value basis.
  /                      /, ,. .’         ,:. : .;,,(, :     ‘,..;c ,                  ( :, c..:*
                                                                                                ;.. ,:;
                   69.         Suppose a group of S-year term loans in the aggregate amouttt of S 100,000
                   were disbursed by a ,federal credit program at the end of fiscal year 1992. The loans
                   require paying .an annual inten$ of;5 percent and replying, the principal in fiscal year
               ‘, J9~7. Ik:iv?r ++-ed;thr!‘:.*e:      lpten~i;~ou$, ,)c collcc,tg ,a~“! ,yfyr. but only SSO,OOO 4
                  ‘iif thk pri&+d *OttId ~,,G$d: WlGt :,th*.’+is *ttir& ‘brig            tlte ye& he low
                  ,wem disbursed. thi aylrage mtekt mtt of Tr&sury securities of the same mhrity
                   was.9 penat&                  _..,           .,       ,,;, _.           ‘,“,‘*.,” ., ,jl,
                  ,70.        Based on the ‘casli’flow @rojection,shov in Table 1 below, at-the end of tI@ ,‘:
                   1992 fiscal year;, the present value .of the direct loans was S71,44O’and the loans’ .. $1
                   subsidy cost *as 528,560. It’is assumed in this example; that asre’qui@ by credit’         ,’
                  refotsn,.. the subsidy cost (3;28960) was funded with :s~~prop.ristions,-&l ‘the’ remaining
                  amount ($71,440) was financed -with borrowing from_’ Treasury st 9 I&em.’ 1                 /.
                                                                              ,I. ,          .,1
 :p;y                                I, :,&B&g.       _.                                       ..
                 ‘.       I’HE PRESENT VALUE OF DiREa    LO;jNg                                 ,’

                 1993                                                                                      s5.000
                 1994           $,’                                                                         ,s,ooo ”
                 1995                                                        ‘.‘                             5,ooo ‘I’
                 19%            .                                                                           ‘5.000
                 1997                                                                                     s85*000
          Resent value at 99%                                                                             $71,400’       -

                 71.         If the nominal value accounting method were used in financial reporting, the
                 StO,OOOof the principal that was estimated io be uncollectible would have been
                 reported as a bad debt expense. The estimated uncollectible amount of S20,OOOwould
                 have been recognixed as the cost of-the losrkin financial statements. In reality,

“FASAB    Exposuri Draft, Objectives      of Federal   Financial   RepOrting,      Vol. 1, par. 13.

                                        Volume I; Version lrO
                                         February 28, 1997

                       however, the agency spent S&560     of budgetary resources to fund the cost of the

                       .i2.       Also, if the nominal vaiue accounting method were used, the loans as assets
                       would have been re+orted at SgO,O& at the end of .the 1992 fiscal year, which equals
                       the SlOO,OOOptinc~pal of the loans minus an allowance of S20.000 for the
                       uncollectible amount. On the other hand, debt to Treasury would have been reported
                       at .S7l,,440, which was the amount, actually botrowed to finance the loans. The
                       f&cial      information would have shown an exiekr of the assets over the liability by
                       S&560. ln realtty, however. even if the, default estimate was correct, the entire
                       collection of interest ,&id ptino&al would be used to pay interest and principal to
                       Treasury. The &&it program. in fact would have no exoess in assets. The following is
                       a comparison of the loans reported on a present value basis and on a nominal value

               ,’         ‘I,
                                           iABLE 2:
                    RbPOIiTiNC    ON THE DHiEk.     LOANS A;T PR&@NT            VALUE
                                     ON S&l+&h&d        30.1992                 -’
                                                . . .I’

                                            TABLE 3:
                    R&PORTING     ON THE DIR&m   LOANS AT NOMINAL                VALUE
                                      ON SEPTEMBER 30.1992

                        73.     A similar distortion would result in reporting loan guarantees. The distortion
                        would be caused by reporting loan guarantee liabilities on a nominal value basis,
                        whereas the budgetary resources received to fmancc the liabilities are measured at a

      “Tables are provided only for illustration. They do not represent a repotiing format.

                                           Volume I, Version 1.0
                                            February 28. 1997
                                                                                            SFFAS PICA2           .

*3\-----         74.      ,Jn,evahrating’efforts and’costs of implementing present veiue l ecounting for

\                post-!991 direct loans and roan guarantees. one should keep in mind that the federal
                 direct loan and l&n guarantee progiains have modified or ,will have to modify their
                 accountmg~ systems in order to implement the budgeting requirements of the Fe&ml
                 Credit Reform Act of 1990. They will have to maintain data by cohort and risk
                 category, compute interest on borrovving from Treasury and on uninvested funds, and
                 make subsidy estirn& and ree&imates. The accounting standards provided in this
                 stat&ient do not require more than the budget process requires in these respects, and
                 tld th& Gould &t result in a bubstantiai &notmt of idditional effort or cost.

                 75.      Some respondents indicated,that it would be burdensome if present value                 .
                 accounting were to be implemented on a loan-by-lorn~(or tins&ion)         basis. The’
                 Board does:not propose that ,the accounting standards be implemented on a
                 h&bj+$ir      bdsfs. The, +@lards “should ii~~ly:to~a cohort (or risk category) of direct
                 loans or loan
                          ,. guarantees m the aggregate. : ‘. ); ’        :‘.
                 76.       In addition to making financial n&rung consonant with the budget, the              *
                 Board & ‘beheves‘thiit the stander& proposed in the Exposure Draft will produce
                 better fi+r$rl; information for the followi‘ng reasons:
                 77.       First, the proposed standards would require measuring and recognizing the
                 subsidy costs of direct loans and loatrguarantees at their inception rather than at a
           .e.   later d&. The current rcoounting~ practice does not require this. In the absence of this
                 reqtiir@nt. the host of direct loans is not recognized when the loans are disbursed,
.,         .*    and the ii&it@ ‘to pay claims under lo& guamntees is not usually recognized when
                 guaranmed’loans’ .” are disbut-sed.
     /                                                           ”
     d           78.      Second, the proposed standards would require a comprehensive evaluation of
                 future cash flows over ‘the life of direct lb+ land guaranteed loans, including
                 payments of interest, principal. fees, prepayments, defaults, delinquencies, and     I
                 recoveries. The current acbounting prectiee‘typically provides an allowance, for the
                 portion’& the’principal that would not be collected. It does not take into account the’
                 impact of other cash flow elements.

                 ‘79.‘      Thitd, the Proposed ‘staii~rds would ‘require discounting the net cash flows at
                  the govknhenth borrowing rate on tiketable Treasury securities. Discounting is a
                  basic feature of &nt      value accounting thit measures<and recognizes the interest
                  subsidy cost of direct loans and loan’ guarantees; and the tune value of all cash flows.
                  The time value of such cash flows is not accounted for under the nominal value
                  accounting method, and the interest ‘subsidy cost is not accounted for when the loans
                  ore disbursed.
                          .,.L                            ,)
                 80.       Rinally. the proposed standards would require hn annual systematic review of
                 the projected cash flows. The projections would be revisedind updated to reflect
                 newly developed events, changes in economic conditions, ,Fd better undersuuuling of
                 the factors that cause def@s. The subsidy, costs would be reestimated accordingly.
                 The reestimation requirement ttssures that credit programs~maintain an up-to-date data
                 bbi b$’ ‘cohort ‘ tid %ktimgoe     of actual collectioiis,’ defaults; and amounts written
                 off on federal loans a&loan guarantees. Such a complete data base was not available
                 prior to credit reform.

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                                       February 28, 1997

                   81.       In summary, the recognition of cost at inception, the oomprehensive
                   evaluation of all future cash flows. and the discounting of futureoash flows to present
                   vaJw  l e complementary elements at the core of present value accounting. When
                   t&en together, thfy place an economic value on the cost the federal govenuncnt
                   incurs in making direct loans and loan guarantees. Likewise, they place an economic
                   value rather than a nominal value on lq assets and loan guarantee liabilities.

                            Baaed.on the view that financial l ccounting’should be compatible with the
                   &et,aud     based on the,other l dvaata@s of us& the present value accounting, the
                   Beard has con&tded that the present value rctiutttittg method should be used in tlw
                   Neountin# stand+ for post-1991 ditect loans and loan @larantees.

SUBSIDY COST ~OlifPONENT            ‘,

                   83.      The Exposure ,hft proposed that when director #uuanteed loans am
                   disbufse~ their subsidy expense be recognized separately &no- mtereit subsidy
                   costs, de@dt costs, fees-(as ‘a deduction from the costs), and other subsidy costs.
                   84.      ‘IJte Exposure Draft also proposed the following requirement: The intereat
                   subsidy l lloyee    shall he antort@ us& the ‘intereat method. Compound intereM
                   shall‘bel camml&d on the allowances for default losses, fees, and other dost

                   as. The Exponrrc ‘hall posed a question: Should the subsidy cost component%
                   if material, be recognited separately in fmtial  sporting? Some respqndenu sped
                   that the subsidy cost components should k ripara&ly recognized. They believed that
                   separate recognition would provide the level of detail needed to uadentmd the
                   program better and improve their component estimates for. budget form@atioP

                   86.      Some respondents were opposed 10 report@ subsidy costs by component on
                   the grounds that (l),only the aggregate l motmt of subsidy costs is needed for budget
                   execution purposes. (2) infotr+ion;on   cost components may not be used by
                   management, and (3) .the cost of complex record-keeping and calculations outweigh
                   the benefit.

                   87.      Afteqoonridering the benefits and efforts required in accounting for subsidy
                   cost components, the Board es concluded that wheb direct or guaranteed loans are
                   disbursed, the subsidy expense of the dire+ loans or loan guarantees should be
                   recognized in sewate oomponen~. The Board believes that by reporting the subsidy
                   expense oompownts      of dir& or pranteed loans disbursed duting the reporting year,
                   the cost components of newly diAnaed direct loans and loan guarantees can be
                   compared with those of prior years. The cost oompownt information would be
                   valuable for maki& credit policy deoisiom; monitor& portfolio quel@and.               I.,.
                   @fOViIl~ Cdit     pCXfOIfWWC.   Information on intemst subsidies and fees would help
                   in ad&g decisions on se-        interest rates and fee levels. Information on default
                   costs would help in evaluating credit performance.

                    88.      In &lcti~    the pewat.  value, of the .subsidy costs for the budget, agencies
                    must fint develop data on cash flow components. OMB requires agencies to use the
                    OhdB credit ~bsidy  model, whioh t&es these cash flows as inputs and automatica&
                    calculates the components of the subsidy cost. Since the information on subsidy mod

                                         v01uate I, ver8ioll 1.0
                                           Febtuary 28, 1997

                                                             I        :             _.                                     SFFAS Iuo. 2

                                       &t&&ts      of ;(li dii& loans and loan gua&aes is available. reporting the
                                       iB6olTBdi~p ~0ll@,liii~
                                                           ; :raquim,bigdificaBt additioyaa~effblta.
                                                               ;2::. ,,:,.           ‘J,, ,,I.
                                        ‘89., : ~,Rowe& ‘& B@ r&l&s that it.wouldrcquirc consi&rable efforts to
                       ‘z$:--”          maintain ra~o&’ for tbi &&nt’value’%f %ost compo~ints      for each existing cohort of
                                        lb& and l& guarant&%r&xe~or           ah~~uIa~ ‘iiuercst on each component each
                                        year. adjust each component each year for h&in&s,      and, if applicable, adjust each
                                        component for. modifications yhen thqoccur. After considering the efforts that would
               9                        be required and the hefib    $d &odd be dtived,,ttie Board deoidednot to ,.‘. ‘, ‘-.
               :,.:,                    mwmpz~d then~requ@ment .tq ypxtize or acbumulatc interast on each subsidy cost
                                        cpw&BL       w&O& ~&&~t&&~3”0,Biims                   mry.~mo&a & $&$idy
                                    ,‘, l lJya@+c .o@$ .bj~,~‘&e&$bii~              tlb interest ‘method. They would, not

                                                        .I       ,,              ..L..‘,   ,,( ; ,“,,    ,, ;::,.y
                                           99. : By eliminating the. r@rei&it            to aW#tix~~~airdac~umulate interest on each
                             ‘.            componint
                                                    ,$,I .of th~~~~atmsidy
                                                                         :ost,  allowance,  WBoard maliaes that, infomation would
                                           iId be rhilable F baf&,,qhSB+S~h th6 $i+iiBt valueS Ofthe Cot+XiCBt% However,
                                     ,,] d&, ‘&d~ s@ * available’c t&k charigrs ~iir’4he’total amount of a cohort’s rubsidy
                                  .’ alIo,~~~,~aff&i              by a&al~ r&stimatts. Th6 primary factor that oauq changes in
                                           th&s&sidy allow&’         Gould, &,~lcfaulti r&siimdtes. :Furthermore, the Board believes
                                          ,&t it:+.&!,: &~;&@&a&                    && &h..~~&t~~og        ,b&&       a’&b b& for
                                           a@ ,ooll~ti&~, default& ahliriq&acies; and recoveries. For purposes of monitoring
                                           proramgerforman~,        ,and 6stimsting, future losses, the actual default and collection         I
                                           +a b+e.is ‘mom tmportant than tracking-chadges’.in the:allowance for the present                   I
                                       .,,,valuc of’subsidy oo%by’ &nnpori&~ The actital&fault ,and colleotion data base is
                :.’               “.. ‘ai& ,_ he&h,,          f&&h&th~       bnd r~bti~~~thg subsidy .oopb.
                                                                            ‘,,,‘,,.!.                                                        I
               .,..                                                                          ,,. ,‘.>                                         I
         .XCCOUNTING’FOR            FEES.
                                              :     ,                                             ,” .
                                        91:      : In fhe Exposure Draft, the Board piopbsed that the present value of estimated
                                       ‘fee receipts b& rccogni&l as a deduction from the subsidy expense. The Board posed
                                        a ,quastioh: How sho,uld fees be ,ricogn&d on an entity!s financial reports? Should
                                        they bc,rccog&ad as a dad&ion of subsidy expc&. or as a revenut?
                                                          ..;      ‘_, ‘.L,’ .
                                        92. -. Many &pond&r b agreed with the.pro@sal that the present value of
                                        e&rated f& oolIeotionb bl’rGo@ized as a deduction of subsidy expcnsa. Some ‘:’ ”
                                        mSpOB&Bb       COBtCBdCdthat fees should k~recognized’as a revenue rather than as an
                                        .expcnse component. They statad that .offsetting revalues against expenses would BOt
                                        prdvide Ckkh’eBUS/CXfbSBSb        infOtmatiOB COn&ning the OpCfatillg rcsuib Of a C&it
                                        pr&pan~ !hha &fthk respo~dantg also said that to the extent some of the fees ara
               .’                        uaad ,ti *fray r&-live          Oosta. they should not offset subsidy expcnscs because           i
                                         iha ~edaral’Credit Reform A& of 1990 excludes administrative costs from subsidy

                                       93.       Tha Board is not persuaded by the’argume~ts that fees should be reported as
                                       8 rivenue; ihc’ aubsidy expcnsa of ‘&mot loans and loan guarantees is the focal point
                                       of oradit reform, and it is measured as the preseat.valuc of the net cash flows .of the
                                       direct loans and loan ‘guaratitees; Since the estiuiau~I fees ‘ata a component of the cash
                                       flows, the Board believes that the present value ,of f&s should be reported as a
                                       component of the subsidy expense. Since the Board has concluded that all of tbc

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i.LS                                                                        Febnrary 28,1997

                      subsidy expense components, inch+tg the present value of fees. are to be reported
                      separately, reporting the present value of fees as,an expense component would not
                      reduce information on the collection of fees. Furthettnore.~the administrative expenses             /-
                      that.are excluded from subsidy costsare often covered by appropriations, rather than                : -I
                                                                                                                               /           :
                      paid by fee collectionj. Thus, it is,not necessary to allocate a portion of the fee
                      ~~~ll&hx~~ to pny the administrative costs that are not a part of the subsidy costs.

                                     ,-                                   :

                       9i.        The.phrase pre-1992 d$ect loans and ldan guarantees refers to direct loana
                       obligated, and loan g~ratttees codped         b;ifere Octob& !, 199 1, the effective date Of
                       the Federal Credit Reform Act of 1990. In the Exposure Draft the Board did not
                       recomme& restating ,@e-i992 direct 1daCind 106 &a&es                  at present value. The
                       Board’s position wns &&the costs df re+&tg those dir& loans and loan gttamntees
                       would ,outweigh the benef$s.               ‘,                .1
                       95.        Most respondents whb bomtbented       on this. issue agreed with the Board’s
                       pOsition. They em&sized tl$ @e res@tement of ‘pn-1992 direct loans and loan
                       guarantees would be a complex process ant! would reqtiire substantial resources. They
                       pointed out that a major ,difftculty ‘is cat@ by tli6 lack of complete and accurate
                       historical data that a restatemeit needs to be based upon. Because of the lack of
                       accurate datai even if,&e agencies incutred it great deal of cost, the restated loans and
                       loan guarantees .oould not be accurately compared with ~st~1991 loans and loan
                       guarantee; on the.aame ba&.,‘The respandents +inted out that since the pre-1992
                       direct loans and loan guarantees we& obligated 6r committed in the past, restated
                       ittfotmation would be of limited usefulness to c&rent budget decisions. They also
                       pointed out that the amount of pre-1992 direct lbans and loan guarantees outstanding
                       would diminish over time as loans matured, &faulted, or were modified.                                          ‘r
                                                                                                                         hi2           ..’I
                       %.        In addition to considering the comments on the Exposure Draft, the Board
                       also considered the findings of a G;AO report presented to the Board.” The GAO
                       report suggested that by not requiring a restatement of pre-1992 direct loans and loan
                       @tamntees at present va@c. poor information would be perpetuated, which could affect
                       the ability to (1) forecast the future budgetary impact of pre-credit reform credit
                       activity, (2) minimize losses, and (3) judge the reasonable accuracy of subsidy
                       estimates for post-‘1991 credit. The GAO report recommended using simplified
                       methods, such as sampling, techniques, to restate pre-1992 direct loan: and loan
                       guaran~es at present value.

                       97.         However, there was I strong indication in the comments the Board received
                       and in the findings of the GAO report that agencies have been experiencing serious
                       difftcttlties ii~ implementing the credit reform requirements related to poet-1991 direot                   .
                       loans and loan guarantees. A restatement of pm-1992 direct loans and loan grunatcur,
                       even on a sampling basis, would require additional use of the agencies’ limited
                       accounting resources. The Board also agrees with the view that as the pre-1992 direct
                       and guaranteed loans ari approaching      their maturity and are paid off, liquidated, or
                       w&ten off, the difference between their present value and nominal value becomes less

         “GAO Report to the Chinnan, Senate Budget Committee, Fedeml Credit Pmgmn~: Agencies Had
&~OIU   Problruts Mcckng Credit Re/onn Accounting Requirements (GAO/AFh4D:93-17, Jan. 1993).

                                            Volume I, Version 1.0                                                      /
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                                                                                                  sFFAS NO. 2

                       si@ficant. Thus, the ,B,oard concludes that it is appropriay not to require restating     *
                       pm-1 992 direct loans and loan guarantees at, present value.
                      ._                     .
                       98.       The Depart&nt, of Veterans Affa&$ted         .m ita comments that it had
                       acootmted for pm-1992 loan guarantees on a present value’ basis. The Department Of
                       Education indicated ,m its comments that it planned to report pm-1992 loans on a
                       present value basis, Their .efforts to account for pre- 1992 loans and loan guarantees at
                       present value, qlthough.not at the same level of detatl as required by credit reform,
                       could very well res@tin improved information for f$edit management. Other agencies
       ,GY‘,I          may’ follow their examples. The, Board believes that. reporting those pn-1992 direct
        ‘? G.         -loans and loan ,guamnteea on a present value basis should be’ Iietmitted.’
                       99.       Although a restatement of me-1992 direct loans and loan guarantees at
        i ‘.           preaent,.value is not nqmmd,.the Board ~on@ea~,to believe, that it is of @n&mental
                ,.,    importance to estimate, and reco8nixe losses:ax#abifif’c”       fzr those dir& loans and
                       loan ,guarantees. .Loss,estimatjon,‘and reco@iuon, am necesmry to support federal
                      .:go&mnent ,I$&ial~ .plantjng and ,rnanagement:. .The, infotiation on both current and
                       potential liabilities related to federal credit programs alerts Congress and federal
                       offtcials ;lo. the longttetm ,costs and future financing needs.

                       l~oo., The recomme,nded standards would require that losses of pre- 1992 direct
                      loans and liabilities related to pm-1992 loan guarantees be recognized when it is more
                      likely thon not th+ the loans will not be totally collected or the loan guarantees will
                      require a future cash outflow to pay default claims. This is the same standard that the
                      Board recommended for the recognition of losses on receivables in FASAB Statement
        ,;            of Recommended Accounting Standards No. 1, Accounting for Selected Assets and
                      101.       The Board believes that each loan guarantee rjiogram should disclose the
                      aggregate amount of outstanding guaranteed loans. In addition, it should also disclose
                      its risk expsun,   which is the guaranteed portion of the total outstanding guaranteed


                      102.      A modification is a government pction that alters the estimated subsidy cost
                      of outstanding direct loans or loan guarantees. Both a government action and an
                      alteration in,iubsidy cost are neces&y conditions for a modification. A subsidy
                      reeatimate is not a modification.

                         103.     Direct modifi+ions change the subsidy coii by legislation or administrative
                        actions that alter the, tenns’of existing contracts or by selling loan assets. Existing
                        contracts may be altered by such means as forgiveness, forbearance, reductions in
                        interest rates, extensions of maturitv, ‘and prepayments without penalty. Such actions
                      ’ are modifications unless .they are considered workouts as explained below or are
                        permitted by the’existing contract terms.

                      104.      Indirect modificiittons change the subsidy cost by legislation that alters the
                      way in which an outstanding portfolio of direct loans or loan guarantees is
                      administered. Examples include a new method of debt collection prescribed by law or
                      a statutory restriction on debt collection. Such new legislation would produce a

                                           Volume 1, Version 1.0
                                             February 28, 1997

              one-tine effect on the subsidy cost of outstanding direct loans and loan guarantees
              only. After the enactment of the legislation. the, effects of the legislation are i14uded
              in the original subsidy cost estimates of newly obligated direct loans and newly
              committed loan guarantees. Thus, the legislation is not a modiflcatioa with respect to        :                1
                                                                                                            13 ,             ’
              direct loans obligaied,aad loan guarantees committed subsequent to its etta~tment.
               105:     Tit6 term “modification” does apt include the routine administrative work-~llt~
              of troubled loans or loans inimminent default Work-outsam actions undertaken to
              maximixe the repayments to the govemmeat under existing direct loans or to mini&e         ’
              chim’ payments that the government .would make under loan guarantees. The,expe~tcd                             .
      .       iffecti of work+ts on cash flows are ittchtded in the original estimate and .the
              reestimates of the subsidy cost. Therefore. a .workout effort is not a government l ctioa
              that alters the estimated subsidy cost of direct loans or loan guarantees.
               106:     The tena “modiflcatioa” also does not include actions that are permittad
              within ‘6 existing contract terms,, sttch!as prepayments without penalty permitted by
              existing loan cumraca. The.expected effects of such actions on cash fIows are
              inoludedin,,the original estimate and the ‘reestimatesof the.subsidy cost.
                            i                    _:               :      (,
              107.     tie&her the term “modification’ it& the. term “workout” includes ‘additional
              disbursements to borrowers that increase the amount of dir&t loans outstanding. These
              disbursements are considered to be new’ loans in *e, amount of the increment.

               108.      When direct loans aad loan gudrantees are modified, the subsidy cost of the
               modification must be caltiulated. The book value of the modified loans ad the
              liabilities of the modified loan guarantees must be restated: The Exposure Draft used
               two types of discount rates to calculate the present values of post-1991 direct loans
               and loan guarantees that are modified: CURRENT DISCOUNT RATES aad original
               discount rates.
                                                                                                           iil2         .f
              109.     The term “current discount rate’ refers to the interest rate applicable to the
              time when the modification odcurs on marketable Treasury securities that have a
              comparable maturity to the remaining maturity of the direct or guaranteed loans, under
              either pm-modification terms, or post-modification terms, whichever is appropriate.             .
              The cost of modification is measured as the excess of the present value of
              pre-modilicatioa net cash flows over the present value of post-modification cash
              flows. bothdiscounted at a cutrent diwount rate. This is consistent with the
              measurement method described in Oh@ instructions.

               110.    The term “original diwottnt rate” refers to the discount rate that is origin&y
              used to calculate the present value of the direct loans or the present value of loan .
              guemttee liabilities, when the direct or guaranteed loans were disbursed. The value of
              modified loans or the liability of modified loan guarantees equals the present value of
              modified cash flows discounted at the erigiriel di&ount rate. The original discount rate              *
              is used to detmnine the value of modified loans because tbis is the interest rate that
              the Treaswy charges on funds that it lends to the credit program to finance the loans.
              The original discount rate is also used to determine the liability of modified loan
              guarantees because this is the interest rate that the Treasury pays oa ftmds that it holds
              for the credit program  to pay future cleitns.
                                 -,             7,*x. )_
              111.    Because of using the two different rates, a difference will notxtally occur
              between the change in the book value of modified direct loans and the cost of the

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                                   Febnaary tg, 1997
                                                                                                                              SFFAS~Nd. 2
                                                                    d,                     ., .;
                                         modification. In the iase of.loan .pr.anteesi thera will ,notmally also be a difference
              _                          beiween the change in the liability ot modified loan guarante& and .the cost of
                                         modification;                            , .I ‘,’         .I ,’
(       3k-
                                        112.      The Exposure Draft used an lqxarpple. to illustrate the; difference.“, The
                                        example used the original discount,rqte of 6 pz~nt,~?~+cul#e                  the book value of a
                                        modified loan, end .it used the cutrent discountrate of 8 percent to calculate the cost
                                        of modihion.       -The oaloulati,ons resulted in a difference between the change in book
                  ,4‘                   v&w at&he cost of modification.- “.L,:,
                                             J..‘        :. ” (, ., :_ i I’ :.    .; .\:,
                                         ‘113. Old@ instructions require &&pa. am&tt ~~~~ t0 tjtc difference between the
                                        change in book -value and the cost of modification ‘e@herbe returned to, or received
                          .:*           hi&theXpasuty         : to $‘ftit tjy ,#@qt~~c,i. $g;,“cx+           transfemd to offset the
                                        difference: is r&red to. in .Q.&fB~~tru$$uts I as          ,the,
                                                                                              . ,.<.“r.: modjfi@on    adjustment transfer.
                                        This transferdoesnotconstitute         a part of theroost of$~~~f&ation and is not a budget
                                     I ‘o~~~,~~~coll~oti~n~:,~~;~,~,--- :, : ,+!,.I,, j’., . .,:,: .:,-j:,. ,,j:, ;;:


                                     .   management. They &$ended th&the~co,mpiexcs:rtyof the,~otn#nation. the effect of
                                         changmg ‘d$cotmtrates~,and the re?$iqg ‘di,fference between the change in book valu
                                         and the cost of modification would only detract from management’s ability to anahrr
                                         the results of modification:,                   ,’ ,:.’ .a:
                                                  .,                                       r
                                          115. ., The,.Boardjreelite;‘th?t’it     is undesirable to &i&late .the cost of modificauoa
                                         and, change in book value on different bases. Because’ tfiecoft of modification and the
                                         bo&k-value are calculated on different bases,:the modification expense recognized
                                         would, not equal the decrease in. the book value ‘of direct loans (or the increase in the
                                            //,,     of. loen guarantees) resulting from,, the ,modification.

                                         116.      However? it .is also undesirable to ,mcogmze a modification expense at a
                                         measuremept basis that differs from the budget and appropriation basis. The OMB
                                         instructions concerning the definition and the cost of modification have carried a great
                                         weight on the ,Board’s consideration of.@ subject. The OMB instructions require that
                                         the,cpst .of.mod$cation be~measured at,.thc ,cutrent rate. and appropriations approved
                                         for a, m+fic+ion     ,ti$ equal the cost of modification.. The Board believe; that
                                         financial reporting.  should ,mRect the modifioation~ cost recognized in ,the budget and                  .,<1
                                             .,    ..
                                         the modification appropriations received.
                                                                                _ .,
                                         117.     The Board also appreciates the rationale,.in CMB instructions. The Federal
                                         Credit Reform Act of ‘i990 requires that the calcu!auon of modification cost be based
                                         on the estimated present value of the direct ioans or loan guamntees,at the tune of
                                            .. ..      This
                                                         *. -.,-requirement
                                                                  ,* ._.., 1_.._./.has
                                                                                         ,. ,.(interpretedas
                                                                                                     .. .,I_.”” calculating
                                                                                                                   .I.      the present value of

                  “8ee Exposure Draft, Vol. 2. pars. 221 thro@                231, and Appendix 2: pages 139 through 143.

                                                                Voltime I, Version 1.0
                                                                  February 28. 1997

                  modifkation cost at the discount ‘rate applicable at the timi of ‘hodifkation. lk
                  Board also agrees with the substantive rationale for using the current rate. BY u+t
              .   the current rate, tht iakilation of the modification cost will reflect the economic Cost
                  of the modification at the time when the modification decision is made.

                   118.      The Board found that some of the opposition to the use of the cutrent rate for
                  modifications’arose because of a tuisunderstandin8 about the difference between
                  modifications and work-outs. Once the distinction was clarified between work-outs
                  (which are included, in the initial subsidy estimates and are quantified using the
                  or$inal rates) and modifications ~(Mich~require separate action as described, but are
                  less frequent in occurrence), t&h of the opposition to using ‘current rates for
                  modificatioM  ., diaap‘pirrcrhd. ”
                          ‘.          _; “L, -‘.      !.            ,
                    119.      In imtsidcrijhg :i &itio~ for the umasurement difference between the
                   niodiftcation cost and the book ,value of the loan (or the Joau guarantee liability), the
                   Board has considered as an rltertiative whether the current mte could also be used to
                   calculate the value of modified direct loans (or the liability of modified loan
                   8uaratttees) so that the chan8e in direct loan book value or loan”8uarantee liability
                   could ,equal ‘rhe’~ost of niodification. The Board ~has’decided against this, for the two
                   ieaaony explained t+W.’                .’
                    120.      Fii uttder credit reform, the ‘tm-subsidized portion- of direct loans. is
                   fvdby          fuuds borrow&d’:f rout Treasury, while the subsidy cost of the dkct loans
                   is finrnced by appropriations. Thus, the:catrying amount of direct loans at any point
                   should equal the b&n& .of.debt to Treasury. Proceeds froni collecting direct loan
                  prindipa! and intem’stivill be:tised~to repay debt to Treastuy. This exact match
                  between loan assets ihd liabilities’ (debt to Treasury) is a unique, feature that makes
                  credit reform loani and loan 8u;antees different from private sector lending.
                   121.       When a modification ocouir; the book value of the, direct. loans is affected.
                  An amount of modification appropriation, plus or minus the modification adjustment
                  transfer. would be used to reduce the debt’io Treasury. By doing so, the book value of
                  the modified loans -and the balance of the debt to Treasury would continue to be
                  equal. It is important to note that the interest rate on the debt to Treasury does not
                  change as a result of the modification; it remains the originrl rate. Thus, the debt
                  balance to Treasury in fact equals the present~valrrc of future payments to Treasury
                  discounted at the originrl mte. Since the debt to Treasury is based on the original rate,
                  that rate should also he used to cal&ate the book value of modified loans, so that the
                  book value of the loans and the balance of debt to Treasury would be kept equal.

                   122.     A parallel situation exists with loan guarantees. The financing account of
                  each loan 8uUmttee’prOgnm maintains a fund balance with the Treasury equal to the
                  liability of the loan guuurteer. The fund balance and the liability grow at the same
                  compound interest rate. The fund balarmewill~ accrue interest at the.,or@iuxl retc, ..,. , ,1.
                  applicable at the time the 8uaritnteed loans were disbursed. The interest rate will not
                  chqe because of a modification of the loan guarantees. Thus. only by measuring the
                  liability of the modified loan 8uarunees at the original rate could the liability be kept
                  equal to the fund balance.

                  123:      Se&d, even if the cutrent r&we&used       to calculate the book value of
                  modified loans. the difference between the chnge iu book value (or the chan8e in
                  liability balance) and the modification cost would not disappear. in measuring the

                                      v01tuM I, veraion 1.0
                                        February 28, 1997
                                                                                      SFFAS NO. 2
         change ik’book. value (or the change in liabili-ty balance), the, starting point is the
         p&odification       book value (or the pie-modifi~auon‘liability     balance), which is based
         on he o&d         discount rate. If the current iaie is’ used to dalculate the
         post-modification &ok value of modified direct loans, the change in book value
         would equal the difference between the pre-modification book value (based on the
         original rata) and the post-modification book value (based on the current rata).
          Similarly, if the cutrent rate is used to calculate the post-modification balance of
         modified loan guarantee liabilities, the change in liability balance would equal the
         .&ffermce between the pre-modification balance (based on the original rate) and the
         post-modifleation balance (based on the current rate).

         124.      The cost of modification. on the other hand, is calculated differently. The
         starting point of the calculation is not the existing pm-modification book value of the
         modified loans (or the existing pm-modification book value of the liability of the
         &difiap loan guarantees). For both direct. loans and loan guarantees, the calculation
         uses the present value of pm-modification net cash flows discounted at the currant
         discount rate as the starting’point. This, pre-modification value .differs frdm the
         existing, pm-modification book value because the latter is: based on the original     .
         discount rate. ‘The cost of modification equals the differeno’e between the present value
         of pre-modification net cash flows (discounted at the..current rate) and the present
         value of post-modification nat cash flows (also discounted at the current rate). Since
         the calculations take a different starting point, the cost of modification would not
         equal the change in book value.

         12s.     Because of the two reasons above, the Board believes that the best solution
         available is to measure the cost of modification at the current discount rate, and to ,
         calculate the carrying amount of modilied loans and loan guarantee liabilities at the
         original discount rate;

         126.      However, while it makes sense to detetmine the cost of modification based
         on the current discount rate, llnan&al reporting dannot discard the pre-modification
         balance of direct loans or loan guarantee liabilities that are carried in the accounting
         records. Because of the use of different discount rates, the change in book value will
         be different from the cost of modification. The Board believes that the effect of a
         modification on assets or liabilities should be reflected in the operating statement. The
         Board believes that in addition to recognizing the cost ofmodification as a
         modification expense, any difference between the change in book value and the
         modification expanse should be recognized as a gain or loss.,Thus, the net effect of
         the modification on the operating statement equals the decrease in loan assets or the
          r.        in the liability of loan guarantees resulting from the modification.

          127.      Based on this view, the Board has concluded that, with respect to a
          modification of direct loans. any difference between the change in the book value of
          the direct loans resulting from the modification and the cost of modification should be
          recognized as a gain or loss in the operating statement. Similarly, any difference
          between the change in the amount of liability of loan guarantees resulting from the
          modification and the cost of modification should be recognized as a gain or loss in the
          operating statement; The gain or loss is to be recognized in a category distinguished
          from the modification expense. The modification adjustment transfer paid or received
          to offset the gain or loss is to, be reported as a financing source or a reduction in
          ftnancing source.

 3                             Volume I, Version 1.0
                                 Febtuary 28, 1997
 128. ’ The Board further believes ‘bt rgenq y fmancid statements should include a
footnote to explain the ~loulrtion of the codt (of modificationa and nature of gain or   -
10~8on modifkatiOas.

                   Volume I, Venioa 1.0
                     February 28, 1997


    This .~p~dk     ~~~plrins ad ilhtmtes the wountiag standards for ,dir&t lo@s and loan guarantees. The
explanations and illustrations are Presented to show how the standardsmay be applied but are aot standards
themaelvea They also take into account OMB and Treasuty regulations on credit reform.

       -                Part   I:     Post-1991 Direct Loans
       -                Part   II:    pm-199zDirect Loans ,I
       -:               Part   III:   Post-199l~Loan Guarantees
       ‘-               pUr    IV:     prS-1992,L~     Gmmn&ejT                :     ”     ‘.                   .i...           ,I

                                                                                                            !           :

                                        ,..a,,                  I.   1)   v

  --                    the measurement and reco&iti$ of direct loans, subsidy ‘costs, and the liability of ki gukranteer;
       -                the re+iamtion’and the l mortixatioa of the subsidy cost allo&tee;
       am               the reestimation of loan guarantee liabilities and the rootitnulation of interest on the krbiliti&;
       -                the recognition of revenues and expenses;
       -                modifidations of direct loans and loan guarantees (including the sale of direct loans);
       -                the .yt+off    of ,direct loans; and,
       -                the fomlosure of assets upon default.

    khe A&ndix.d&    not illustrate ‘futancial statemet&, jotuna entries, or &counting prooedurh.                             Readers
should consult OMR, GAO, and Treasury for guidance.
PART I-POST-1991                                 DIRECT tCkNS

       Post-l 991 dir+ loans am direct.‘l&ns obligaied after Se@ember 30. 199 1, The accounting for post-l 99 1
dikt     loans is‘cxplaikd and illustrated in this part of the Appendix through an cirample ‘described b&w:
                   ‘.     ‘,
    At the end of fiscal ,year 1994. a fedcml &edit program disburses a number of direct loa? with a totil
&siprl. of SIO million. Those loans constitute a’ cohort for that year. The maturity tefm of that cohort is 5
years and the ‘Wed annual’ i&est”mie is ‘4 percent.

         AR of the amounts used in ihe text below arein thousands of dollars.                         ,,

    The loan contracts require an annual payment of S2.246 per year for 5 years;paid at the end of each year.
In Table 1 below, the required annual payments are shown in column (a).” The amounts in column (b) equal the
begianing lord balance of each psriod multiplied by the stated interest mte of 4 percent. The amounts in
column (c) are Principal repayme&, which equal the l mouttts in ~olutnn (a) minus the amounts in column (b).
The amounts in column (d) are ,the ending principal balance of each period, which equal the beginning balance
minus the principa! repayment,, of that ,period. shown in column (c).

        ‘Vhc atut@ payment is detived by dividing the present value factor of 4.45182 intoXhe- phipal   1..      of
S10.000. The pacat    vi&chm DUIbe’ forinii in any’ ordinary annuity’iable, @dWCwS the              present vile-   of
$1 paid over 5 periods discounted at 4 percent. Alternatively. knowing the loan pthipnl, the number of pay
back periods. and the interest mte, one can use computer softwark or a financial oalculator _ to find the required
payment per peiod.

                                                                              Volume 1. versicn 1.0
                                                                                February 28.1997

                                                    - TABLE 1:
                                               PAYMENT SCHEDULE
                                               (b thouunds of dollara)


 It is also assumed that

     - The average interest rate of Treasury marketable securities of a similar mat&y :for the period during
which the loans am disbursed is 6 percent.
    - Fees totahn8 SSOOare rccgived when the loans are disk-d,         The fees are used to ra&ce the need to
borrow from TrcaWy.                                                                  ,          _’

A   REPORTING          POST-1991 DIRECT LOANS AND THEIR               SUBSIDY COSTS              a
     The accounting standard for post-1991 direct Joarts requires, that direct loans disbursed and outstanding be
recognized as assets at the present value of their estimated net cash inflows. The difference between the
outstandin principal of the loans and the present value of their nei cash inflows is recognized as a subsidy cost
allowance,.“      I

     To implement the standard in the example, a cash flow projection and present value calculations are
prepared. ,Based upon the risk factors and other criteria for default cbst estimates that are’entunerated m ‘me
accountin standards, it is estimated that losses in cash flows due .to the defaults would e,quaI 30 percept of ,the
scheduled payments for fiscal year 1997 and each year thereafter. ” Table 2 below displays the cash flow
projections and present value calculations.        ;‘,

                                                                        .                                                                  .
                   .’                                                       \                                     .I,,...
           ‘%I this Appendix, the requirements of the accounting standards are summarized to address specific
situations. However, the standards are not quoted verbs&.      Readers should refer to the text of the’ standards
for their exact wording.                                                                                    ‘,

          “The smndard defms losses in cash flows -due to default as being due to defaults net of recoveries.
However, to simplify ooqtp@@ms, nqmies        are as+med to k Terd throughout P&I     &Id if of th&
Appendix. Refcrrnees to defrul$ throt@~out Parts I and II should be understood to mean defaults net of
recoveries for all caseswhere recoveries are expected The accountin standard for r+overies if illustrated in
Part III of this Appendix.

                                                Volume I. Version 1.0
                                                 February 28. 1997

                                                                                                                    SFFAS.NC?- 2.

                                                        kBLE 2:                         ,,.
                        P8OJECTED     CASti FLOWS DISCOUNTED D TO       TOTHEEND   OFFY19!?4
                                                                           THE END OF FYI994
                                                              of ‘dollars)
                                              (in thywndr Ids of‘dollars)

   1                       I         Fee          I      ”       P&I        I     Default
                                                                                                     I             Net Cash
                                                                                              : i
                                                                                                         smo                      -

                                                      52,246                                             2,246
                                                       2.246                                             2,2?6

   l The t&i    “P & I Paymenta” used’ in this table as well as other tables throughout this,,Append& denotes           .’
   scheduled principal and interest’ payments required (in loan’ contracts.
                                                            : ‘.           ,.                      -
       The present value of the’ loans’ estimated net cash inflows is S8.358.    The   direct .loans are ,mcogn&ed as,.
   assets at ‘that amount. Since the  loans’ outstanding principal is S lO.OOb, the,difference   between   the loans’

 ---J                                            I’
   outstanding principal and their present value is S1.642, which is recognized as the subsidy cost allotiance.

c       The.&ounting      standard for post-1991 direct loans nquins that for direct loans.dirbursed~duriig
   firil year, a subsidy crpcnw be ,recognixed... The’amount of the subsidy cxpcnae equals the present v8lue
   of estimated   cash outflows over the life of tbe 1kis”minur       the present value oi estimated cash inflowsI

   discounted   at the interest  rate of m@etabie%easury        rcuritiir    with a sikilar m&&y     term, applicable
   to tln,pcriod d,ur&g which the loons a,~ disbursed (hereinafter referred to as the applicable Tnnrury
   btemst      rtte).

       @he example, the present value of ,the loans’~a&outflows      is the disbursed amount of-S’10.000. The
   present value of the 1oans’~estimated net’cash inflows is S8.358. The difference between those two amounts is
   31.642, which is recognized as subsidy expense.

         7%~ accounting  standard    for post-1991 +ect   goons roquins that for the fiscal year during yhich new
   direct bans are disbursed,     the components   of the subsidy’expense  of those new direct loons be recog&ed
   separately   among interest subsidy Costa, default, costs, feer and other collections, and other subsidy costs.
                                                                      *,”                                                     .
        ilk intemst subsidy dost of direct loans is the excess of the amount of the loans disbursed ‘over the             present
   value of the interest and principal payments required by the loan‘contracts, discounted at the applicable              Treasury
   interest rate (6 percent in this example). In this example, the amount of the loans disbursed is SlO.000.               The
   present value of the scheduled interest and principal payments is S9.461. The difference between those                 two
   amounta is S539. which is recognized as the interest subsidy cost.

       The &fault cost of direct loans results from any anticipated deviation, other than prepayments, by the
   bomnvem ‘from the payment schedules in the loan contracts. The deviations include delinquencies and
   omiasiona in interest and principal payments. The default cost is measured at the present value of the projected

                                                      Volume I, Version 1.0
                                                        Febntary 28, 1997

payment delinquencies and omissions minus net recoveries. (See footnote 3.) In Uris examl*le, the present value
of the projected payment omissions minus net recoveries is $1.603, which is recognized as the default Cost.

    The present value of fee collectionsis   $500, which is recognized as a deduction from subsidy cosw

.   There are no other subsidy coats” in this example.

     The subskiy expense of the loans is the sum.of the above coat components, which is S 1,642, calculated as
follows:                                                                          .-
                 Intefostt: subsidy cost     s 539
                 Fee colleetio~~              WI
                 Loan &fault coat
                 Totil subsidy cost          &&&

     The loan disbursements are faced     by’three sources: subsidy payments,.bonowing from Treasury, and fy          .
collections. The subsidy cost of $1,642 is provided by appropriated fun&, and the present due ,of loana,,equai
to $8,358. is provided by fee collections and funds borrowed from Treasury at the.Tnasury interest rate of 6’.

     The fees are collected when the loans are disbursed. Because all cash flows, including fee collections. are
used to calculate the subsidy cost allowance. the amount of the fee collections is credited to the subsidy cost
allowance. The collected amount reduces the amount. that has to be borrowed from the Treasury. As a result,
the eubsidy cost allowance is $2.142, which is the sum of the interest subsidy cost of S539 and the ‘default
subsidy coat of $1,603. This is SSOOmore than the total subsidy ooat of $1,642. The debt to Treasury is
Sf.858. which is 5500 less than the present value of the loans of S8$58.

    Table 3 displays the asset and liability balances at the end of fiscal year 1994.
                                             ‘.                                                                           -.
                                                TABLEk                                                                    J
                          ASSETS AND LIABILITIES    AS OF T?iE END OF FY 1994
                                        (in thousands01 dollars)



        lenle ‘term “0th er subsidy costs” is explained in the standard for subsidy costs of post-1991 direct loans
and l&n guarantees.

                                                Volume I. version 1.0
                                                  February 28, 1997
                                                                                                     SFFAS NO. 2

     (1) SUBSXDY REESTIMATION                       .,        _.

    The accounting standard jar pork991 direct.loanr require8 that the mblidy mat •!lo~ma          for dimt
kur be rteMimattd each year aa of the date of the flnanci8l atatemcnta. Since the’aUoWn= repmcoti
the present value:of the net cash ouMorrr of the underlying direct loana, the reestjmation taker into
aeiountdl   fact&a that ‘h&y have affected the estimate: of each component of the. cash flows, including
prepaymo&      defaulta, dhnquenciei  and recoveria, .Ahy increar or, decrease h the mbridy co@.
ahan&      rcs&ii     from the msamak     ii recoeplikd as ‘a rubrldy eipeaw (or .a reduction h subsidy

    l’b& staaaard hrthr    &       tliai reporting the rubaidy tiat~allow~~     of direct. loins .md m~tht8ti
ti -mpqcat:t      fit w$nd        : .-.’                      :.                                   ,,_

     I&p&ix        A, ,thc gasis of the Boards Conclusions;~it is pointed out that the priory faCtOr that CaUS88‘ ’
changes in the subsidy cost allowance would be default reestimates. The aooo&&tg standard p&v&s a number
of risk factors ,and other default cost criteria to be considcrcd in makiig the default, cost +imaW   ,and ,,       ;

      In this illustration, it is originally cstimatcd that 30 percent of the’ loa phyinents would k lost due to
defaults for fiscal year 1997 and themafter; The first recstimati is made early in tiscal year 1995, ‘.Bccausc so
little ‘t&c. has pamcd’s&e t& subsidy was i&alJy estimated, the estimated cash flo\Gs ‘are tmcbingcd and the
rccstimctc is zero. (Th& &stration a&u&i that ‘the interest ratcs’at thetime of loan obligation and              ’
disburacmcnt arc the same, so no rccstimate &needed for the differcncc in interest rates.)             :

    ‘fl& second recrtimation i& ‘&for&d       tily in fiscal year 19%. in preparing financial statements for fiscal
year 1995. It recstirnhs the &idy        co&llowancc as of the end of fiscal year 1994. After evaluating all of
the risk factors, it is concluded that defaults would,occur in fiscal year 19%. instead of 1997. and that 60
percent. instead of 30 percent; of,the cash flows would be lost due to the defaults in fiscal year 1996 and
tbeqaftcr. Table 4 bclow‘disp&        the ‘@Sent values’ of the reestimated cash flows,discounted ,to the end of
frsorl year 1994:

                                           TABLE 4:
                               DISCOUNTED TO THE END OF FY 1994
                                              (in thousands   of dollara)

     The present value of the reestima!ed net cash inflows discounted .to the end qf fiscal yen! 1994 is 55.0%.
corripatid to the loans’ bock value of $7.858, a decrease of S2.!02. Thus. the sub+ cost allowance is
increased by ‘S2.802, from $2,142 to 84,944. The amount .of, &increase in the subsidy cost allowance Wucb
is the decrease in the present value of the loans), resulting, frbm the reestimak, is r&cog&cd as subsidy’
expense reestimates .
    A subsidy payment of 52.802, equal, to the subsidy expense resulting ,from the reestimate. is received undn
permanent indefinite authority. The amount is used to repay borrcwing from Tr&&y.’ Thus, the outstan&*
balance of the;debt to Treasury is reduced by $2.802 to SS,OS6.

     Furthermore, the direct loan program also receives a payment under permanent indcfinite’authority to cover
the interest accrued on the reestimate subsidy payment of S2.802 for the period from the end of fiscal year 1994
to the end of fiscal year 1995. The payment is $168. which equals St.802 times the applicable TreisG mterest
rate of 6 percent. This amount is recognized as interest income reestimates, and the money is used to pay the
interest on the St.802 borrowed from Treasury but repaid with the rcestimate subsidy.

     Table 5 displays the asset and liability balances as of the end of fiscal year 1994, adjusted for the reestimate
that ‘was calculated early in fiscal year 1996.

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                                                February 28, 1997
                                                                                                                    SFFAS NO. 2
                                    .‘,                    TAB&& k:                        j ;
                                  i ASSETS AND‘LtiBILlTIES       AS O@ T&      END-OF FY 1994:
*   ‘3
    ‘t--T.--                AkOUNTS ADJUSTED FOR IkEESTIMATE CALCULATED                IN EARLY FY 1996
                                                             (in ti&ands  91 dollars)

                     :I, .’ -, ,.    <.              . .                 ;‘. ^P
                                                                                ‘.   ‘.    “’                   ”
                               .    AMOBkATION
                                                           ”   :,. “‘,
                       w account@ stendord for post-1991 direct loeni xequires that thk subsidy cost llowank ~f&‘direct
               loans k l tiortihd by the inter&at      method, using the btereft rate that was priginally ised to calcul8tc the
               jrcsent.v&c       of the direct loans when the direct loens ,ncre disbq!%ed. The amortized amount is
                reco@zcd u an increuc oi decrease in interest incook
                                                                                                                        .‘, ‘,
                       The aubsjdy &t l liobwance is amktized as a whole, sot by components. Under the interegt method of
               amortizdtion,the ationization of each period equals the effective interest of the outstanding direct loani minus
               the nominal ,intirest. For any period for which interest is to be paid (a fiscal year in this example), the effecthe
                iatcrcst equdls the book value (which is also the present value) of the direct loa& at the beg-g       of the period
                times the .applicable Treasury rate. The nominal inteiesl equals the outstanding nominal balance of the loans at
                the beginning of the period times the interest rate stated in’the loan cbntra+.

                    In the example, the book value of the direct loans, as reestimated, is $5,056. The effectiveinterest for fiscal
               year 1995:is S303, which equals the book valpe of S5.056 times the applicable Treasury rate of 6 percent. The
               nominal interest’ for that year is $400. which bqu& the nominal principal of the direci loans S(~O,OOO)times the
               stat&d rate of 4 percent. The amortized amount is a negative amount of S97 for fiscal year 1995, which equals’
               the effective interest minus the nominal interest. The subsidy cost allowance is increased by $97, fkS4.944
               to $5.041. The amortized amount is recognized as a reduction in interest income. (Interest income for fiscal
               year 1995 is calculated in section C: Revenuei and Expenses.)” ”

                 + The same procedure of amotization is applied for each of the subsequent years so long as the direct loans
               are outstanding. ‘The,collection of interest and princigj phymentsmust be properly accounted for together with
               the amortization. so that’& asset and liability balances can be updiited.                                  ,

                    At ?he end of f&al year 1995, payments of St.246 are received from the borrowers as scheduled. Of this
               amount, S400 is interest payments, and the remaining amount of S 1,846 is principal repayments. Thus, the
               outstanding nominal balance of the loans is reduced by ,S1,846 to S8,154.

                       lg&nortization can alternatively he computed “asinterest expense other than reestimates S(4fi’) minus
               the sum of interest income from borrowers S(400). interest income from reestimates S( 168). and interest income

  ,,           on fund balance with Treasury S(0). These figures are derived in section C below.

‘i-is                                                          Vohime I, Version 1.0
                                                                 February 28, 1997
 SFFAS       NO. 2

      The: $2346 received from the borrowers was paid to TreasUy. Altbougb tbe debt to Treasury outstanding at
 the end of furl year 1994 was S7.858, the amount of St.802 has been paid off by the subsidy payment for the
 redmate.      This loft $5.095 of debt ,to Treasury.. The interest @at acorued on ,this remaining debt to Treasury is                           .~~ -
 $303; the interest that accrued on the amount of debt paid off by the subsidy reostimate is S168,‘but it is                                      7;      i
 covorcd by the interest on the reostimate. Therefore, of the $2,246 collected from the borrowon, $303 is
 intomst paid to Trusury. The retaining 51.943 is principl repayment to Treuuty. AfIer the principal
 ropmymont, iho outstanding debt to Treasut~~becotnes $3,113.

    Table 6 h&w displays the asset.and lirbility alances after the amortktion                               and the wlleotion   of interest
and principal payments at the endof fisoal year 1995.
                                                            TABLE 6:
                                        ASSETS AND LIABILlTIES   APTER AMORTIZATION
                                                             (lo tltoowds   of dollam)

C. REVENUES-AND                    EXPENSES                                                                                                      /’
                                                                                                                                                 biJ     3
     The wcountbg               standard for &M-l991           direct 10~s requim         that intemt       8ccrucd ,011direct loam,
hrclud&g       amortized         interest,   be recognized      u intorest home.         Inhert       kcrucd~on    debt to Treasury         ir
rceognked        8s    intcmt      crpenr

    in this     0XuttplO.       interest income for fiscal you 1995 is S471. +oh                  consists of the following items:

           Nominal interest                                  $400
           Amortizodintomt                                    (97)      .
           Interest reestim8tes                                168
           Total interest income                             s 471

    bcrost expotue on the debt to Tromtty for the fiscal year is also $471, .which oquttls the debt to Treasury
of $7.859 at the heginning of the year times 6 percent. It is financed with the following sources:
                                                                                                       ,. II ,.., “,,..                                  ./._,; ..j
        C.ollections tram botrowors        s 303
           Illtorost    on m&ttmod
            subsidy payments                                   164
           Total interest expense                            s471

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                                                                Fobruuy 28, 1997
                                                                      .,.                                              SFFAS’NO. 2

               Costa of rQliniste&g       credit activities; such u .saluios, legal fios, and offko costs, that are in-d    for
           credit policy evrluation,~.loan ori#i+ion,~closing.     s@oiogi mor&@,          ma&~*,      wg           end computer

                                                                                                 ,jl’      ”       ,I ‘.,’
           medlflwiloa crpoaso ubw the kens we mod&d.                                                          :
f -\          ,         *
h/g&          The recounting is implcmentod in the steps deFr$ed below.

               (1) CALCULATE            THE PRE-MOdili~ATI,ON         VALUE                ;

               The promodifiution    value is tbc present val,ue of the net orsb ,tiows of the d&ct 10~ est&qated rt the
           time of modification under .Pre-modification tetms and discounted at the current discount rate.

                h. uhd ,in ‘&is put and Put II of, this Appendix. the, ~current dhcount, rate is $e interest rate applicable at’
           the time of modifihidn    on marketable Treaquy securities with I similar maturi$ k. the remaining niaturity of
       ’   the ,&ect lonas tmder prekdificrtioa     m: or post-modification terms. whichever is apphpriate.sO             %

               ‘fho wsh flows of the loaas uader pm-modification terms during 1996-99 ‘8~ asFed to be tht same as the
           cash flows that were reestimated early in f-1 year 19% for these years ,and that are shown in Table 4. Those
           cult flows are used to calculate the loans’ prehxlification  value.. it is rsquned that the’ Tnrsuty rate for 8
           comphble maturity (4 years) and rpplie@ble to the -time of modification -is 4.5 percent. As Tabl’e 7 below
           shchvs. ihc @es&t value of the pre-tnodifhion      hsh flows dkounted at 4.5 percent is $3323.

                    *?lle   deftition    0 f tbe current discount rate is provided iq Appendix C, Glossuy. [See Appendix E of
           this Volume.]
/- \

LA                                                           volumes I, vehxl 1.o
                                                               Februuy 28, 1997

                                                     TABLE 7:
                                        PRE-MODIFICATION         VALUE’
                       (In thousands of foliari, calculated at the current discount rate)

                                 P&I PAYMENTS



    (2) CALCULATE       THE POST-MOD~ICATION              VALUE

   Thb lo&s p&t-modification value is the present valti df the lixms’ net cash ixifldws estimated at the the of
modification under post-modification terms and discounted at thehxrent discount mte (for a S-y&r maturity).

     The m$ifihation .forgiv& 70 percent of the ouhnding      principhl~amohs, and requires the remaining 30
percent, or $2.446, bc paid ‘back in,S’ jGF’(instead of 4 years) starting &ith year 19%. The stated intehst rhe
remains at 4 percent. As shown in’Table $ below, under the mbdified terms, the required annual principal and
interest payment is $549.

                          PAYMENT         SCHEDULE
                                                   TABLE 8:
                                                      DF THE MODIFIED        LOi$NS
                                                                                                                       \.. i
                                            (in thou&d;    of dollars)

 1998.                              549                     61           :       488                 1,036   .
 1999                              ,549                     41                   508                  528
 2000                               549                     21                   528                     0

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                                               February 28, 1997                                                       3     .P
                                                                               .,.                                                   SFFAS      I+    .2

                   It js’estjmated hat 20 percent of the ~,heduled.~as~~~~~,~s,,of~~e~modi~ed loans would ba lost due to
              &faults. ‘fh~ current d&o;unt rate for a ma&ty of S.yc3~ is.5 percent. As Table 9 shows, the Present va1*
              of the post-modification cash inflows
                                                 .-   discounted d 5 percent is S1.902.
                                                                 :._ ‘.‘I,      )‘,,,’           : ‘,  ”
                                                                   .tPBLk 9:       ; :
                                                      ‘POST-MODIFICkTION         VALUE           s
                                         (in   th~~~tli    of:dol&        c8&+@$8t           t&e cumn!     dircqunt   ,mte)
                                                                                           DEFAULT       LOSSES            NET CASH tionwQ
                                                                                                                                ,, ,,. ,._
              II .,,,                              1,                   CCAQ         I;.                              I

              I .M-                                I                     549         Ii                    (110)      I:                      439    ,,

                  PV AT 5%

                        (3) CAiCiJLATk         AND RECOGNIZE            THE Coti,          @P-MtiDI@TION
:                   The cost of modification is the excess of the pre-modification value over the po+-modification value SlDec                                          I
               the ,pre-modification value is S3.223, and the post-modi+&k        ,vnlue,is, S1.902, the cost of modification 1s
               S1.321, which’ is recognized a;’ a subsidy txpcnse for meifkkions.,
    3                                                                                                                 ,,
                        (4) CALCULATE,         THt,;CHANGE        IN THE LOANS: BOOK VALUE                                                                          1
                     The 8ccounting        st8nd8rd     on &t      lo- modi~e8tiql?r;,;rquircr.         th86nhen      port-1991 dkct loans we               ,       /
                modified,   their existing ,book v&e-‘&‘eh8ngd              .to on anount       equ8i-to    thepresent       v8hlc of. the io8ns’. net I
                cub inilons      projected     kder     the modified   tern$ frolir.thedime of modific8tion              to,.the lo~s’~m8tu~Q       8nd             I
                discoyittid   8t the Or@b8i         discount’ nti (the I&       th8t is ‘0rigin8iiy     used ‘to‘ c8lcu~ld       .the
                                                                                                                                  ., prmWt~V8iUe      Of"

                      In this example, rhc original discount rate is 6 percent. As Table 10 below shows, the present value of the
                 ne’.zlcash. inflows estimated under the modified terms and discounted at 6 percent is S1.849.


                                                 TABLE lo:
                                  POST-MODIFICATIOti        BOOK VALUE                                            i
                      (in tbouundr of ddllara, calculated at the orilplul discount rate)                          i3

    At the $me the moditha~ion action is .4akan, t& existing book value 6f the loans if $3,113. The book value
is Changed to S 1.849. This rcprcscnu a decrease in book value by ‘S1264.

     Table 11 displays the effect of the modification on the book amounts. ‘& table shows that, due to the
forgiveness. (1) the outstanding balance of the loabq receivable is reduced from S8.154 to $2,446, (2) the book
value is nduced from S3.113 to S 1,849, and (3) the subsidy cost allotiance. which is the diffsnnoe bet&o the
gross amount and tbe book value, is dbanged from $5,041 io $597.

                                               TABLE 11:
                            CHANGE     IN THE VALUE OF MODIFIED             LOANS
                                           (In thobandr   of dolhn)          ’             ’

                                            AMOUNT                    ALLOWANCE                VALUE

                                            Volume I, version 1.0
                                              February 28, 1997
                                                                                                                                SFFjrS NO. 2
                                            ,.I      ,,


                                                                   _. jl,I.         ‘~./ ‘.            “’   ‘,,                         ,’
                             (!!I CALCULATE          THE GALN’ OR ‘LOSS AND THE DEBT TO TREASUR’Y

                         &thtion     will norm8iiy differ, due to the usk of different diskcount nter or the uw of diffemt    ’
                         meuWmnint    iaetkddr Any rdifference between ,the, chmge in book v8
               “,        -#tied    ~‘8 .g8i&or .ku For post-199l~~ircCt 1086 & ~odifich~n            ~djyr+wH yrfhc        p8Jd 9’
        ST i
                    -.   rod+dd   to ;ii;ffset the:gain or. iou,,is recognized ir,8 lkwnc&g   sowce.(g,r 4 reduction ,@If+Fcing     wwce).


                         ’   Q PRp’J@             XkL$ISmES
                                                        ..’                    ,’

                             The 8ckunting hnd8rd        requiks&!    disclosure be m8de trb notes to fhnci8i,st~iemedtr’
                                                                                                      fin8nci8i,st~iemedtr’ to eyphh
                         the a8ture pf the modificcrtion,of direct lo8nr,,jihe
                                                                   lomqjihe discount r8te used in c8icui8ting
                                                                                                    c8icuMng the modific8tion
                         cxpehe, 8nd
                         cxpe&,    8ad Le b8sis for recognizing q@g8in ‘or loss t&ted to the modifiutioh’.

                             With respect to the modification described’ above, a foomotc disclosure should be ma& k the ftnanoial

                                  210MBinstnt&ions       provide th#t if,the decrease in boqk value exceeds thf c&t of modification, the
                         repotting entity receives from the Treasury an amount of modification adjustment tr&fer         equal,!o the excess;
                         end if the cost .of modificatipn exceeds, the decrease in book value,’ the reporting entity pays to Treasury an
                         amouut of modifioaaon adjustment transfer 6 offset the excess. (Set’ OMB Circular A-l 1J                                      ’
                                                                           Volume 1. Version 1.0
                                                                             Fehry    28. 1997                                                         1
t        SFFAS NO. 2

    !    statements for fiscal year 1996. The disclosure would explain the following:”
             (a) The direct loans in the cohort of fiscal year 1994 were modified in October 1995. The modification was
    I                                                                                                                       (--        :
        to forgive 70 percent of the outstanding loins and to ext&d the maturity of the remaining loans to the end of             /l
        fiscal year 2060. .,.                                                               ,’

             (b) The mo&fiortion expense is Slf21; which is the decrease in the present value’of the cash flows from
        rhar estimated .t@er pn-modification terms to .tba estimated underpost-modification    terms; discounted at the
        current i&rest mte of marlt?etable Tress&y securities of Oitilar maturity. The pre-modifro+ion cash flows were
        discounted-a1 the current disco& mte of 4.5 percent, which was applicable to a maturity of 4 years, and the
        post-modification cash fiows were ,discouated at the current discount rate of 5 percent which was l p$ioablc to a
                                                                  ,.       ..                                !
        m8nlxity of 5 years.

             (c) & a resuhof the qoclificatio& the book value of the loans mc+abie decreased by $1,264, from SUl3,
        as reported at the’ end of fiscal yiar 1995, to S1,.849. The difference-between t&s decmase in book value and                          I
        the modification expense, which amobts (0 SS7, is recognized as a gain in tbe opemting statement.         ‘.

        E. Write-old     Direct   Loans ".                                            ,     ',                       .'
              The 8ccounting st8ndFrd on write-off of direct lo8as requires that when post-1991 direct 10~s 8m
        riritten off, the unpaid princip81 of the 108~ be remov&d f&n the gross 8inoent ,of lo8ns ,receiv8blti
        Concurrently, the umt 8mount is ch8rgcd to the 8Ilow8nce for rubsidy costs, Prioi to the writc-off,‘the
        uncollectible 8mountr should h8ve been klly provided for in the .subsidy cost ~8llow8nce through the
        subs!dy cost estim8te or &esti&at&.     Thcs$forr,+the .irite-off .wouid )h8ve (no, ckct one expenses.                             .

             Direct loans in tbis example that are determined to be uncollectible are written off as of the’end of fiscal
        year. 195. However, before tbe write-off, qccouat/ng is performed for, the year-end nestimation, the
        amortization of the ailowance’for subsidy costs, and ihe recording of c&&&and           payienu.’ Thi; takes tbe
                                                                                                  :                              \i
        following steps:                                                                                                    .i -_ \.

              ln ‘taiiy fiscal year 1997. before the write-off, the c&t program WCS a’ year&d re2stiniation for the
        subsidy cost allowance. This recstimation is for the balances calculated ds of,tbe end ef fiscal ‘)ear 1995
        adjusted for the modification in October 1995 (Table 12). The result of the reestimation indicates,that 20
        per-1 of the outstanding loan payments due after the modification were lost,because of..defaults for fiscal vear
         1996. and the expected loss would be 30 percent in f&a! year 19d7 and thereafter. The reestimated loss of 30
        per-t      for fiscal year 1997 and the subsequent years is 10 p&centage points more @n the previous estimate
        made in October 1995. when the loans &ere modified. As Table 13 below shows,. &e &t present value of the
        reestimated net cash inflows, discounted at the original rate of 6 percent to the end of fiscal year 199$ is

                                                                                                                                           .       -
                “The disclosure will not be illus&ated for other modifications explained in this Appendix.

                                                     Volume 1, Version 1.0
                                                       February 28, 1997                                                     o>

                                                                                                                              273 .
                                       1                                                                           SFFASN0.2


I c-3                                su~~ycO~'R~EST~~!ON:PROJECTEDCASH,
                                                  gI~ct)yNTE~      TO’THE
                                                                             END OF FY 1995

b         .A.’
I                                                                                                                                         ,

                                                                                                                      ‘, -/,,.
                     Based on the nesthate, the direct loans’ booi yahic is reduced by S 179, from S 1,849 ‘to the reestimated            i
                 pmcht ‘hiu$ df S1,670;: This is accomplished by adjusting the subsidy cost rllowancc upW!rd;@y fiT,9; froni              i
                 $597 to $776. The in&a& df $179 in the ,arbsidy cost allowance ir reco&nizcd as subsidy CX*W                  .          1
                 rcmimatcs.                              .                                                                  ,.

                      A subsidy payment of $179 equal to the subsidy cost ~incrcascrcsult+g from the ~ccstimatc &$civcd
                 under p&knent indefinite authority and is used to reduce debt, to Treasury. As a result, the .debt to T~asury is

          /      rcduccd from $1.849 to $1,670. Furthermore, the direct loan program also receives a payment under permanent
                 indcfmitc iuthority to cover the interest accrued on the increased subsid) expense of $179. The payment is $11.

          LJ     which equals $179 times the applicable Treasury interest rate of 6 percent. This amount is recognized as
                 intcrcst income reestimates, and the money is used to pay interest accrued for fiscal year 1996 on the $179
                 borrowed from Tress*. that ‘is repaid by the subsidy rcestimatc.
                     The following table displays the asset and liability balances as of&e  and of fiscal year.4995, adjthcd for
                 the modification in October 1.995 and the results of the ncstimate that is calculated in early fiscal year 1997.

    /’ ( 3                                                      Volume I, Version 1.0
    \-.                                                          February 28, 1997

                                               TABLE II:
                        ASSETS AND LlABlLlTIES     AS OF T@ END OF FY 1995:
                     AMOUNTS ADJUSTED FOR ~MODIFJCAT~ON IN OCTOBER 1995                                                    r’
                         AND REESTIMATES CALCULATED           IN EARLY FY 1997                                                  >
                                                                                                                                ’ I
                                       (la tboowdr   of dollan)
                          ASSETS                                        LrAmrIEs
   Louu Rqceivable                           S2.446     1 ,‘Dek,.t&&q                                  $1670
   &SO:                                        (776)                                          .
   Allowum     for subsidy aosts
   Loans Reeaiwble - Net                     El.670

     (2)THE    AMORTrWiION         OFTHE     SUPSXDY COST ALLOWANCE                               1,

     The subsidy oost’elloweace is mrtized es of the cad of fiscel yeer 19%. The emorti& amouat rque&
the loeas’ effitive interest miaus their aomiael iaterest. The louts’ effective interest for fiscel year 19% is
S 100. which is the 10~‘s hook value of $1.670, es reestimrted, times the origiael discouat rete of 6 perceat
The lcnas’ nominal iaterest is $98, which is the low! aomiael outstsadiag beleace of 32.446 times the stated
iaterest rote of 4 perceat. Thus, the l mortigedemouat is $2, which is the effective iatereat miaus the aomiael
interest. The l mortiued earouat is recognized as interest income. ,ead the l lloweace for, subsidy costs is reduced
by $2. cad becomes $774.


     Of the scheduled rnauel payment of $549 for f&l yeer 19%. peymeats of 5439 em noeived from the
borrowers, which equal 80 percent of the scheduled payments. Of the amount received, $78 is interest payment
Which equels 80 peaeat of the losass’ b&ace of $2,446 times the stewed,iaterest rate of 4 pereeat), cad the
=nei.aiag $361 is priacipel repeymeat The outsteadmg aomiaal pxiacipel of the loras is redueed by $361 to
S2.083. There is uapsid l ccrued interest of S20 (which equals 20 percent of the baas aominsl baleace ASof
the end of fiscrl year 1995 times the stated interest rate of 4 percent). At this point of time. the loans book
value is 31.33 1. which equals the outstanding principsl of $2.085. plus interest receivable of S20. miaus the
subsidy cost nI1ownxlce of $774.

    The debt to Treasury wes S 1,849 after the modification in October 1995. Of that rmouat, $179 hes beea
paid off with the subsidy payment received as e result of the reestia~te. which reduces the debt to S 1,670; clad
the $1 ,l of eccrued interest on the $179 hes beea pid off with the interest on the reestimate. The interest
accrued on the nmriaiag debt is S 100. which equsls the debt bslsace of 51.670 times the Treesury interest rate
of 6 percent. Of the S439 ia peymeats received from the borrowers, SltX.is used to psy interest due Treasury.          .
end the miaiag      $339 is used to reduce debt to Treasury. As a result, the balance of debt to Treesmy
becomes $1331.

    Table 15 displays the asset sad lisbility balances after the unortization aad the recording of collectioas cad
payments at the ead of fiscrl year 19%.


                                                                                                                            (‘, .-
                                              volume I, version 1.0                                                         L 3
                                                February 28. 1997

                                                                                                                                    SF&US        NO. 2


                        ,,I,,       ,,
                        !                                                                                                                                ‘I
                          : ~                               ,..,               ~,   _                        .’                          ., .\

                          (4) IhITE-OFF     OF UNCOLLEC’hBLE              @IRECr L+NS                                 ,I             ;

                               It ia cw&med that non-perfonniq loans with ,an odstandiq balanceof $489 (20 pgceat of the direct
                  .   loan balance after modification in October 199s) are in default and will not be collected. The          program is

i       .”            authori@ +I wriw qff those ,logs. and the unpaid l ccnyd interest of $20. The total amount $ the write4f is
1, .,A:               $509: Thus, the principal is reducei by ‘$489 tb Sl$96, ahd $e, herest receivabie of $qO’,is.etten’off.     The
                      subsidy cost l llowa&a is r&u&d by $509, from $774 to $265:. :                   ,,        )

                              The loans’ book vale is not “changed w the write-off; it remains S 1’,331, which equals ,the amain@
                      princkl ofSl.596. mints the subsidy allowance of $265. Table 16 below ‘bows tj~e asset qnd jiability                                    I
                      balanws after the write-off.                                                                 :
    .                                                                                                                                                         t
                                                                             TABLE 16:                                                                        k
                                ASSETS AND LIABILITIES             AFTER THE WRlTE:OFF           AS OF THE END OF FY 1996                                     ei
                                                                     (in thouundr  of dollara)

                            The book value of 51,331, as indicated in the above table, equals the present value of estimated net cash
                      ,jnflows of the remaining outstanding loans. The estimated cash flows and the present value calculations are
                      shown in Table 17.

                           IO Table 17 the amounts in column (a) are the schedriled annual principal and interest paym+s. Since the
                      principal of the outstandin loans is Sl,S% and the remaM       life of the loans is 4 years, the req&d annual

                                                                        Vohune I. Veision 1.0
                                                                          Februaty 28, 1997
  SFF’AS NO. 2

 payment is 3439. ‘he amounts in column (b) e&al the default amour& reestimated at the end of fiscal year
 19% minus the scheduled payments of the loans that have been written off (recoveries on those loans are
 assumed to be zero). The amour&in column (c) are the projected net cash inflows of the outstanding loans.               /’
                                                                                                                         ‘3‘_   i
                                                TABLE II:
                                 DISCOUhTED TO THE END OF FY 1996
                                         (br thoua~da of dollan)


       It should be noted that to ca!oulrte the amortixation corredtly in subsequent periods, the unpaid principal ind
  interest should be written out of the nominal ptincipal balance. The amortization wou!d bs distorted if the
 unpaid amounts were kept in the nominal principal balance and continued to accrue int.ereat.. However, direct
 loan programs may need to keep the non-paying loans in their accounting rec,ords until collection efforts are
 exhausted and the loans ‘are author&d, to be written off The non-paying loans and interest accrued on them              ,I ..
 should be accounted for sep-&ately. so that the amortization of the subsidy cost allow&e of the performing
 loans can be calculated comctly. Readers should consult Treasury, OMB..or GAO, for guidance on accounting
                                                                                                                         k2/ ,‘t
 for non-paying loans.


     The accounting rtandaid     on uk   of loam states that t@ uk.of     port-1991 and pm-1992 direct loam is
a direct modifIcation.”

    It is assumed that after the close of fiscal year 1996, the credit program is authorized ‘to sell’thc loans. In
October 19%. all of the loans are sold with recourse. The net proceeds from the sale amount to S1.100.
Accounting for the sales takes the steps explained in the paragraphs that follow.

         2%isassumeathatthesa       lea proceeds were not included in the cash flow estimates for the initial.

subsidy calculation.

                                               Volume I, Version 1.0
                                                Felm~ry 28, 1997
                                                                                                                    SFFAS Nb. 2

            (1) RECQCIWF         ‘,.i COST ;.,.OF MYDIFICATION
                                                  :,     ::.    I ;          , ._,         i), :
            T&e ‘kou&g       ‘&nd&l    on .&k of I&IS ++irer, th8tthe .cort of mpdifk8tion              be’deteF@!d  on, the
    .   b8sis of the.&modlf&ion’       +8hie’6f t$l+s        Ad’ ‘If thc,pre-modillciition      ,v8lue,of @eJ08nr @d
                                                                                                 which is r~?gniz~d 8s


                                (krihoutids,o”f     d3ll8n.L c8jcul&ed   8t     thC.,ecGrr&t   ,discount r8te) ‘:

            The pm-modification value of the loans sold exceeds the net proceeds of S1.100 from the sale by $262.
        which is recognized as a modification expense. The credit program receives an appropriation’,equal to that
        amount to cover the modification cost. (The credit program must have an appropriation equal to the
        modification cost before it can sell the loans.)

            (2) RECOCNIZi        406K;VALUE
                                         ,”        : GAIN OR LOSS         ,‘.
             The 8ccokting     st8nd8rd on’uk of direct lo&s’rtatea t&t tlie book value,has~(or gain).nn.a’~le              of      “1
        dlroct IOMS equ8lr the l sisting book v8lue of the lo8ns sold minus the net proceeds f&m the ule. &we
        the book v8lue iors (or g8in) 8nd the cost of modilic8tion 8re c8lcul8ted on different hues, they will
        nonn8lly differ. Any difference between the book v8iue IOU (or g8in) tid the cost of &odifi&ion                is
        recognized 8s 8 g8in or lora.” For ulcs of post-1991 direct lo8ns, the modification 8djustment tnnrfer
        p8id or receiycd.,to o+t             ilh g8b 6r loss is kognized 8sj_~~@mncing id& . (or   8 kduction’ in llnincing
                                                                                             I. ._, .        2, _ :    _,,.,,..,_
                             , ., ! ,...,I .I_ /.%4.+:: /. . .,_.
                                                               _ , , . ,, . , .., I   / I”
                  *‘If there is a book value gain; the gain to be mcognixcd equals the book value gain plus the cost of,
        modification.                ,..

*                                                           Volume I, Version 1.0
                                                             February 28. 1997


     The existing book value of the loans sold is Sl.33 1. Upon the sale, this amount is removed’ from the’books.
At the ssme time, the net proceeds of $1,100 ‘from the sale are recorded. .The book value loss is ,S231. The
accounting standard requires that-any difference between the book value loss and the cost of modification be
recognized as a gain or loss. in this case, the cost of modifiortion is S262 and the book vahre loss’is ,S231. The
difference of $3 1 is recognized as a gain. Under the OMB instructions, this amount will be p&id, to ‘freasuty as
a modification adjustment transfer. and is recorded as a reduction in financing sources.


     It is estimated &at 10 percent of the loans sold with a principal of $166 would default at the end of ftscal
year 1997. Upon their default, the federal credit program will pay the loan pumhaser an amount equal to the
defaulted principal plus accrued interest. ?l&estimated future default, payment ,ts Sl66, which equals the
principal of the loans that are expected to default plus the 4 percent nominal interest of S6 acotued on thaw
loans for one year.

     At the time the loans are sold, the interest rate of Treasuty securities of a similar maturity is 5 percent The
present vahte of the estimated default paymentdiscounted at 5 percentis’Sl58. This amount ‘is reoogxuzed as a
subsidy .,expense and a loan guarantee liability. The credit program receives. an appropriation of Sl58 to cover
the’guarantee expense, which is pid ‘to ‘the loan guarantee financing ac’count and bebomes part of the fd
balance of that account., (An appropriation must .be available to cover the subsidy expense before the loans can
be sold, since the payment to the loan guarantee tinancing account must be made in or&r for the guamtoe          to
take effect.)

    At this point, the credh program has S 1,489 in cash, which was derived from the following events:

    Net proceeds from the loan ssle                           Sl.100
    Appropriation to cover the modification cost                  262
    Appropriation to cover estimated recourse
        liability                                                 158
    Less: modification adjustment transfer                       t 31)

    Total in fund balance                                     S I’.489

    The credit program uses S 1.33 1 to pay off the debt to Treasury, which was borrowed to finanGe the direct
loans. The remaining balance of $158 has been paid to the loan guarantee financing account (as stated above).
That amount, together with interest for one year at 5 percent, is to cover the recourse liability of the loan
                                                                                                         ‘I ,, .
guarantee financing l ccourk                                                    .(


     pm-1992 direct loans are direct loans obligated prior to Qctober 1, 1991,~and are recorded in liquidating
accounts The eccounting skdard         nqui,rrs that thi hkes of pm-1992 dir&t l&i. bc ncogiiztid when it
is more likely than not that the direct loams yUl not betotally collected. The aLlowawe of the               -
uncollectible amounts should be mstimated        co& yeor l s of the dote of the finonciai statements.    In
estimating lorrtr, the risk factors diseassed in the shndard for post-1991 direct loons should be

                                               Volume I, Version 1.0
                                                 February 28.1997
                                                                                                                          SFFAS NO. 2

             considcrcd.                                                                    :
                                                             ,.    .
                  The am&d      fb+er    &tcr          k8tement        of pre-1992’ direi        lo8ns on 8 present v8iue b8sis is
            I permitted but not nqaired.                    ”

                 AII of the amounJs ‘used in the text tl$ follows arc 9 thousands of dollars.
                                                                                                                                    . .+   .~
             ,A. PROVIS$IN FOR UNCOLLECTIBLE                    AMOUNTS                   ,     .,      ,,                                  .-
                           “, ,’
                  Assumo th;li it &i end of fiscal year’ 1994 a credit progmm’his pm-1992 direct loans with outstanding
             p@neipal::of.SS,000.at 7 pcr+$nt iptei&t r+,,,F*qg        in three 9ears (at the end of fiscal year 1997). The .
             pognm,~nag&&qvaluates               tlte risk. @ton enumenited in @6 accounting’ standard, and estimates that the net
              lti oiprinci@:due       ~.&faults.w&dd.~‘b& $2,000.. J’hv, the $@a& mapageqqt pr@es an alloti&                  of ,’
              St,000 for ti~ollectible amounts, and charges that amount to bad debt CX+W. “I Thils,..the hb& irl&l#‘of the *
              loans is S3.000, as shown below:                           _ ,_
                                                                            i : ;‘.i .:. ,_ ,‘.    ,’ :
                                                                                                              :/       )‘. ,;

              R M~DIkICATION’          OF PRE-1992 DIRECT LOANS

i    : ‘.         Assumi.tbat in October 1994. shortly’aker the close of fiscal year 1994, a de&on is qadc to take t&e.
$     !      following actions:,(l) forgive 50 percent of the amounts due. (2) lower the interest rate to 4 percent, and (3)
‘>   :...    extend the due date to the end of fiscal year 2000. ’                     5:.
1    ‘::
     “: Y        These actions arc within the definition bf direct modification because they are federal govem&ent actions
:            $hat would directly change estimated subsidy costs and the present value of outstanding direct loans by altering
     Q       the terms of exit&g coritraota.

                 The 8kbunting st8nd8rd on direct loan modifi&8tio?s st8tes that with reipect to 8 direct or indirect
             modiik8tioa ‘of pm-1992 direct lo&r, @e Cost of mbdific8tion is the excess of the pre-moditk8tion    v8iue of
             the ioqn8 over their post-modific8tion vak    ‘I’hc amount ok the modification cost ‘is kcognized is i’
             medifbtion    l speaae’when the iours 8re modilied
                  Accoimting’ f& tbc cost of modifi&ion      takes the following steps:                                                          I
                  (1) CALCULATE        TE?E PRE-MODIFICATION              V&UE
                  The pm-modification value is the present value of the net cash inflows of the direct loans estimated at the
             time,of niodifiWion uniieipio-nwdification’tem           and d&ounted at the current discoun! rate.
                                                                ~/ 5”
                  It is estimated that under the prc-modification t&j, 40’ per&t &the cash flbws would bi lost ‘due to
             &faults in fiscal year 1995 and each year thereafter..,:The current d&punt rate for a Iflaturity of 3 years ii ,4
             percent. As TabIe 19 below shows, the present value of the estimated net cash inflows discounted at 4 percent
             is $3.172. This is the prc-modification value of the loans.
                                                                       ,,:.    .,                                             :.

                       “This 8ssumes that no allow&uze for uncollectible arhounts was provided prior to fiscal year 1994. If
              tkre is an allowance for uncollectible amounts, that allowance should be adjusted to the &rent estimate and
              tk difference between the cumnt estimate and the existing allowance should be charged to bad debt expense.

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    SFFAS NO. 2

                                                       TABLE 19:
                                           PkE-MODIFICATION         VALUE
                          (in thouunds   of dollars, ulculmted at the current discount mte)
                                                                                                                       :?_ _I            i


        (2) CALCULATE      THE POS~MODIFICATION            VALUE
       The loans’ post-modification value js the present .value of the loans’ net cash MOWS estimated at the time of
    modification under post-modification terms and discounted at the current discount rate.
        The modification reduces the outstanding principal by 50 percent to,:St$OO, lowers the nominal interest rate
    to 4 percent, and extends the maturity by 3 years to the end of fiscal year 2000. As shown in Tabie 20 below,
    under the post-modification terms, the required payments will be S477’per year for six years.

                                                     TABLE ;O:
                               PAYMENT      SCHEDULE OF THE MODIFIED             ‘ibANS
                                              (in thousands !f dollm)
                                                                      5                                                2 -T          ‘\,
                                                                                                                       kid           I


     Taking into consideration that the loans owed by borrowers with poor conditions have been forgiven, it is
estimated that only 10 percent of the cash flows would be lost due to defaults. The cment discount rate for a
maturity of 6 years is 5 percent As shown in Table 21. the present value of the estimated net cash inflows
discounted at 5 percent is S2.179. This is the loans’ post-modification value.    ’

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                                                   February 28. 1997
                                                                                                                                                                                                      ‘,                        SPAS             pg. 2
                                                                      ,’                    ‘.
                                                                                       :                 ,: Tlr@.& ti:.'                            ':             ,_. j'             ,,                   1 .;,, "'                                      I
                                                                               POST-MODIFi6ATiON’VALUE          ‘,. “’
 P’ n . ,.A                                  ‘.,,              (in thousands of’dollarr, &.@uiated it’& erfr##scOimt                                                                                  rat6# ’              ’         ,“‘I

                                                    ‘,’   .>    (>,        ‘,,‘.,                              ‘,.‘,.                       I.:‘;                  ~-                                                                  ,.   ,’
                       !                 :   ,I,.                                                                                                                                 :        ,:.
                                                                                                                                                         ;:   ;,

                  Q)             $$C~@                         A&j         k&(,(.,j&         TfiE              COST          f$@+j&&&jN                                                                                ”        ‘I                   ,,

                                                                                                    ,.     ”                                                            ‘.,   .
                                                                                                                        ‘.            ./.                                                        ;;


                   The‘ cost dir%i&iiriciti~n’L~~&e exce& df the lo&s’ pre-mo&fication vaiiie &er,the loans’ post-modifidation
              value. Since the loans’ pre-modification ,value is 53.172, and their post-modification value is $2.179, the cost of
                                                                                                                        ,, ,,~
              modification is $993. which is recognized as a subsidy expinse f6r &&catioxis.          ’             ‘.

                  The credit ‘$&a&                             &iv&    an a&opriation: of $993 to cider the modification expe&e. which is @id U
              the financing account.                           The fmancing icount, in turn, pays this amount to the liquidating account as part of its                                                                                                           I
              paymentto acquire $e                             loans. (A subsidy appropriation equal to the xost oJ modification must be, available
              kfom ,tbe inodification                           & take’ place.)
                                                                  :. “                                  ..   “’                    ,’
                  (4) CALCULATE                                   THE CHAN&E               IN BOOK VALUE AND THE GAIN OR LOSS                                                                                                                                 !

              loams are dhectiy m&iiiied,
              UI amouni iqual ti’ihiii
                  Witk rorpect to modificatihnr of pro-1992 direct ioans, the standard requires !hat when ,pre-1992 d+t
                                                  be irhnrferrcd to a financin~~aeeount and their book v&e be &nged to
                                          $oit-abod@cation value. Any subrqu&t’modificaii&        ti”&ea&d ii a
                                                                           .:   ,.,,                                                                                                                                                                          ,
              modification Of post-199l“io&.*‘,          ;

                    Tka ckanp ia book value of pre-1992 direct loaos rehiring fiom.i direct or indirect m&diflca@m and
              Uw cut of modification will normally differ, due to the use of different discount rater or the ur’4f
              dillereat meuorement   metkodi      Any difference between the cost, of,modification and the change in the
              loana’ book vaiue due to’ moidifJcation is *g&cd      as a’ #ia ir loss, ;            ;   ”      .’      )

                         3%~ account’m g standard provides that when ~1~1992, direct loans are indirectly modified, they are .’
              kept in a liquidatiag account; and that their bad debt allowance is reassessed and adjusted to reflect amounts that
              would not be collected due to the modification. Indirect modifications of pre-1992 direct loans arc not

I .tf-‘-l
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(_                                                                                            February 28, 1997
.   SFPAS NO. 2

         Prior to the modification, the book value of the loans ias recorded in the liquidating account at s3,6f)0-
    Upon modification, the loans are transferred f&n the liquidating ioooun~ to the financing account and recorded
    at their post-modification value of S2.179. The change in book value is a decrease of Sg21. Since the Cost of
    modifldon      is S993, and the change in book value is $821, the difference of $172 is reoognixod as a gain.                  3       :

         * fm*           mwt      pys  &e @i&ing       aAnt     an amount equal to the loans’ pre-modifioation~value Of
    $3.172. This comes from two soureos. First, the ftaancing account receives the S993 that is appropriated for
    tho w.st of modificetiou     Second, the facing     account borrows from ‘Treasuty the .remainder, which is $2,179,
    the. post~~ti0~         vrlua of the. J~UIS. .h ea~c~~~    the liquidating account 8raasfors IO .the fioanoing acoot@
    thd .loen assets that had a bobk value of $3.000 before the modification was made. The gain to the iiquiba~
    aowunt is Sl72, whioh, es shown above, equals the difference between the cost of modification and the change
    in book value of the loans
                                                                                                                  ..      ‘.,
         Post?1991 loenguarentees ue loan guuuntees committed after September 30.1991.. The rcoouuting                                 ’
    sunduds for post-1991 loan guamtitees are explained l ndillustmtedthrough         tho TV of an example &se&d
    belowz             _,

        A cohort of S-year term loans that amounts to $10 ,million in face value is guaranteed by a federal loh ,,         .,:,’
    8~~~tco   program. The gumntoo.covors 60 porceytt of the principal and interest psyritonts. The borrowers em
    requiredto pay in-it   annually at 7 percenk and to repay the principal~when the loans matureat the end-of the ‘,
    5th YOU.  The government agrees to pay a 1 percent interest supplement to the lenders at the end of each year
    Om the  MOMS’life. The loans are disbursed on September 30.1994. me federal loan gwn&c              prognm
    COlkdS a fee of 5 percent, when the loans are disbursed. ‘fhe avenge interest rate of marketable T&uty
    sect&&   Of a similar maturity f&r the period. in which tho guaranteed loans are, disbursed is 6 pereent.

        All of the amounts used in the text that follows are in thousands of dollars,

    A. REPORTING         THE LIABILITY       OF POST-1991 LOAN GUARAXWEES AND THhZ                      SYBSIDY
    COSTS                                                                                                 j

         The wcountbtg standard for port-1991 loao guarantem requires that for gum@teed loams outr@ading,
    the present vduo of crtimated net cub .outflonr of the loan gummteer ba tignhcd     ma l lhbiUt$
    Diacloaure ir made of Umface vaIae.of the guamnteed .louu outrtatyling and the amount   of the
    outrtmding   b&ace that & g&aoteed.           ’

         io implement the standerd in the example. cash ,flow estimates and present value calculations are prepared.
    It is projected bat the botrowers would pey interest,when due, but would default on 60 percent, or S6.606. of
    the principal repayments. Upon default, the federal credit program will pay 60 peroont of the defaulted
    principal, equal to S3,600. to ihe lenders. It is projected that a net recovery of S2.000 will be realixed a year
    later through the foreclosure end sale of pledged ,assets. The foes of S509 are received when tbo guaranteed
    loans ‘are disbursed.

        Table 22 below shows the estimated cash flows and tho present values of tho cash flows.

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                                                     February 28. 1997
                                                                                                                  SFFAS NO. 2

                                                        ,’ TAtiLti’22:
Q                                                   (in thoururdr of dolkrs)

                1999    ,,.                ;‘,)’         ,’     100.       :.    s3.600             ‘.               s3.7qo
                2000                                                                            ” s(2;ooo)           boo)
                i’V \,6H’ (_,       ,    s<w),                 $471              $2,690           S(1,410)           SlfOl

                   Thei present val,~ ot thy estirqrted net cash outflows of the ioan guarantees is $1,201. This amount ~a
          y--. recognized
‘/ .\                  .,? as a liability.
w                 Disclosure is made in a footnote to the linanoial statements for fiscal year 1994 that guaranteed loans bsvc
              an outstanciing principal of SiO@O,’ and the guaranteed am&at is S6.000. (A similar disclosure is made m Rich
              year so long as the guammeed loans am o~tstandii.)           ”

                   The 8ccounting rknd8rd for post-1991 Lola gu8r8ntees requires th8t for guwanteed 10811sdisbursed
              daring 8 lkc8l ye8r, 8 subsidy crpenae be recognized. The 8mount’of the subsidy crpeaw‘cqu8ls ihe
              prosent v8lue of estim8ted c+ ou+ws over ec life of the guFr8ntced iours minus the present v8luc of
              eetim8ted,&     inflows, d@ounted 8t4he intorost r+ of m8rket8bk Tnasuty &c&ties with 8 simikr
              018cPii~ terui, 8ppik8bk to ,tkc period duria& wbti the ioani~me disbumd (hcrein8fter referied to 8s
              the l pplk+bk Treuyry interest rrrte).

                  In the ex&nple, the present value of the cash outllows minus the present value of the cash inflows is $1301,
              which is recognized as a subsidy expense.
                  ti ~wuating      st8ad8rd for port-1991 lo88 pwanteer requires th8t for the fkc8l year during which
              hew gtmlrateod burr am disbuirid, the componenta of the sibsidy espenw of thorn new 1088 gu8tanteoe
              be keo@sed wp8r8tely among interest subsidy costa, def8ult costs, fees 8nd othei colkctkns, 8nd other
              eubsidy costr

                  The in~n~subsi~y     co* of the loan -tees           is the present value of $e interest supplement paym?ts to   .
              the i+is,   wiii& iii’*. example. is S421.                            .., .._.    .,_ .,         ,.

                                                              Volume I, Version 1.0
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    The &fault cost is the present value of the projected &fault payments mi..us the present value of net
recoverk~. The present   vdue  of the default payments is.S2.69& and the present value of the net recoveries is
S1.410. Thus, the default cost is Sl.280.

       The present value of fee collections, whioi is $500. :s recognized as a,deduction from subsidy COSTS.

       There are no other subsidy costs in this example.

    The subsidy expense of. the loan guarantetk is the sum of the above cost conqonents,L which is S 130 1,
calcul@ed as follows:

                                   Interest subsidy cost                        $421

                                   Fee collections                              (560~
                                   Loan default cost                            L2iQ.
                                   Total rubsidy cost                         sl3pL                      ,-.   ;

     The loan guarantee program vceivis in appropriation equal to the subsidy cost of S I ,20 1. W& the
guaranteed loans are disbursed, the appropriated amount is paid to the loan guarantee financing account did is
tic&cd    in fund balance witb Treasury. The $500 of fees are oolletked $t the same time. The amount of #the
fees is debited to fund balance with Treasury and credit&to the liability of the loan guarantees. Thus, ‘tbe fuad
balance is raised to $1,701, on.which Trcasrtry. pays 6 percent interest. The. loan .guarantee liability is also
raised from 51,201 to Sl.701.

       Table 23 shows the project&d c&h flows and their present values aft& the receipt of fees.
                                                    TABLE 23~                                                          ,,+.& )
                    PROJECT&D       CASH FLdWS DtSCOIJN’I’&D TO h&                      &ND OF Fy1994,
                                       AFI’ER THE RECEIPT OF FEES
                                             (in thousands of dollars)

                            SUPPLEMENTS‘                                       RECOVERIES

                                                     Voluabc I, Version 1.0
                                                      February 28, 1997

                                                                               ,                                              SFFM      NO. 2,
              Table 24 displays the asset and liability ‘,ba@mes atthe end of the. 1994 fiscal year.
                              .:                                     ,, .
                                                              ‘;,ThBL& .24:        .. ‘.
I’ L‘3,
                                    ASSETS AND LIABILITIES                AT THE’ END OF FY ‘1994
\                   .’                                  (in thousands, of dollars)       ,;.<,,(                                                           ‘.

                                                                                                                                               I ./
              %-                     . :.                                 .,                                                   .’                          :.

          a     L~I.LITy
                L~I.IJ’IY       REEmRbfATIGN
                                ~E~RbfATION              AND-IFjTERES@MPOUNDING
                                                         AND-IPjTERES@MPOUNDING                    “r’. ”            .~ ,,
                      , .,‘y                                                 ..                    “.+,                                                         ,’
                        . ,.            ,,.
                il) j’#      RE&+~‘I~N               t& TW’ LU@IirrY           OF LOAWGUAR&NTEES                      ’ ’                              ‘. :
                     /”                        .’ ,.,.,
                                               I..,      , , 5 “.           ._ I.       ,(                                     :.
                The accounting standard for post-1991 lorn ~uaniees requires th*t&e~iiaiility                          for loan gu8rantics
                                                                                                                                  gu8ranticr           ““:>
           k’roestiutod        each
                               auh yehyear aa.of ‘the.,date.of
                                                    ‘thedate.of the’ financial rtatementr
                                                                                rtatemcntr     Since the‘liability
                                                                                                       thc‘liability represents ,the                      .:.
           ptaaaut value of the net cash outflows of the underlying loan &uarantees, the reestjmauon taker. into
          cut          oli factors that may: have l ifded ‘.the l athuate of each coinponent’of,
                                                                                          coinponcnt’of, the cash flowa, in$,tding
          ‘propay&&           dcfault;;dil~~~enciii,
                              default;;dil~~~enciii,        and recoveries. Any-increase or ,decreaw ‘in the’loati guarantee
           lirsuity &Ring         from the mrtimates.ir         recognized as a subridy expense (or a reduction hi subsidy’
                                                       of !oak‘guaranteei and
          CSPHWO); ReportinS ‘the ,,R&tty:, oi’!oak‘guaranteei              and reestimates
                                                                                  reestimates byby compquerft
                                                                                                    compquerft      is
                                                                                                                    is not
                                                                                                                        not ‘required.
               In~ndix      A, the basis $f’&e’Board’s Conciusions..it is pointed out that the,+m&       factor that~causis                                 II
          changes in the subs&‘&uld        be default reest&ites. The. accounting standard provides a mm&r of risk
          factors and other default cost criteria to be considered in making the default ,cost estimates and reestimates.’

                in the example. it is initially estimated that 60 percent of the loans will default on the principal repayments
          when tkloans mature at the end of fiscal year l999, and that S2,OOCjwili.be recovered from the sale of
          foreclosed ass&. .“?I+ iki reestimate is ‘$le early -iti fiscal year 1995. Because so ‘little time has &sed since                                          I
          the subsidy was init&~y’:&tit&l,        .the est&nated cash ‘flows are tmchajgeii and the ‘meiiimate is hero. (This
          illustration adunes that tk in’kksi’iates’kt tlt~‘time~‘;;f’coinmiun&t and~‘disbursement
                                                                                         ,I.    L      are the same, so no.
          reeatimate is ,needed for the difference in interest .rates.)

               The aaoond re&nat&i         of the subsidy coal is made early ‘m fiscal ‘year 1996, in pk&aring financial
          statements for fiscal. year 1991, It rkestimates’.~~,loan guarantee liability as of the end of fiscal, year 1994. It
          indioates‘ that the initial ‘default estimateis comet.’ However, it also indicates that the net recovery real&cd at
          the and of fiscal year-2&O would be Sl,OOO.rather than S2.000. As shown in Table 25; because of the
          decraase in the amount of recovery, the present value of the net cash oi&ws discounted to the end of’ fiscal
          yaar 1994. is $2,406. rather than Sl.70 1, as previously estimated for the end of fiscal year 1994 and shown in
                                                                                   ^                              ”/
          Table 23.        ‘/       ’

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                                                                  February 28, 1997
 SmAS NO. 2
                                          TABLE 2% "
                                 stmsx~~ COST *EST~TION:
                                                    (in thoumnds     of down)

     The reestimated liability is $2.406, bornpared to the existing liability of Sl,701;, an increase of $705. khe
increase of $705 is added to the loan guara&e liability and is recognized as a subsidy expense~reestimatek
      The credit pro-      receives a subsidy. payment under permanent indefinite authority eq& to $705 to “cover
the cost 3ncrease resulting from the recstimate. In. addition, a payment of Sk2 is also received under p&nanent
indlf*te    authority to cover the &rest accrued on the $705 ,reestimate payment. for the period from the. end of
fiscal year 1994 to theend of fiscal year 1995, and is np;drted,as interest income. w total amount ofS747
received is at&d to the fund balance.
                                                                                                                                       3         )
      De punting       rtandard for pork1991          loan guaranteea     nquinr      tlmt interest be accrued and
compounded      on the liability  oi loan gu+rantees       at the inter&t     nti   that nar originally       used to cakulatc   the
prrmt    value of the lo= &antee           iiabilitks    when ihe gu~mnteed         loans
                                                                                      ,‘..., were  disbursed,     kke .accrued
interest is recog&ed      u ikerest    eipenr’

     With the passage of time, the present value of the liability of the loan guarantees increases at.a rate equal to
the rate of interest used to discount the liability. ‘The increase for fiscal year 1995 is S 144, which equsls the
balance of the liability of $2.406, as reestimated, multiplied by’thc interest rate of 6 percent, The amount of the
increase in the present value of the liability is added to the liability balance, and conctkntly    it is recognized as
interest expense. As e :result, the ‘liability becomes,S2$5O.

     Interest is also accrued on the credit program’s fund balance of Sl.701 at 6 percent. The amount of interest
accrued is $102, which is added to the fund balance, and is recognized as interest income. As ‘mentioned
previously, the payments of $747 to cover the reestimated subsidy cost and the accrued interest are also added
to the fund balance.

    The interest supplement of $100 is paid for fiscal year 1995. Both the fund balance and .the liability are
reduced by SlOO.

    As a result of the above transactions, the fund balance becomes $2,450, calculated as follows:

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                                                       Febntay 28, 1997
                                                                                                                         287              I
                         ,,                                                                                      SITAS NO. 2
                                                                                                                  ‘/         .
            Fund balance at the end of FY 1994                s1.701
            Interest ,on the, ftid ,balance                       102
           ‘Subiidy payment reestixnates                          705                                     .,
            Iiitkrest tin sub&y payment reestimates                                                                _:
         : interest supplement paid                                                                                               ‘,’ ,
            Fund balance ,at the end of FY 1995                S2.450

        Tba loan guarantee liability iS also 52,450 at the end of fiscal year 1995, calculated as follows:
               ./.., ‘;    ,: .i..’    .,
           LiWityba~cat,tbW                    ..
            end of FY 1994, as m&mated                    $2.406 ,,                                                              ,. ”
            b&me due to pasSr8e of time
            herd     supplement paid                      ,&$I         i           :,                                   ,:
           Liability ~l&e     at the
        ,. d of FV 1995                                   S2.4$,,     ,:   :          .,,

        Table 26‘displays the,.asset and liability balances a! the. end of .&e 1995, fiscel year.
                            ,:,. :                                               .;;:.   ,’ ‘,
                                                         .TABLE 26:
                                .:               AT,,,THE END OF FY 1995
                        ‘..                       (in thouundr   of dollrn)


    C. REVENUES AND EXPENSE?                                                  ,’

         The -unt$g’#tondord              for post-1991     loon yaw&es    requires that interest l ccrucd on the liability
    4 loan guarantees       be reeogriniied aa interest espeaaer and that interest due‘from         Treasug    on uninvested
    lhadr be re6opized os interest income.              Inter&s: l ccNed on debt to Treasury,    if any, is recognized    as
    ht+st    &pods&

          In the example. interest accrued on the liability of loan guarankes is $144. which equals the reestimated
    kbility of S2.406 times 6 percent. The amount is recognized, as interest expense, and the same ainount is added -
.   to the liability, as explained above.
        Intekst income recognized for fiscal year 1995 is also $144, consisting of (a) interest income of Slot on the
    fund balance. which equals the fund balance of $1.70 1 times 6 percent, and (b) interest incomk’of S42 on the
    sub&y payment re+imates.

        Costs of administering loan guarantee activities. such as salaries, legal fees, and of’fke costs, that are
    incuricd for ckiit policy evaluation, origination, closing, servicing, monitoring, maintaining accounting :and
    computer systems, and other credit administrative purpks,,are recognized separaf+ as kinii%&&iti~ ex@kues.
    Administrative expensei arc no01included in calculating the subsidy costs of loan guarantees.

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                                                       February 28, 1997


     ~asume that in ~otober 1995, .shortly after the close of fiscal year 1995, the loan guarantee program takes
action to expand its guarantee from 60 percent of the outstanding loan principal to 80 percent. This action is           /‘3_,i
within the definition of direct mxii~cation because it is a government action-that directly changes~thc estimated
sttbaidy coat and the present value of the loan guarantee liability by altering the terms of the loan guarantee

     The MOO&~        ~ta&&d on modifkationr    of loan guarantees rtikr that with mspect to 8 dimt or
indirect modification of pre-1992 or port-1991 loen ~arantces, the coat of modification ia the cscess of the
poat-modifka~n      bbilky of the loen ponnteer    over their pro-modification liability; The modifi@oa
tort t roeo@zod as modilk&on        erpenrc when the loin pwanteor      arc modifkd.

    Thel ccountitq   is implemented in the ateps described   below:


The pm-modification liability is the present value of the net cash outflows of loanguarantees estimated at, the
time of modification under the pre-modification terms and discounted at the current discount rate.

      Aa used in this part and Part IV of this Appendix, the cur&at di&otmt rate is the~,interest rate applicable
at the time of modilication on marketable Treasury securities w&b a similar maturity to the remaining maturity
of the guaranteed loans under pre-modification terms or post-modification terms, whichever is appropriate.n

    Ihe cash flows for the loan guarantees under pn-modification terms during 1996-2000 are assumed to be
the same as the cash flows that wem reestimated early in fiscal year 1996 for these years and’&at are shown in      ,,
Table 25. Auttme thatthe current discount rate for.a comparable maturity (4 remaining yea=) is 4 percent. ~a
Table 27 shows, the present value of the pm-modification net cash outflowsdiscounted at 4 percent is S2,61!.

                                                TABLE 27~
                                     PRE-MODIFICATION        LIABILITY
                       (in thousands of dolbn; calculated et !he current discount rote)


                                                                                   ‘.‘.   ‘.        .,

    the definition of the cutrent disoount mtc is provided in Appendix C. Glossary. [See Appendix E of this

                                              Volume I, Version 1.0                                                      / ._
                                                Febtuq 28. 199t                                                          ‘L11
                    (2) CALCULATE       POST44ODlFlCATION
                                                   -’ .:             LEABlLlTY              I,
                                                               ,I’, ,
          i          The loan guarantees’ post-modification liability is the present value of the loan guarantee2 net cash outflows
       ’ L> 3
                estimated at the time of modification under post-modification terms and discounted at the current discount rate.
        \ 1:                                               .‘.
                     The modificaion  immam~ the guarintee percentage from‘60 percent to 80 percent., It is estimated that 60
                percent or $6@0 in prinoiprl reprym&iHs will default. This estimate is not affe+J by the modification.
        .       HOW,       &th.the exp&&‘&’      & &kt&        +kitagt,   the edit program will pay 80 peE+t of the
,:j,            defiulted a&&&a, equal to $4,800, to the:lendem. The,$et +sh outflo,ys estimated under the post-modification
;:              @rata am diwounted at the current mte of 4 percent. As shown in Table 28 beloti, the presdnt iralue of the
                est@ted net hish outflows   is $3,644. This is thepost-modification liability of the loan guarantees..
                                                        ; : ,./I ,,+&g     2& : ._ ., : .,         ;   .I,\.   ,.,,

                                                      ~qsTIMOIJIFICA~I0~         L&BIL@‘Y            ‘,
                                   -   (h &ou&ds       $doUan:   *Wed         8t the cur&        discount r&toj
                                                       _I    .c ’ 1,-                     ,..,I,             .i          :,_

                    (3) CALCULATE       ‘&D    ~ECOCNIZE      THE C&ST OF MODl’FICATION

                    The cost of modification is the excess of the loan guarantee’s post-modilication liability over their
                pm-modification 1iaLGlity. Sine the loan guarantees’ post-mo&fication liability is S3.644, and their
                pre-modification liability is $2,618, the cost of modification is Sl$26. which is ~~ognized as a subsidy expense
                for modifications.

                    ‘(4) CALCULATi       THE .CHANGE II’! $HE BOOK VALUE OF THE LIABILITY

                      Thi 8ccounttng rturd8rd on lo88 p8r8nt~.modillcrrtions   require8 th8t the existing book v8lut of the
                ltbillty of modiflod post4991 1088 gu8r8ntees be churpd to 8n 8mount equ+ to the’ present v8lue of the
                act cash outflows pro&ted     qndcr the mod!fIed terms from the’time of moditlc8iion to the lo8nr’ malurity,
                8nd discounted 8t the origi88l discount We (the r8te th8t is origi&ly used to crlcul8te the present v8lue
                ef the li8bllity, when the gu8lrateod lo8nr were dirbursed).

                     In this example. the original discount rate is 6 percent. The present value of the loan guarantees’ net cash
                outflows estimated under the mo#fied terms and discounted at 6 percent is S3.401. (See Table 29.)
                               *     ._ ., ‘,    ,’   _ ,-. ..        .,.                           :

                                                               Voluine I, Version 1.0
                                                                February 28, 1997

                                                 TABLE 29:
                               POST-MODIFICATION      BOOK VALUE LIABILITY
                        (In thowandr  of dolbn; ububted  at 8he ori@nel dlscounr rate)

            FY              INTmEsT                 ,DEFAULT                     NET.            NET CASH
                          SUPPLEMENTS              PAYMENTS                  RECOVEiUES           FLOWS

  19%                    ,’          Sldo                                      -.                          SlOO
                                                       .            :
  1997                                 loo                                                                I’ 100
  19%                                  100                                                                 ‘100
  1999                                 100                 $4.800’      ..                                4,900

  2000                                                                               $0 SW                mw
  PV;t6%,        ”                   ij46                  53,862              :      S( 747)    ,” ‘. $3,401 ”

     At the time the modification action was taken, the exist@ book ,value of the lonn gunmntee liability A,
St.450 (See ‘fable 26). The book value is’bhanged to $3.401. This is en increase of S9Sl in ,the book value of
the lo8n guu8ntee liability.

      (5)~RECOGNIZE     A GAIN OR LOSS.:                                            ..,.

     The &counting stidard     on ban yerant&       mbdffl&nr    staCa ‘tietthe’ehaage   in the amount of,
lbbllity of 60th pr+!I2     and part-H91 loamgumanreea remltitq from l direct or indlrect modifbkbo                   0
and the cost of modiflcatbn will .normally differ, hue. to the ose of different discount &es or the uiof
dlflerenr nieaaurement methodr       Any dlfference between the change in ibbliity and the cost ,of
modifbatba     is recognized es a gain or bu     For posh1991 ban gummahea, the modi!lcatba l djostmeat
traaafefi’ paid or received to off& the @I or t&a Ia recognized u l tlnanc~g &u&e (&r a reduction in
llnoncing soilrce)m

      The cbn@e in book value in this case is S951. compared to the cost of modification of Sl,ii6.       The
difference between those two rmotits is $75, which is recognized (IS I grin.

     The credit program receives a subsidy rppropriation equal to the cost of modification. Since the. cost of
modification exceeds tbe increase in book value by t75. the credit program Pays to Treasury ci modification
adjustment transfer of 975 to offset the &rin. This is reported as 8 nduotion in finrnoing source. The net effect
of the xhodifichion is to increase the fund brlance of the credit pfognm by $951 $o $3,401;

      TabI+ 30 c&lays   the asset and lirbhy   balances after the modification in October I?95

     WMB instructions provide that if the increase in liabilhy exceeds the cost of modification, the report@
entity receives from the TreasGy m amount of modification rdjustment transfer equal to ‘the excew, and if the
cost of modification exceeds the increase in liability, the reporting entity pays to Treasury an amount of
modificatiqn adjustment transfer to offset the excess. (See OMB Circular A-l 1.)

                                                                i                                                      --.
                                               Volume 1. Versi?n 1.0                                                i’
                                                 Fekuuy 28, 1997                                                     3
                                                                                                          SF@     NO. 2
                                                 .) TlrRLE30:     -             :
                               ASSETS AND LiABlLlTIES    AFTER i$IE MO,DI$iCATION                          ”i
                  ,’                 IN -0BER      1995 (in tboarmdr ii dojlan)
’                                                                                                                        1
                          ASSETS                                                LUBILITXES

                                                         e3.401    Lqrti guarantee liability                    $3,401

                                                          ;   ”

              At the same~time~ the prognm’s loan gurnntce liability at the end of fiscal year 1999 is also 33,856, which
         eepk the estimated default claim paymtit of S4.800 minus $943, the present value of the.estimated net
         r&ve~y    fi’om fonclosing as&s; It has been estimated that the net recovery would be $1.000 ad would be
         rulixed at the end of f-1 year 2QOO. ‘fh@ pre~t val$ of the net recovery disco&d          to the end of fiscal
         year 1999 at t&e origiorl discount rate of 6 pement is $943.     .’

              As expected, when the guamnteed loans mature at the end of 1999, $6,000 of the principal is in default. TO
         mctt its guuantee ,obligation, the loan gurmntee program must, pry 80 percent of the *fault amount, or S4.800,
         to the 1cnder.s. When the defaults occur. the loan gurraatee program in this example has the options to foreclose
         poperry pledged by the borrowers who defaulted, and/or to require the loans involved, ns a compensation for
         *wwpyment.                  -:..                   ,              _             ,’ ,( ,_ .‘~:                .’

             %.is assumption is mnde only to avoid repetitious illustmtiops.

I) ‘_I
   :cl                                                 Volume I. Version I.0
- ..-.                                                   Februuy‘ 28.1997
 SFFAS Nt+ 2         ..

       The occouating rtendard oo foreclosure requim that when property ir transferred fkom borrowem to
  a fedwai credit program, through fo~ior~re      or other mum, aa l compenution for ioucr that the
  government rurtained under port-1991 looa guorontti’       the foreciord property be recognized U an asset
 ,at the present value of its krtimated iture net cash inflows discounted at the originai discount rate.

      The accounting rtandard rtatea that at a forccioaure”of yaranteed IOMS,~ federai @wantor may
 acquire the ioaar invoived. The acquired loans are recogi&ed at the present v&e of their atimated net
 cub Inilowr fom wiling * ioanr or from coiiecting paymentr fern the borrowerr, diacouated at the
 origimai discount rate.

        In thisexample, the default occurs atthe~loans’~mat&ity.and .virtually no.cash intlo~ cen,berua@edeither
   from selling the loans or collecting payments from the borrowers. The loan guaranteeprogram thereforu
   forecloses the assets. It continues to estimate that the net cash inflow from possessing and +ing the foreoloaed
   properly d he Si,OOOand will be received at the end of ,fiscal year 2000. The prcse& valueof the es&n&ted
...net.cuh.inflow..di3ooun~.at..the..originrl.rate of 6 percent to the end of fiscal year 1999 is $943.

   - Tb& kcoanting standmd rquim         &at if a iegititp& cidm exists by a third party or by the~borrowrr
 to m part of the recognized vaiui of the foreclosed ameta, tiie p&eat vahk of the atimatod ciaim be
                                                                                             : :~,
 recognized, u l special contra valuation l iiowu~ck

     In this example, no such claim is assumed. Thus. the present value of the foreclosed property is ncordod as
 an asset at $943. Concurrently, the amount pf $943 iscredited to the loan guarantee liability, so that the loan
 guarantee liability is increased from 33,856 to 54.800.  .

      The default payment of f4.800 is more than the.fundbalance .of S3,856,‘and the loan guarantee program
 does not receive cash from selling the foreclosed assets until one year later. The loan guarantee program
 borrows the difference,of $943 from Treasury. ” Thus, the fund balance is increased by $943 to S4.8OCj.
 allowing the default payment to be made.            ’ X

      When the default payment is made, both the fund balance and the loan guarantee liability are reduced to
 zero. The credit program takes collection action against the borrowers. However, further recovery is not
 anticipated. At this time, the loan guarantee program has the following asset and liability balances as shoti m       : :   ,.’

 Table 32.                                                                                                              -.
                                                                                                                 I., .i I,
                                                    TABLE 32:
                            ASSETS AND LUBILfiIES         AT THE END OF,FY 1999
                                             (in thouundr of doliars)

                                                           :                                             >
                                                                                                     .    ,.   .,P

    %e l ccouutittg stgxidard is the same for property transferred in partial or full settlement of post-l 991 direct
loans, and the application of the standard to direct loans is ilhtstmted by the present example of loan guarantees.

     s’Borrowing from Treasury is necessary in this example because all default payments occur at ,the same’ time. c               .
If they occtured in different years, the default payments in most oases might be covered by the fund balance and
the proceeds from selling foreclosed assets. Borrowing would only be needed for defaults near the maturity date
of the guaranteed loans

                                               Volume I, version 1.0
                                                 Febnuy 28.1997

                                                                                                                                                            SITAS NO. 2
                                   .‘,    _’                   ,.             ‘;
         F. DISPOSITION           OF THJZ FORhCiOSEi)                     PROPkRTY                      .                                                                :
              The. foreclosed, property is initially ,FcFrded at the present value of the estimated net cash inflows. Until the
         ~perty, is sold, +e present value of the property’ mu”’ + updated to ieco@ize change$ imralue due to the
         passage of time. : The recognition is m+ thrt+          an dccrual of interest at the otiginal ,di&ount rate. The
         amount of interest &rued for fiscal year 2OOCjis S??, which equalp,he book value of the foreclosed proper@ at
         the b&@nnin&.of the fiscal yea;; Ghich is $943, times the oiiginal discount m&e of 6 percent. This amount of I
         intemst is reco@xed as inter&i inco&e,‘a!id’is idded to the,bo@k vblue of ti?e fo;eoldid property. As i result, ..
         ti book value of the foreclosed property becomes Sl,OOOat the end of fiscal year 2000.
             Inm&      is alao   a&-d          on   &e   &bt   b     T&suy     of 5943 ai the mtc ‘d 6 pe&~lc ‘,Th& amOkit  of i&Wt -for
         fiscal ‘year 2OQCtis SS7, and i! pqp@d                      as inbrest qxqm:,     The amvyt is added ‘0 the debt to Treasury. Ab
         r~t~~‘~btto~~~~~o~~~~l,~ii~eadpf,fiiorlye~2000.‘,’                                                           :/,             ,: .,    ”            ”   ,‘.,,\
                                                ..,                                                         .*                                     ,’ .:’        :..          :
              ft is a&ea   & ‘& &&:ii.‘;bi&j,i          the &i ‘kf’&l                      ,yeir ,2m aid k                  bgodt        of net proceeds fram,                    .1
         m mle b sl,m.            me am&t’&        & &t ‘jrroo&&’ &“ttd t0 piy off ‘th6 debt to ‘Treasury; AS a mault. the                                                        ‘.
         asset l d li&ility      balances for tl$s cohort of loan guarantees are reduced to zero.
                                                     /      :;             i ‘,         ,             ;     ,, ,.
              A ~&&on         ah@ b;l’&o&,&       for the nei. cash flow ‘&f Ihe &perty aftes’the end of fiscal yiar 2000.
         If the m&&ion       resubd ii k’[nd&@xi of the .jkeni value of the property; the amount of thi: reduction
         would be recognized as sub& ‘&$&se re&ti&tes.             As illustrated in preoding sixtibna ‘on nesttiatea, a
         Payment from pezmaneht indifinite authority ,would be available to cover the subsidy reestimate expense. &I
         this case. because the property was sold at the eat&n&d time f&r the estimated hmouni. there is no-tieaiimatl
         subsidy expense.

   .     PART q        iPRE-1992 LOAN GUARANTEES
                                     ._  ”                                                                               ‘(
‘cd          pre-1992 loa&guati$es    aie ldan guarantees comniitted prior ‘to October 1, 199 1, and, the liabilitils under
         pn-1992 loan guarantees are reodrded in liquidating accounts. The ,accounting’standard requires that the
         lkbilitkr   of pm-1992          lo8n g&nkca                be icco@kedwhen         il is more       likely    th8n not th#                the lo811
         guarktee~ wlllx’equire a hiture hh outfloir k pay ddifault”klaims.’ Tlie liability of loan guannteci
         should %e matim8Cd     iii&h ye8r 8i’of the date of the fininci8l iit8temenW Iwe&ai8ting   li8bliltlea~ the
         risk f8etora discuised,in          the &d&d                for post-1991 loin @iririnteer should ,be considereil.                              Disclosure       is
         m8de of the f8ce v8lue           of gu8Imnteed            lo8na outstanding   8nd #he 8m6unt gu8r8nteed;’

              TbC rtandwd        ames th81 rirt8temen~ of pre-1992                    lo8n gu8r8nteer            on 8 present          v8iue       b8sia is permitted
          bat hot required.

              AU of the amounts used in the text that follows are in thousands of dollars.

          A. RECOGNITION                OF LIABILITIES                                                                         .,.,

               Assume that a federa! credit program guarantees a group of loans and the guarantee was committed prior to
         October 1. 1991. At the end of fiscal year 1994, the loans have outstanding principal of $5,000 at 7 percent
         interest mte. maturing in three years. The borrowers are required to pay interest annually and to repay the
       ,-principal at the end of 1997. The iuarantee covers 60 percent of the principal.”

              ‘A loan grantee    may guarantee bqth principal and ,interest payments. In that case, the estimate and
          recognition of loan~guarantee liabilities should be based on defaults on both principal and interest payments.
 ,c-.l                                                                   V&me I. Version 1.0
                                                                          February 28.1997
     Dkcl~sttre is made in a footnote to the fmancial statements for ftscal year 1994 that guaranteed loans have
an outstanding principal of S5.000, and the guaranteed amount,is S3.000. (A similar disclosure is ma& in each
year so long as the guaranteed loans arc outstanding.)
                                                                                                                         “1.   ;;
      The program wgement        evahates tbe risk factors enumerated in the a~oouttting standard, and estimates               ’
that $2500 of the loams’ pMcipa] repayments would be defaulted WhCB thk loai mature. ‘The program will pay
60 pcmettt of the d&ttlted l motmt, equal to Sl.500. It is also estimated that the credit program would realize a
net moovery of $500 through l cquiriBg and sclling.pledged assets. Thus, tlte progra~t management ‘recoguixes~a
liability ,of $1 JtOO,which ,eqt& .the -estimated .&fault payment minus the net recovery. The S l;OOOis charged
to &fault expcttsc.u

U   MODIFICATION         OF PRE-1992 LOAN GUAR4JUTEES                                                    ,.
                          .,                                    ~ .,
    AMBM that ia October 1994, shortly after the closoof fiscal. year ‘1994, a &&ion is’made to incre&e ‘the
.guam~tee. from..60 .peroeBt -of- the--loan-payments-toSO -percent. ~~Thisaction-is tithitt’ the ,&ftition of dir&t
modifbation bw+ue it is a fcdml govemmc nt action that~diicctly changes the, estimated subsidy cost and the
present value of outstanding loa~ guaraBters by l ltermg the terms of existing contra&s.
     Tine aceoaatiag rlurdwd oa modifi&as          o‘t ~OUI gyaraateoi St&es thit with respect to l dikct dr
iadiwt    modifiqka      of ,prr-#99? or port-1991 iou~ guwwwes, the cost of mod$iWioa is the excess of the
post-modillutioa    ibbiiity of tb? Ibaa ,--tees       over their’ pre-modifktioo lbbiiity. The moditkioa
cost is reco@zed as modifkatba        espeaw nhea the iou~ gu@raatees are modifkd

    AccotmtiBg for the cost of modification takes the following steps:


     Ihe pn-modification liability is the present value of the net cash outflows of the loan guarantees estimated
at the &Be Of modification, under pm-modification termsad discounted at the currc~t discount rate.

      It is es,timated that under the prc-modification terms, a &fault payment of Sl.500 would be ma& at the end
of fiscal YCU 1997, ad a net recovery of $500 from the, sale of foreclosed .asscts would be received at the’ end
of fiscal year 1998. The OUpBt        discount rate for ,a maturity of 3 years is 4 percent. As shown io Table 33. the
Prewnt value of the estimated net cash outllows discounted at 4 percent is S906. This is the pm-modification
liability of the loan guamntees.

    %is assumes that no liability was previously ncognited. If a liability has been recognized for the loan
guarantees, the liability should be adjusted to the current estimate. and any increase in liability should be
charged to default expense..

                                               v01uBte I, Version 1.0
                                                 February 28.1997
                                                                                                                                                      sFFAS NO. ,2
                                                                 TABLE 33:
                       ‘.                            PBE-MODIFICATION.        LUBiLrrY                         ‘.,                                                                                I
                                 (III tho&odr        of dollan, calculated at the curnet                       diccouat, +)                   ;. _        ’        .   ,,
          .,“..;.                 .,.        ‘h   ...(                      ‘/



     ,          ..,.,,.j        1,,, 3,                                 .,,)                                                                                                                      1
                            ,.. ,                                       i>.                      ” ._,               ,’       1,’       ,,,
         ,i:.                                                                                     /‘:;:                                                                .,       :                 I
                                                                                                                                                              ,,            :
’   (2) CALCULliTE                  THE POST-MODIFICATION                               LUBiIil’b’                                                             I
                                                                                                                                                                                            * [
     T& loan guamnte&’ post-m&Mkation liability is the present V~UC of -the )08tl @fantees’ net Orsh hollow?                                                                                  h
estimated at,,$te t&e “ of n@itkation urykr postTmodifrcat$n thy and discounted at the current didcount rate.                                                                   .   1         1
                                                                      .,._   ;                              .’
     Tbo modifica@& &d           pbe gbamntee’ frdri;;:661@cent to gO,@ceht. It is,est@nated that S&SO0 of the::
principal ;Ic&me@s vy’i(j‘Gf&l~ wlkthe        lokns mat*.     With th6‘kxpansion of the g-tee       ~~rcentagei the
credit program will pay”&p&ucrit ii t& &faultkd ‘imdiints, ‘equal to $2,000, -to leriders at the end of f?l       Ym’
1997. A nef:recovey of S500 would be received from selling foreclosed’assets at the end of fiscal yeu 1998;
Th? cash ou’hows estimated under: the post-modification terms are discounted at the current discount rate of 4
percent’ As shown in Table 34 below, “he present value of ,the +im&d           irct cajh.outflow is $1,351. This is:                                                                          c
the post-modification liability of the loan guarantees.
                                                                   TABL;EM:.,‘.                                           :
                                                         P~STAMODIFICATIQN      ~UBi~rrv                                            j”
                                    (i+ thyqndr            ,ol
                                                            j /:,d6lla~,c$cuhted
                                                                            ‘.              at tlw current discount rate)


    --/VT-;--’ I-.-.- ‘1 . . . .        :,   “           ~      ,--_,,,,,,-, ,!, .‘“I                ...j, ., ,,,.,^. : Y... .:     _         ., ,,

                                                                                                                                                                                        ,    ,i

                                                                       Volume I, Version 1.O
                                                                         Febnury 28, 1997                                                                                                    I



     The cost of modification is the excess of the loan guarantees’ post-modification liability over their                     r’
 pm-modification liability. Since th& loan guaiantees’ post-modification liability is Sl$Sl. and their                           -IL
 pm-modification liability is $906. the cost of n@ification is $445. which is recognized as a subsidy CXpenSe for               ~
 modifications.~ A subsidy appropriation of @t amount is required before the modification can take place. The
 apprcipriated amount is paid to the financing account.

     (4) +KUJ,,ATE           TX& GHAN&     IN THE BOoK VALti           OF THE LIABILITY
      WI&. m&t        b modi&atiopr of pre-1992 lo- guwaatets, the st8nd8rd requires th8t ihca ire-1992                    ”
 lou~~pa~~          l m dim@        modi&,      they be tranifecc;md ‘W •-fin~eing~8~uat         +d the odsthrg book    ,,
 v8k of the l&bUity of the .modifled bur gu8rantee#‘@ changed ,to 8n 8moant eqU8l to their
 post-modlktbn         li8bility. Any subsequent modillutiok        is t&ad    8s 8 hiiidIfl&tba    of post-1991 lOUI
 #u8~toehW            ” ‘.
       : :. ‘, I .I                                                      ,’
      prior to the mod&iion.       the liability of the loan~guarantees was recorded in a liquidatingaccqant ai $l.OOO.
 Upon modification, the loan guarantees are transferred from’the liquidating account to a fhancing account, since
 this is a direct modification. The liability is,recorded in the financing account at the post-modification liability
 of Sl.351. The change in book value of the liability .is ui’ increase of $35 1.

     is) RECOCNIti
               ..”       A ,GAIN OR LOSS
      The ueounting st8ndkl on lo8n w8rrmt&-modifktions         states th8t the change in ‘the 8&ou&‘of
lability of both.pre-1992 8nd ,post-1991 lola gu8r8ntees resulting from 8 direct or indirect modiffc8tion
md the cost of modlfintbn     nili norm8lly.diWer, due to the use of diffetit’discou~t  rites oi the use of
difkent,mcupremeat       methods. Any divercnce between. the ch8ngs in’li8bility 8nd thk’&t’of
modifScation t recophed~u       8 g8in or lou

     In this case. the oqst of modification is SSSS,and the change in book va!ue 1s $351. The difference of S94                i=-=-
                                                                                                                               3       i
is recognized as.1 gain.

      When the loan guannees are transferred fro& the liquid@g account to the financing acdount, the
liquidating account pays the financing account an amount eqpl to, the loan guarantees’ pre-modification liability
of SF.     The transfer of the loan guarantees has the following effects on the liquidating account: (I) the
existing liability of the transfemd loan guarantees equal to S 1,Obo is removed. (2) the fund balance is reduced
W S% which is the amount paid to the tinancihg account, and (3) a gain of $94 is recognized.

      The financing account records the liability of the loan guarantees at S I.35 1, which is their post-modification 3
liability. It also reco& a fund balance bf 51,351, which consists of lhe’$906 received from the liquidating
a-unt,     and the $445 appropriated tq covg the cost of modification.

    a The accounting standard states that when pm-1992 loan guarantees are indirectly modifie& they are kept
in a liquidating account,Xnd that the liability of ‘fib;& loan guarantees is reassessed and adjusted to reflect any
change in the liability resulting from the modification. indirect modifications of pm-1992 loan guarantees are
not illustrated in the Appendix.

                                               Volume I. Version 1.0
                                                 Februry 28.1997
                           \ , ,, _,.

        ,s _I ‘,

      ,.’   .;             regardingrevenuerecognitionfor property seizedto,‘Isatisfy
                           ~‘Ly~~ ;~i;lbiliti~.: ;:;;     ; : : ,: .‘1
                           ” ,‘;”            ‘. ’ ,,; *        ri:,,, .’ ,’ ‘I ,”.,, ,,
SUMMARY            “”

      This,statementprovidesaccountingstandardsthat apply to several‘typesof tangible
property, other than long term,fixed assets,held by federal governmentagencies.These
accountingstandardscover the ~followingassets:
                       - inventory(i.e., items held for sale);                       :q,,.
                       - operatingmaterialsand supplies;
                       & ,&&pile &$eh&; ’                               ,.. .’
                       - seized:& forfeited propetty;          .’                   ,’
                       m-foreclosedproperty; and
                       - goodsheld underprice supportand           b
                         stabilizationprograms(including nonrecourse
                         loansand purchaseagreements).

                                     Volume 1,Version i.0
                                      February 28, 1997

 hventory Held For Sali

         The standardsrequire reportingof inventory by categoriesas follows: (1) inventory               ,‘I‘,
 held for sale,(2) inventory held in reservefor future use,(3) excees,obsolete,and                            >.’
 unserviceableinventory, and (4) inventory held for re#air.

        The standardsrequirehistorical cost or latest acquisitioncost valuationof inventory
held for sale and inventory held in resewe.for future.sale. The.standardspermit useof any
other valbationmethod (e.g.. standardcost) which re&nably approximateshistorical cost.
When historical cost valuationis u& acceptablecost flow assumptionsincludethe first-in,
first-out, weighti averagi or moving-‘average  c&St’flow~‘tiUnrptions. tie standardsdonot
provide.for .useaf.tht last-in, first-out cost fl~yc-~p$~n    0~.lower of cyst .or market
valuation. .Whon!atst aqu@ition coqtvaluation‘is.4         the valuesmust be adjustedfor
unrealizedh&ling gqi=:and loss&. ..
       Excess,obsoleteand unserviceableinventory is to be valuedat net realizablevalue.
Inventory held for repair is .to be valuedat either historical cost or latest acquisitioncost less
‘an allowancefoi the estimatedr*air cost.

Opcnting Ma@riaIs -and Supplies

      Operating materialsand suppliesare to be accountedfor underthe consumption
method and valuedat historical cost or any methodapproximatinghistorical cost (e.g.,
standardcost or latest acquisitioncost). In addition,categoriesfor (1) operatingmaterialsand
suppliesheld for use,(2) operatingmaterialsand supphesheid in reservefor future use,or’ (3)
excess,obsoleteand unserviceableoperatingmaterials.andsuppliesmust be reported.
       An exceptionto the consumptionmethod.is provided#ten (1) the operatingmaterials
and suppliesare not significant amounts,(2) they are in the handsof the end userfor use in
normal operations,or (3) it is not cost-beneficialto apply the consumptionmethod. In any of
theseevents,the purchasesmethodmay be used.

Stockpile Materiala
        Stockpile materialsare to be accountedfor through the consumptionmethod using the
historical cost valuationor any methodthat reasonablyapproximates,historicalcost.       :            ”              ,. ,:1

                                                                                                         / ’ “,
                                      Volume I. version 1.0
                                                                                                         :L -I .P
                                                                                 SFFAS NO. 3

Seizedand Forfeited PropcrtJr

        The market valueof seizedproperty other than monetaryinstrumentsis to be disclosed
in the notesto the financial statements.Seizedmonetary:instrumentsare recognizedas assets        -..
with an offsetting liability. This treatmentwas.providedto foster a higher level of control
Over seizedmonetaryinstruments.

       Fo&itld property is recognizedas an assetuponforfeiture ,&d valuedat market value
1~s~any lie&. Revenuerecognition.is deferreduntil,saleexceptformonetary .ir+umena ,,
Specialpro+ions are madefor. items seizedin satisfaction.of t& liabiiities and for transfer Of
           ,.: governmentedities
                             ‘_ for their use.                                .*       )/..>



        Foreclosedproperty must be classifiedas Post-1991properly or Pm-1992properlyto
remain consistentwith the provisionsof the Credit Reform Act .of 1990.,‘Post-1991property
is associhcdwith loansor loan guaranteesissuedafter September30,1991 ,andis valuedat
its net presentvalue. ‘Pm-1992property is associatedwith loansor loan guaranteesissued
bdore September30,199l and is valuedat the lower of costor net realizablevalue.

Goods Hel’d Under Price Support and Stabilization Programs

        Goo&sheld underprice support and stabilizationprograms(e.g., commodities)are I-
valuedat the lower of cost or net reali&le value. For nonrecourseloansthe-standards
provide that allowancesbe establishedfor expected,  lossesandlossesrecognizedif it is more
likely than not that they will occur and the lossesare measurable.For purchaseagreements
the standardsprovide that contingentliabilities be establishedand lossesrecognizedif it is
more likely than not that a losswill occur and thatthe lossis measurable.

                                        v01umc I, v&ion I.0
                                          Februmy 28, 1997

                                             TABLE OF CONTENTS
                                                P8mgnply in                                                                                                              !‘)   t
Contenb:                                  Original Pronouncement8                                                                                          Pye:

CHAPTER ,2: Accounting Stmdards
  Inveatofy . . . . . . . . !. . . . . . . . . . . . . . !%335   .....     ...    . . . . ., . . .   ...   ....    ...   .   ..   .   ..i    .   .   ...   .   .   301
  Operating hMerials and Sup#ies . . . . . . 36-50               .....     ...    ........           ...   ....    ...   .   ..   .   .. .   .   .   ...   .   .   305
  Stc&Dile Imeriah . . . . . . . . . . . . . . . . .-*5146       .....     ...    ........           ...   ....    ...   .   ..   .   ..     .   .   ...   .   .   308
  Seized mud Forfeited Property . . . . . . . . 57-78            .....     ...    ........           ...   ....    ...   .   ..   .   ..     .   .   ...   .   .
  Foreclowd Property . . . . . . . . . . . . . . . 78-91         .....     ...    ........           ...   ....    ...   .   ..   .   ..     .   .   ...   .   .   ::i
  Goods Held Under Price Support and
       St~bilizatioa Progmu . . . . . . . . . 92409              . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318

APPENk         A: Banis forCo&siona             . . . ,I10462    . . . . . . . ..%.....>........................                                                   321
                                                                                                                             ,.          I.
Pamgnptu      I- 16 and Glosuy       omitted.

                                                       vohmc I, vanion 1.0
                                                         February 28.1997
           ’ : “,.,
                ‘, ,
                 ‘,.:,‘(,‘, ‘.
                       17.                 *~nven&l’ is t&ble’pcr?onal’
                       (2) iq t,&miceu of ~rodu&on for @de,
                                                                              y!vp;at); that is (1) held for sale,
                                                                 yy(j)tob$constuned in the produotion of
                       goo& for..sale.or in the provision of services;.for,,r fee. The term “held for mle” shll
                       be &preted     to inch& item& for sale ,or transfer io (1) entities outside the feden
                       govmrmen!, & (2) 0th fecieid eittitiei. The ‘p&&al objective of the mle or transfer

                       ,g.     ‘/                                    /      ,A,..
                                    &$$,,&,w         In-+    &I, &,,nc9,@,&&&&,        title psses w he
                       purchasitrg~entity ‘or when the goods rre+l&erki    tothe$rchasin~       entity. Upon sale
                        (when the title psses or the goods are delivered) or upon use in the ,provirion of a
             .I         service, the related expense $a!1 :be recogn@ed,and the cost of those 8ood.s shall be
                  /(   ‘&&i&i fro+: iiivenjory. Delivery or @i$kuve        @ivery, shall be based on the texkts
                        ‘of the ,contmct re8~ding.$$jxn$~bndloi ,, dehvej.        ’
                        20.         ‘Vduitieni i+qory +ll be v+kd $‘eit+(l)             historical cost or (2)
                          I.    acquisition cost.  ’    ”

                                            Historical cost %lW~include iI1 ‘approprk purcbade. transportation and
                                    on costs incutred to brin8,the ite? to their ourmnt condition and location.
                                              osts. ‘such is excess&e handlir$‘or reworhcosts; shall be charged to
                       &*ti.           of ,*e pend.’ Db/&d &&+:~i;h,*            ‘b; i;iilGd rt its f,ir wl; rt *e
                       t&e of,donation. Inventory &q&d         through ix&rig;     of horunonethry assets (e.g.,
                       km)     shall be valued rt the fair value of the asrt.received at the time of the
                       exchange. Any difference between the recorded rrxtount .of the asset surrendered and
                       the fair value of the asset received shall be recognized IS a gain or a”loss.
                       22.        The furt-in. fust=out (FFO); weighted avenge; or moving avenge-dost
                       flow assumptions may be applied in F,ving ,at the historical cost of”md@tg,inventoy
                       and cost‘bf .goods sold. In addition, my’ other valuation method may be used if the
                       results reasonably approxitnate.those of one of the above historical cost ,methods (e.g.,
                       a aadard cost system).                                   ‘.              .
                                                                      .j,l.              ,.._
                                                                                     *,              :-          ._.

,’-                                            Volume I, Version 1.0
\..                                              February 28.1997
B      SFFA$   NO. 3

                                 23.         (2) The latest acquisition cost method provides that the last invDi= price’
                                 (i.e., the specific item’s rctuel cost used in setting the current yeu iubilized S&
                                [sales] price) be applied to all like units held including @ore units acquired through
                                do+ion or nonmonetuy exchange. The inventory shall be revalued periodically but at
                                least at the etid of each ftsorl year. Revaluation results in recognition of unrealized        .r’
                                holding gains/losses’ in the eirding inventory value.’ Upon adjustment for tmrealized
                                hold@ &as/ios&s. the lkest~roquisitioa cost method then results in an
                                qJproxiJwtion of historiorl con

                               24.        An ~~llowawe ‘for imdibd   hoid@ &tts/losses i inventory shall be
                               &tablished to capt~ these &iisIlouer,  The end& hlance of thisrIlownace shall be
                                ti+ cutn~ti~    ciiirerenci b&we&   tiii~iiisto~wl   ~~b8sed   00 l stitwied or l ctwl
                                ~.ltution”alld th$ l&t ioqliisition~ tio:oriof &lb    iMentoly. The balanoe rhrll a
                    .‘.         l dj*      ,+ch t@e thy ik+y         b+nci $ l djiidda The rdjusttaeat .neo6Iuy to
                                t$ine’the #low&e       to the rppropkte 6jlrrrce’+l    be a cotn@oncnt of cost of goods
                    .,          sold for the pcriod~udesoribedbe@v.
                                 : _                ,:       :         .,:.-   ‘.’     ‘*
                               25.        The c&t of goods sold foi +e poiioa +a11 be eontputed as follows:
                               Be8ktpin8 inventory at be@ia’g-sf-@-period    .lrtest kquisition      cost
                          .,   1ess:.k&nirg   rllow+r$ for uplulikd     h&t&    pin&@

                               C&t of Goods Available for Sale
                               less: ending inventory at end-of-the-period latest acquisition cost

                               26.       ,EsceptYn to Vduatiom.         Valu& inventories at expected net rutliuble        ’
                               value is acceptable if there ii.( 1) an inability to determine approximate costs, (2)
                               immedirte marketability at quoted prid;es. and (3) unit ‘ktercbangesbility (e.g..
                               pctrohm metves). Application of this exception may result in inventories bein
                               valued at gruter than historical cost.

                               27:        @vaitoq Held br R&&e for,,Fm$twe Sde. Inventory stocks may k
                               aruintriued because they ke nd;t’readily available in the market or because there is
                               more thn a remote ohanc~ tht they Will eventually be needed (although not

        ‘This wit VOW k mfetrcd to as the latest acquisition cost for the remsittder of this standard.

         %Mttg      srins (or loss@= result from holding r&s in periods of chat@g prices. Under histotical oost
    methIs. hhiiq        @ns (or losses) ue not sepuately rrcognizecl even though they exist. Under the latest
    l C@dJn cost method, holding pins (or losses) will be recognized in the valuation of inventory sinoe tht
    VrJW is rdjwted perbkaliy        to present the more current latest acquisitiork costs. These grins or losses M
    unrealized hold@ grins or losses. ‘Unrealized” refers to any pin or loss l ssocinted with iuveatoy still held
    by the tntity. “Rcrlizati~tt” of the holding grin or loss occurs only when an item of inventory is sold.

                                                  vohtw I, version 1.0
                                                    Fehnmy 28.1997

    item on the .face of the. fmnciel statements r&h separate disclosure in footnotes or (2)
    *own    u l .sepuato l@e item on the face of the frnrncial statements.
    30.         Such i&on&y shall be’ valued at its r.xueoted not realixablo value. The
    difference between the ,Orrrying amount ~of~the+AMty       before identification as         ,i
    excess, obsoleteor ukervioeable and itr expected net realixablc value shall be                /
    recognixod as a loss (or gain) and Elhcr separately reported or disclosed. Any
    subscquont adjustments to its net realizable value or any loss (or gain) upon dispose1
     shall also be recognized as a loss (or gain).

    31.         Management shall develop and disclose in the financial statements its
    criteria for identifying oxcoss, obsolete and unseticeable inventoty.

    32.       Inventory Held for Rep&       Inverttoy held for repair may be treated in
    one of two ways: (1) the allowance method or (2) the direct method.

    (1)         Under the allowance method, inventory hold for repair shall ‘be valued at the
    same value as a serviceable item. However, an allowance for repairs coatm=aaset
    account (i.e., repair allowance) shall be establjshed. The ennual (or other period)
    credit(s) required to bring the repair allowance to the current estimated cost of repairs
    shall be recognixod as current period operating expenses. As the repairs are made the
    cost of repeirs shall be ohargod (debited) to the allowance for repairs account

    33.        (2) Under the direct method,. inventory hold for repair shall be valued et
    the same value as a rmriceable item less the estimated repair costs. When the mpair is
    actually made, the cost of the repsir shall be oapiulixed in the inventory rccorint up to
    the vrlue of a serviceable’item. Any differencebetween the initial estimated repair
    cost and the l ctual repair cost shall be @her debited or credited to the repair expense

                        Volume I, Version 1.0
                         February 28.1991
    SmAS   NO. 3

                    34.        Trausition to either of these two methods may result in n+aiziug         an
                    iec~+ed‘imouat        of needed repin tht W& not prsvi~wly accounted for. To
                   avoid overstating k&r expense’ for the ‘Ii& period tbat repair expense is accrued,
                   p&i per+ l kinta irk td bb’aeepintely identified or estimated. The estimated
                   amount, to rep~‘inveato~      ‘that is attributable p priti’periods shall be credited to the       i
                   repairl llow+tce under the r+r ~llowake method or to the inventory account under
                   the direct method and reportkd as an adjustment to equity.
.                  DkbnweRe&remea(r.
                   35. -      &era1 composition of inveptoy.
                       -      +sis for *ten+ipg      iaveritory v&t& kcluding the valuation method a&
                            ..mycon no* l umptions. ,,                  ..
                        -    Changes from prior,yorr’r rccouating me*,          if my.
                        -    Baluiceti for each of the follow;iag. oatqo;iir of inveatqy; invtitoty hefd
                            .for,.cupnt ad+mqttory        .&Id in qaerve for .fimfe ule, cxceu, obroletc
      j                    “and unserviceable iaiktito~, rhd“i&atoy         held for repair U&U otberwi~
                             p&d        o&he fticial      qtatem&e.
                       -     Reigidns     od the ‘ule,Of ,pW&ia~:
                       -     ll+ie+sion    wit&i for i&w@            t& category to which iaveatoty ir
                       -     d~esilithe      &ia      for identifLiag the category to which iaventoty is
                         I assignsd;
                                        The pkoiisiow of this, statement need not be
                                                applied to immaterial items.



                                     Volume r, vemiotl 1.0’
                                       Febmuy 28.1997       .

                                                            ,,                                                                                   SFFAS ?a      3

          OPERATIl’iG M+~EkI+S                              +l’lD ,SjJPPLIEF                                      : ‘_       ,,,:
                  ,I ,. ,_                                  :;           ;., I.                                    )I.~ ‘_ /
                                         36. ‘, .. ,.D$I+qn.      “Opt ratin g materiaIs and supplia7 consia of tan-        personal
                                         property i&be cotistitn ed’ innortnal’opeAio&~    Excluded are (1) goods that have been
). ,-.,                                  acquired for tt+n cot$tucting real property or in assembling eqt@nertt to be used
                                         by* the ent&y,,(2) stockpile .m&ials.: (3) goods held under price stabilixatio~
                                         pew-,      <4J.@y&y+       property. (?I yi=!+
                                                                                     i !,    forfpited, properry. and (6) m=ntw.
                                                                 .,,.,“,   ‘                           .‘..

          .i/                        .. j7,       &$ting:,mate~als and supplies shall be oategorixed as (1) operating
                                        m&ial;   a&+j&     held, for’ us& (2) o#ti$g    materials and sttpphes held in
                                        &VC forTwS&.‘or       (3) ‘lx&ss,~obsole~, ,a,ndu&r$eable      operating materials
                                ,.      ,& rupplia f&a ccl~g~~es.ui”~~f~,in:-~~~~,36;              45, & 47 ~$p~Ctkly.
                                                                 .;:           _,..,       .i,   : ‘, ,_>,’: I.      _   1..: I _:‘_   ,~
                                              .’   _,


                                      pss upon: deliv+zF of,he:;goods. &livey or ~o~t$tive, delivery shali be based on
                            :         ‘die’ t&i& ,yf ‘th+~ottt;ia
                                                             :_   rega+ng
                                                                  ., .,   ,&&mg,,~d/or   delivery;
                                                        r1 ,;-/ ;
                                ,,, i 39.: .’ ‘i& oon ,bf’&ds &all be i&&d           from oph$&    materials and supplies

                                         ii$y bea4pp;lied
                                                      ‘.‘,“;.*,to o&&i& inat&@ and ~su$piies;.~e~j$rchaas method provides
                                         thht, o.ieram@taterial~ a&$&&s        be txkned’
                                                                                  ‘. ,’    when _,
                                         41.           &it ‘;i3d ,$br ii ‘any‘o&ponetii of. a repoiiing .enhy that obtains’ goods hr
                                         direct‘use,:..,,in ‘!.‘I
                                                                     ‘.                  olk&63.   isny component of a reporting entity,
                                         in&ding’qontractot$             tlyt t&r&i$‘or     ‘s&s o~~&ttg &erials.and supplies for
                                         Eimvc i,+&&j+not                      b.+&&d.an       id Fri ‘,:,
                                                                           ,‘.           “.!’                                                                      I
                                         4%      ‘-’*va!ii~&     Under
                                                                   .     4hb Consitmptim Method. Opkting                                    tthrials   and
                                         supplies shall .’be valued on’ the basis of historkal
                                                                                         .,.   cost: i.”
                                         43.         Historical cost shall include all appropriate p&hare ad production costs
                                         incyred to. b@ng ‘the items to their cun-ettt cot&ion and location. Any l bttormal
                     i.,                 coats. such’ +i excqssive himdlihg 07 tqwork co&, shall & charged to op&tions of
                                         @e peri%Doni~             ope@g tz&$a\s had supplies, sli$l’b;c &lucd at their fair value
                                         at the time of’donation. Of&ing           ‘mi+erials and’&tpplies acquired through exchange
                                         of nout&ietat$ assets (e.g.. barter) shall be vahted’attbefau         value of the asset
                                        ‘received’at’ the time of the exchange. Any difference bekeen the recorded amount of
                                         the .asaet m&t&red         and the ‘fair value ‘of the asset .reo&ed shall be recognized as a
                                         gain or q loss.                                                   :.
                                         44.         ‘I’he first-in, ftrst+ut (FIFO); weighted average; or moving average cost
                                         flowl ssumptions shall be applied in arriving at the historical cost of ending operatiug

                                                                               Volume I, Version 1.0
                                                                                 Febnuuy 28,’ 1997
     SFFAS NO. 3

                     materials and supplies and cost of goods consumed. I~I additiort, any oe valuations
                     method may be used if the results reasonably approximate those of one of the &we
                     historical cost methods (e.g., a standard cost or latest acquisition cost system).

                     Q&w      CtterpdSr   af OotraypL   MtCritlr   and. Se
                     45.          Opahhag Matoriais and Sapplitt Held In Roiont for Fotuw Utt.
                     Oporeting mr@riala and supplisi stocks may be iz&taiued because they are not
                     readily itiilablt  in the market or beoauri theie is more than a remote chance that they
                     will sventqdlyheBe&& l ltboqh no1 nocouui~y in tbc rtomal come of operations.
                   ; These stocks shall be. classified @s0-h         ‘mtetils e& sup$ies held in reserve for
                     fimro W. O&king mate&             and supplies ‘%&in rep      ,for f&ure use shell *be
                     vaI+ t@ng the snye bash es ope,mting ma&ids ad siapplies held for use in normal
                     opemtions. ihe valuc’of opemting mate&          an&sia&lies held ir; reserve for future use
                     sheII,he either (1) hiclude# in the operating materials end supplies line item’on the
                     faeq of the fmial      statements with s+ar& diwlosure #8 footnotes or (2) shown as rl
                     stpmtt liit iy on, the face of w @n@ii~,~stat&i~~ts. ;Sach materials and supplies
                     rhll k,valued !he same as operating m+iA ._’ and supplies held for use in normal
                     Opm+S.                                             :,   “.
                     i6.        ~‘I%aiteriacoasideredby     -&BeBt        irkltlltifyiBg op&iBg lBmxi8ls
                     end suppliti held in rtservt foi fimare use till&     ‘&&lo&d. Examples of factors to
                     be konsi&red in devel~piag the critetia are (1) l l! relevant cos!s risociated ,tith
                     holding these items (including the siorage and h+lling As); (2) the expected
                     rtpltctmtat w+t when aeeti; (3) the tiqe rqu@d to riplesh operating materials
                     and supplies; (4) tbt potential fir deierior+ion’or .pilferagt; and (5) the likelihood tbrt
                     a supply of the item will be available iq $e future.

                     it.        Exe@, Obtilttt, and IhtrGicci~li‘~6ptrAaig         Mattrialt lad Suppllts                       ~
                     ‘Exc+s .opemtiq materials ibid supplies” are oeting       materials and supplies stocks       : . ‘i       1
                     that exceed the amount expected to:be ,wd in,nornu~‘optratiorts b&ruse the amount              v-z--
                     on hand is niorr tbaa can be u&d in the foreseeable ‘hhiwand that do not meet                              I
                     mai&agemtit’s criter& to be held in rev     for future use. ‘Obsolete operating
                     materials ind -lies’     a& operating materials and sup&s that are no longer needed
                     due io chbgu in~teohaol,ogy,~laws,, customs,,.& operations. ‘UnsWicablt       op&ating  ,
                     mat&iali and supplies. are o+ing      materiaii aad tipplies that are phykdiy
                     damaged ind caauo1 be conruined & opentio&. The citegory ‘excess, obsolete and
                     unserviceable open&g .ma+rials and supplies’ &all be either (1) included in the
                     operating materials,&i supplies line item on the faqe of the financial statements with
                     separ8tc disclosure in foomotes or (2) shown as a separate line item on the face of the
                     fwiaJ     statementa.
                     48.         Such operating materials and suppliei’shall k valued at their estimated net
                     realizable value. The,di&erence bee        the carrying rmo& of the operating
                     materials, and supplies before identication es exce~;ebsolete or mwrvictable and I
                     thee e&mod net realizable value shall be recognized as a loss (or gain) and either
                     mported atpuately or disclosed. Any subsequent idjustments to their estimated xtoLct
                     realizable value or any lou (or gain) upon disposal shall’also be recognized as a loss
                     (or ga&).

                                          Volu& I. version 1.0
                                           February 28.1997
                                                                                                                                             SFFAS NO. 3

                                         49.         Management shall develop and discloae’in the finracial stat&&      its
                      -=>;:I (,          criteria for identif@g exceq obsolete, and,
                                                                                  _‘. unserviceable  operating materials   ad
                                        =Pl?m:                 ’       I,, ,,              ..            ,,
                  ,                  .,.,,   ,o
                                  . , Dlrch-=                Rc$P@fe~+                    ‘,       ,,         ,,           i(

                                         so.       ,-       @nqki, ootapiitioa       $ opemting ctkeriilr ’ bd supplies.
                                                    -       B$s ‘for’ &#$ag           opcmting’ materiil~ ir;d supplies. values;
           .I.                                              in&d&     iIiluitiiii   in&d iild my cost ‘SW ;s¶umptioas.
            .,.        .,         ,-                _,      dhinljei &&.;j&         y&s ~~~o;rtins”‘tie&&; .if my.
.        .w.                                        -       Balaih      fir ka& of tl&‘$&~?rki      of opbm&                    materials mad supplies
                                                            desqibd      ahova.
           /‘,      ; . .
         , ./ ‘1 ‘. ,.; : i., ?-
    .: :
          ;        ‘./    .; .‘: ,,
      ,,       ,‘,
                                                    .’              -’ ./ ,,           .., ;,      .,, .
                                  ,.“’                             \. ; The provisioitsof this stat&tkitt n&i not be
                                                                                 applied to imnukial items.
                                                                               .,._’    .“,.,                     _’
                                                        *             I’ :.                    !       i
        ,,.C..’                                :                                           ,..                                                              I
    :      AI                                                                                                                                               I

                                                                                                                   .   .

                                                                       Volume I. k&on   1.0
                                                                        February 28, 1997

                        51.         Defbitioa.    “Stockpile niatcrials” are. strategic and critical materials held
                        due to, statutory requirements for use in natibnal defense, conservation or national                      ,
                        emergencies. They arc not held with the intent of selling in the ordinary course Of
                        business. The following items a& &cifioally ex&&d from stockpile materials: (1)
                        items that are held by an agency for sale or use in normal opentions (see proposed
                        standards for intitory    and opar+in8~~te~als and ‘%tpplies), (2) items that are held
                        for Ure in the event of an agency’! +a@          ,emergency or contingency (see proposed
                        standard for operatin materials ayd supplies), and (3) materials acquired to support
         2,             market prices (v proposed staadaicj for goods held rinder price support and

                        52.          Reco@h~.       :?me cgtfurii~$on~method of accountin for the recognition,
                        of ~pc‘nre shall be ppli+ for stockpile ‘$i&ials. These materials shall be fecognizcd
                        as r,ucu and ~mportd when produced’ or$ur&ased. “F’urchase” is defmed as the date
                        that title passes ta,the $rchr&n8 ‘e&ty. If the contract between the buyer ad the
                        seller is sileni re@dine passage of We. title is assumedto pass upon deliyey of the
                        goods. The cost of stockpile m@teri?ls shall be removed from No&pile materials and
                        reported ,u .~~..opemting expeti yhen issued for use or sale.

                        53.         Vdu~th.       Stackpile. materials shall be valued on the basis of historical
                        cost. Historic61 cost ihall inclu& all‘.appropriate purchase, transportation and
                        production costs incurred to bring the items to their current condition and location.
                        Any abnormal odsts. such l <excessive handling or rework costs, shall be chuged to
                        operations of the period. The first-in. first-out (FIFO); weighted average; oy movin8
                        avenge cost flow assumptions shall be applied in arriving at the historical cost of
                        stockpile materials. in addition, any other valuation method may be used if the results
                        reasonably apP;roximatc those of one o-+  JR above historical cost methods (e.g., a                 I.
                        standard cost or latest acquisition cost system).                                                            t
                        54.        Exception to Valudion.     The carrying amount of materials that have
                        suffered (1) a permanent declkre in value to an amount less than their cost or (2)
                        damage or decay shall he reduced to the expected net realizable value of the materials.
                        The decline in value shall be ncognited as a loss or an expense’ in the period in
                        which it occurs.

                        55.        Held for Me.     When stockpile materials are authorized to bi sold, those
                        materials shall be disclosed as stock$le materials held for sale. The matefi,als ”
        ,L              authorized for sale shall be valued using the &me basis used before they were
                        authorized for sale. Any difference between the carrying amount of the stockpile
                        materials held for sale &d their estimated selling price shall be disclosed. The cost of
                        stockpile materials shall be removed frop stockpile materials and reported as cost of
                        goods sold when sold. Any gain (or loss) upon disposal shall.& recogaized as a gain
                        (or loss) at that time.


   ?he decline in value shall be considered an expensa if it is an expected decline in the normal course of
                                              Volume ‘r, Venion 1.0
                                                Februuy 28,1997                                                                  f
          Disclosure Requirementa.

          56. --    General composition of stockpile materials.
7 c---)      .’ -   Basis for valuing stockpile materials; including valuation method and ally
‘-. ._              ‘cost flow-assumption.                   ,, .
                    Changei thn @ior year’s rooounting methods, if any.
               i    Restrictions 0x1,the use of qayrialr.   :i ~.
                    BaIences of &o&pile materials in each category described above (i.e.
                    sib&pile materials and.stockp/le ~matetials.held ,for ale).
                    Decision criteria for categotiz&g stockpile materials as held for sale.
                     Chinger in criteria for categorizing stockpile materials as held for rlc:

 iJ,-._                       Volume I, Vrnion 1.0
                                Februuy 28, 1997
     SPFAS NO. ?

     SEIZED      AND     FORFEITED          PROPERTY

                                 57.         AS a consequence of various laws. certain property is seized by authorized           <       :
                                 law cnforcement~agencies. in some instances, there may be as many as three                       :?
                                 government entities involved with seized property. The fvrt is the seizing agency.
                                 Second the seizing agency may turn the property ovei to a custodial agency. Third
                                :f~cialrecordstnay.be.      maintained ,by a %cntral .fund” created to support the seizure
                                 activities of multiple agencies. Alternatively. the seizing agency may carry out one or
                                 both -of thecustodialagency ‘or central fund roles.

                                58.         The seized assets may be subsequently forfeited to the government through
                                l bandonmettt,or  administrative or judicial procedures. The forfeited properry is then
                                sold,, c,onve+d for use by‘ the govetnrnditt, or transferred to other governmental
                                entities. Because this property is.fiist seized, then all or a portion of it is forfeited, this
                                standard &rately     addresses the l ccounting,and reporting for seized property and the
                                l ccotmtmg and reporting for forfeited property.,

                                                                  SEIZED PROPERTY

                                59.        DcfSnition. “Seized property’ includes monetary instruments, real properry
                                and tangible personal property of others in the actual or constnactive.possession of the
                                custodial agency.

                                60.        Recogdtion.      Seized property shall be l ccotmted for in the finrncial
                                records of the entity that is operating as the central-fund.’

                                61.         Seized moneta& instruments *,I1 be recognized as seized’assets when                   :(‘-    b
                                seized. In addition, a liability shall be established in an amount, equal to the seized           I       r
                                                                                                                                  d-     I
                                asset value. Seized monetary instruments are recognized upon seizure due to (1) the
                                fungible nature of monetary instntments and (2) the high level of control over the
                                assets that is necessary.

                                62.         Seized property other than monetary insttumenu shall be disclosed in the
                                footnotes. The value of the seiZed property shall be accounted for in an agency’s
                                property management records until the property is forfeited, returned, or otherwise

                                63.       Valuation.   Seized property shall be valued at its market value‘
                                when seized or, if market value cannot bc readily determined, as soon thereaftar as
                                reasonably possible. Market valw shall bc based on the value of the property

         ‘If the central fund is other than the seizing or custodial agency, the latter should maintain sufficient internal
I’WO~S        to CT out its stewardship responsibility.

       “Market value’ is the estimated l motmt that can be realized by disposing of an item through at&s length
 WUlSOCtiOM   in the marketplace or the price (usually representative) at which bona fide rrles have been
consummated for products of like kind, quality, and quantity in a particular market at any moment of time. For
investments in marketable securities, the term refers to the per-unit market price of a security times the number
of units of that security held.
                         .. . .

                                                    Vohtme I, Version 1.0
                                                      February 28, 1997

                                                                                                                 SFFAS NO. 3

                                       asauining an’activc market exists foi the pioperty. if no active rnarket’exirts for the
                                       property in the genenl a& ,ia which it wis s&cd, a value in the principal market

                   ‘r\                 nearest the ,place of seizure shall be used.

                                                                ..      ,’
                                                   Esce~tioas td Vduatiok       Valuation of property seized under the Internal
                                       R&etiitc Code shall be bas+l on the’ taxpayer’s equiry, that is. market value less any
                                       third-patty liens.

                                       65.       Seized monetary instruments shall be valued at .their market valtic.
                                       Dlsclorure fieqihemcntr

                                       66. -        Explanation of w&t constitutes a seizure and h genera1 desoription of the
                                                 ,’ cmnpoiitiotr of,seizcd property.
                                             -      Metlid(s) of valuing ~seiztxeS.
                                             -      Chptges frdm .prior ye&s accounting tneth&,~if any.
                                             -      Analysis of change in s&d property, inclttdi~g the dollar value and
                                                    t&ii&r of tiized’pro~rties~that irr (1) on hitnd at the beginning of ihc
                                                    ydr. (2) scizid’duiin‘g the+&r, (3) dispoqcd. of d+tg the. year, and (4) on
                                               ‘. :h+d,at4he ettd of the year as well as kttqwqjiens or &her claims l gsutst
                                                    thc$ropetty. This information should k,.presented by type of seued
                                                    prciperty and method of disposition .wherc material.

                                                                     FORFEITED      PROPERTY
     4:.     :       :

      ..                               67.           This stibrction dcfmes “forfeited property” and presents the accounung and
                                       te#orting standards for ,ii. F+resentcdbelow are’ examples of forfeited propcm
                                               :_ ,,                    .,           ,
                                   j         -.      monetary, instrumenu,
                                             -       intangible proper@.
I’                       ‘9                  -       rUl property and-tangible, personal- property.
                                             -       property acquired by the ~ovemrnent tn satisfaction of a tax
                                                     liability, and
                                             -.      unclaimed and abandoned merchandise.,
                                       68.         Dell&ion.     “Forfeited property’ consists of (1) monetary instruments,
                                       intangible property, real property, and tangible personal .propcrty acquired through
                                       forfeiture $roceedings; (2) property acquired by the government to satisfy a tax
                                       liability; and (3) unclaimed and abandoned merchandise.

                                       69.         Reeegitieo end Valuation.      Monetary insvuments shall be reclassified
                                       from seized monetary insttuments to forfeited monetary instntrnents when forfeited.
                                       Monetary ins-eats      shall be valued at their market value when a forfeiture judgment
                                       is obtained. When the asset is recorded, revenue shall be recognized in an amount
                                       equal to the value of the monetary instrument and the associated liability for possible
                                       remittance shall be removed.

                                       70.       Intangible property, real property and tangible personal property shall be
                                       rroorded with an offsetting deferred revenue when forfeiture judgment is obtained. The
                                       property shall be valued at its fair value at the time of forfeiture. A valuation

                                                           Vo1umc I. ‘Version 1.O
                                                             February 28. 1997

    SmAS NO. 3                                                                                               I

                 l ilowanbe shall bi;established for liens or claims from a third-parry. This allowance
                 shall be credited for the amount of any expected payments to third-p@ cleiman~.

                 71.       Forfeited property that cannot be soid due to legal restrictions but which
                 may be either donated or destroyed shall be subject to the disclosure requirements
                 described below. However. no financial value shall be recognized for these items. .

                 72.       .&mu&m&             sale’ of nroq~~& shall be recognited when the property is
                 sold.                                                               .

                 73.       W=heldbsale

                           -     pl8ced into offkiahse,
                           -      transferredto another fedem! government agency.
                                  diatributed to l she or ,loql law enforcement agency. or,
                            ,I, dstributed4o~a foreigx~~govepment.
                  74.        When a determination ii-m+& that property wiI1 be distributed in one of the,
                  ways &s&bed above and not held, for sale; the property shall he reclassified as
                  forfeited pmpcrry held for donation ,or use. kevenue associated with property not          I
                  disposed of through sale shall;be reeognited upon approval of distribution and the
                 ‘previously established deferredrevenue shall be reversed.

                 75.         Revenue shall be classified as it arises from sale or from disposition, and
                 this distinction shall ,be maintained in the entity’s accounting rcpons.

                 76.        Ropetty acquiredby .the go.vemment in satisfaction of a taxpayer’s liability
                 shall be recorded when title to the, ,property passes to the federal government. &Q&
                                                                                         property shall be
                 Mluod at its market value lessany thjrd-paq liens.      Upon   sale of the property,
                 revenue   shall be recognized in the amount of the sale proceeds and the property and
                 the third-party liens areremoved from the accounts.

                 77.        Unclaimed and abandoned merchandise shall be recorded with an offsetting
                 defersed revenue when statutory and/or regulatoy requirements for forfeiture have
                 been met. The merehndisc shall be valued at its market value. Upon sale of the
                 merchandise, revenue, ahall be recognized in the amount of the sale proceeds and the
                 ttwthdirc    l d the deferred revenue ate rem&red from the accounts.

                                      Vohme 1. Version 1.0
                                        February 28. 1997
                                                                                                                                  ‘,                ,FAAS
                                                                                                                                                    S  Nd
                                                      ‘Discloaurc~Requ~nmcn~                    .I                           .,    ,
                                                 .,             .       ‘,‘. II.2,, ,I.<” ,J .., (I s.,, ,: -,;<,; d,.,
                                    . .                78. ,I_ ‘1 - :.; 5Cdmposi$on~of forfeited property.                    ;
                                                                         ‘mm         Method(s). of ,valuing forfeit@ property. :                   ,.
                                                                          ‘_-        Rest&iionsl&+ the’ use ~r”di$position sf forfeitid property. ‘1
                                                                            -        Cltsngcs$om prior yea+ rccotmting metltods, if any:
                                                                            -       Analysis of change in forfeited property~providing the dollar value &
                                    ,1’                                             ,~umber     of forfeitures t&at (1) erconhm&at  the bqhming of the year,
                                                                                                     [. .
                                                                                    (2). are a,& duMg the..y&r, (3) ‘iri’ d@hed af dtxiq ‘the year and
                                                                                    ee method of dispchitiqn. ad (4) are on band at the end of the yeu. ;
                                                                                    This information wdtdd,be presented by type of property forfkhd :
                                                                                    wljen mat+.              j                                                /-       \,’,:
                                                                         -  If-available, +xt estima~.of~the value ob.propqty or his to be           ,.,M”
                  ‘,     ‘.         :        I         .~        ‘/.
                                                       ,I                   didributcd to fed@ sgte and local agenciq in fur        rchtiiig
                                                                   ,q ., ,:jicfi&.             ,,’    : :.:            . ,’         ; :^’ iji. ./,
                                        (:                               .,_                                     ,$,
                                                                                                                  ,, ‘, : : : :_ .’    ,, .“, >,;,:, * :;
                       +.,’                                                                                                              ‘, 1 ,‘
                   /           ‘,                               ‘,                     -. Tbc proviiions of this statement ‘iteed’ tiot be          ,,        ., ,,            j
                                                                                                     applied to immaterial iteny;.                            . ,.,’
                                                                                ;                 ..‘,’            .,         .:
                                                 .                           .,               ‘i                                                    ,, ~.<~?~ ,.l
                         !!                                                                                                                            ‘. ‘. ;.’
                                                                                                                                                           ., :
                                                                                                                   .,                                   .,
           ,.;.           I’                                                            ”                               .’                   .,:,         j


                                                                                       V6luttte I, V&on 1.0
I.                                                                                      February 28, 1997
L   314
    SFPAS NO. 3
                                           ‘TABLE 1
                  -----   _. --.   a-



                                        v01umc r, vinion 1.0
                                          Fcbnwy 28.1997
               FOREbLOSED                 PI@kERti
                                          .,     _,
                                               ,‘,’                 .   “.                       ,.            :            :
3\\,                                                           :                     .’
                                                  78.         ‘Dcfinitim.    The term ‘foreclosed property’ ‘meansany rsset received in
                                                  satisfaction of a loan receivable or as a result of payment of a claim under a
       i                                          guaranteed or insured, loan (excluding cpvodities             acquired under price support
                                                 prpgmns), All properties included .in f~reqlosed property are assumed to be held for
                                .                 sale*                       -.                 ;,                __ _,_
                                                 Hp.      ~,         :           ‘1. ;,,
                                                              kr ++qce        w$h theFederal ,Cred$Ref&m A& of 1990. the remainder of
           .                                     tlj? iii&d      $1 ,refer: to, Spcific, ~~3ioni’~~rl~~~~92’I~clowd                    property and
;                    .,                       ., P!P!~!eq.! ro~!~~..PqJYy.             ‘p!?~~.;~ypd              pro]*          rdm   to property
                                                                                                               r,,_.I p rt
                                          ._: : ?~
                                                 u?oc,&@+~t?h !!nct. Iqy oWgq@ qrc+t.syy-$j                                 conunirted b&m ~~bcr
                                                .&1991. .Poat-199i.z fo,rW&d pro&’                refers ,tq ~@pqr&,‘a~iated           with dimct
                                              ,, kyj? obli~ted,,9r;,:lo~, e@rrpt#r +inniitted#er~$&lbet                          30? 19q1. The
                                                 ~~~~n         u yy$,        Wy          ,!y ,k$@ ~qi+~           ,!ky~        fhw~ l s50dd      with
                                                 pW:s?!, .+@y’ti:                 !e ~~Wty~‘$$~I~3hc                      iah flows aiscwiabd~ with
                                                 post:j?9,! fore$o@ property, must be ,measu&&‘@$e$tt                          value basis. However,
                                                 pm;,!992 foreclo~sed
                                                                 V,,_L’, propev, need not be valt+Jn thts basis. Additionally, any
                                                 programs that are spccifloally ‘exempt’iiorh the use &r+nt                    value techniques for
                                                 dcterminittg the COSTS   of direct lo&u and lo& ‘&knees                 shall rely on the accounting
                                                 pria$ples provided for pm- 1992 foreclosed ,property .’ ,

                                                  81. i”      :~&I&       oi ~&&owd      P,r~p&t$ “ ‘Post- 1991’ foreclosed property is
                                                  valued at the &t present value of the p&je&dJ fut& ‘bash flows associated with the
                                                 ,propmY. Fl992                                                    l
                                                                        foreclosed property is re&ded t’kost and adjusted to the lower of’
                                                  cost‘or its net realizable ‘value;‘any difference is &ed’in     a valuation allowance. Both
                     3’.i                         of thwmndmds       am ,described further ,910~. For either post-1991 or pm-1992
                                                  foreclosed property. other .hation,methqds       ‘miy be ,used as an-approximation for the
                                                  abovem&hods ‘q po .Imaterial difierencei in kalu&ai ‘wjll, result.
                                                 82.       ,,HOt ,Pfcmnt Vduc ,‘_The’f&t s$p in deteq&ing net present           value is
                                                 proje&isthe      future gsh flo~s,associated Cith the ‘property. The projected future
                                                 W* ~~4W.Shrll       include estimates of (1) the sales prokeesij, (2) rent, management
                                                 CXperUe. a+‘tiir        co?+ +uiiq the holdin8’period. and (3) selling expenses (e.g..
                                                 +yWyg         and kimisGns).      In estimating the sales prooeeds, the entity’s historical
                                                 eXp@ien~ .itt ,@n8 property and the n&e           of the sale shall be considered. For
                                                 i+tk.     market valuebased on sales b$we&,$llin8           buyers and sellers may not be
                                                 appropriate for properties to be disposed of in a for&d or”liquidation sale. If the entity
                                                 hu hi,st+$ly       bee unable to qalize t$e fair value of property, this shall be
                                                 considered F estimating sales_’pidceeds.                       ‘,
                                                                                         ,”/, ,’
                                                 83.         The second step is k discount these cash flows to their present value. In
                                                 order to place the .pkjected cash flotis on a present &e basis, a discount (interest)
                                                 rate tttust be selected. The discount rates used shall be the same rates that were used
                                                 to discount the cash flows of the related loans or guarantees.

                                    _..      .   .I._:   ._.   .,            ,, :         ,-7.        .;   _           .,   ..1   ,/   ,

               ‘Section 506 of the ‘Federal Credit Reform Act exempts specific agencies, such as the Federal Deposit
           Insumn~ Corporation and the Tennessee Valley Authority.                                      .’

                                                                                    Volume I, Version 1.0
                                                                                      February 28. 1997

                            84.         Following foreclosure, the ne: ‘present value (measured in a manner
                            consistent with the measurement at the time of foreclosure) shall be adjusted
                            periodically to recognize both changes in the expected future cash’ flows ,and for
                            accrual of interest due to the passage of time. Any adjustments to the oarrying                        I
                            amounts shall he included in the presentation of “intcrcst income” and the rcestimatc          ’“,     f
                            of ,+bsidy expcnsc.“’

                              85.       .,,’.-Net Reelkebk Valoc Prc-1992 forccloscd property held for sale sbottld
                              be reported in ihe c&y’s financial statements at ixpcctcd net realizable value. The
                          , cxpcotcd net rcalizablc value shall be based on ancstimatc of tltc market value of tbc
                              property adjusted for my expcotcd losses and any other costs of the sale. The cstimatc
                              of market value rhill bc b&d on (!) tbc tnarlcct value of tbc property if an active
                              muke!‘~xirtr; (2) the nuirkct tiiuc of similar properties if no active market exists; or
                              @)a i&nablc          f&coast of cxpcctcd cash flows adjustcd.for .cstimatcs of all holding
                              Costs, itt&cling ‘hny c&t of ca*ital. In, addition to ociribidcring market value, tltc
                            ‘,eiipsot$ ~~~~l~blc‘~tnlu~-~~coosider-~thc~~entiiy’s-hi~orl~e~cncc                 in
                              disposing’of forccloskd propertick i.e.; if ‘tbc entity is’t)i@ally unable to obtain
                              market value .for propcities, tbc cxp+cd, net rcalixablc tilttc &all bc adjusted to bc
                              consistct+ with liistoiicllly cxpc&&cd loss&.’ #lditionally, if tbc cntily will not bc
                              able to sell tbc pro+        undcr’notmal ma&t conditions or is forced to sell tbc
                              prodcrry within i yen time, tbis factor shall be considered in arriving at net
                              r&able        value.

                            86.        If tbc cxpcctcd net realizable value ii less tban the cost,’ a loss has
                            occmrcd. ‘Ibis loss shall be charged to operations, and a valuation allowance shall bc
                            established. If tb& asset’s net rcalizablc val& subsequently incrcascs or dccrcascs, this
                            imount shall ,bc &&cd or charged to results of operations and the valuation
                            allowance adjusted. However, the asset value shall not be adjusted above cost.

                            87.         Assots SubJcet to Claims of Other Partks.        If tbc property is taken
                            subject to claims of tbc lender. debtor. or other @arty, thcsc claims shall bc accounted             ,’f
                            for in a valuation allowance. These claims can be in the form of a lien or a residual
                            intcmst of tbc debtor or lender. etc. For post-1991 foreclosed property, these claims
                            shall bc rccordcd at their net prcscnt value at the time of forcclosurc. The discount
                            rate applied shall be the same rate that applies to the ‘related foreclosed property. For’
                            post-1991 foncloacd propciry. any periodic changes in the net present value of tbc
                            claim shall bc offsct by a charge or a credit to “intcrcst income” and tbc rcestimatc of
                            ‘subsidy cxpcnsc.’ as appropriate under the standards for direct loans and loan
                            gumntaes. For pm-1992 f&&lord         property. thcsc claims shall be recorded at the
                            expected amount of tbk cash rcquircd to scttlc the claims.

                             88.        Rceeipts 8nd Disbwsemeots During the Holding Period for Post-1991
                             Forrcloacd Property.     Airy rcccipts or disbursements associated with acquiring and
                           1 holding post-1991 foreclosed property shall bc charged or crcditcd to forccloscd
                             property. This shall incJudc rcnul receipts. maintenance and repair cxpcnsc.          lr

    ‘See FASi     exposure draft No. 2. Accounting     for Diner Loans ond Loon     Guarantees,   Scptcmbcr, 1992.

    ‘Cost is tbc caying     amount of the loan at the time of forcclosurc or, for a loan guamntcc. tbc amount of
the claim paid.

                                                 v01ttmc 1, vmion 1.0
                                                   February 28.1997             ’
                                                                                                                                              sJTAsyO.3         .

                                               adveitkng costs, and any other elements bf the projectid cash flo@cqpuic+d                            in
                                               artiving at the net present value.

                                                ,sp:           S&‘oC Fbicclomd Ptipcrty”        Upon sale, any’ difference between the net
                                                canyiq amotit’ of foreclosed property and (the net proceeds of the, sale shall be
                                                mdognized’ hr a .c&n@tent of >opeiat@ res@ts. Fdr .postr199 1 foreclosed property,
                                                interest income ihell be accrued, from,the previous periodic adjustment in the oqying
                                                amount up to the sale date. The difference between the adjusted oartying amount and
                                                USnet saldi:‘@dbe&is shall bcrecqnized as a reestimate .of “subsidy expense.’ For
                                                p&992        fkecloicd~prope~,: this differnice sh+l be recogaized as a gain or a lpss on
                                                thk,.,’sale of .,fo&losed p+rty:                        :, ,.
                                                                     ,‘._ ‘.                 ., .‘Z’.~   : .(!_
                                              .90.            Aaaotr Converted FroiJield~for+k,        Ame@;to Operating Amoth
                                                Assets not sold’but placed intd operation s@,be removed from foreclosed pr?perty
                                              ” i&on ‘iit& ioti&i ir’,tien;. If .reimbursem+t: fgr,. the transfer of assets from one
                                                Mm:ti.ido&               ’ is ma&3he proceeds from the transfer shall bs treated in t&e
                                        .j’   -&m&&                 m.a        ale       to l &&#rty.-               ,.“..   ,,’        :.,
                                                      ‘; . .   ’ .I1_ ,:.,:.   :;;;:     I<.I) ., ..:,   .ii,           _: ‘._     <,
                     .’          .,-’          Dtibtire~Re~uinmitr;            1m ‘,            ,’      :
              ,.                                  .’           “,_ ‘;. ,“.          ‘,,.   ’ ,.       ,
         ,I    .‘.                                             Valuatioh .bsis used for foreclosed. pr&t$.
                                               91.        k
                                                          -    Ch&s       from prior year’s rccountiagmethods, if any. ,
                                                          -    Restiictions 6n the &e/disposal of the propCrty.
.. .                                                      -    Balances in the categories described above.
                          i ‘.                            -   .Number:tif properties held and average ,holding period by type or
, ,.“.
                                                                         crtcgory.              x               ‘,
                                                               -         Number of propenies for which’f&eclosure proceedings are in process
                                                                         et the, end of the period.
                                                                                       The jkisions    of thij statement n&d not be
                                                                                                appiicd to imniaterial items.

                                                                                Volume I, Version 1.0
                                                                                 Februwy 28, 1997                                                                   /I
s=AS   NO. 3


                    92.         Dclhition.      Goods acquired under price support and stabilization
                    programs are referred to as commodities. Tornmodi,ties” are items of commerce’ or
                    trade having an~rxchange value. They are acquired, held, sold, or otherwise disposed
                    of to ,satisfy or help satisfy,ecobomic gods.

                       93.        In conducting price support operations, the money is frequently disbursed in
                       the~~fomt of l ttomecourse~ loans.?, ,Recipients of such loans pledge specific farm
                       commodities as collateral for the loans and have the altemstives of redeeming the
                       loans (repaying them with interest) or sutrenderiag the commodities in exchange for
                       the outstanding loan balance.
                                             .:                     ,.,”        ,,
                       94.     j Besides l cquirmg .oommodities through ‘s&en&r of collateral for
               ,/ ,....n~oune~lointi.an..enti~,c.mry,~acquirr.      commodit&s by a purchase settlement A
                       purchase settlement is exercised on the basis of a purchase agreement between a
                       producer and the Commodity Credit Corporation (CCC). On the basis of the
                       agreement, a producer has the option to sell commodities to CCC and receive full
                       payment for the commodity at the price support rate. The amount of the purchase
                       settlement is calculated by multiplying the price support rate by the number of units
                       purchased by the CCC. Support ptice rates are set by law.

                    9s.        Because nonrecourse loans and purchase agreements are closely associated
                    with the l cqtnsition of the-actusl .commodities. the three components of the price
                    support progrrm are addressed in this accounting standard.

                    96.        Reeegnition,    rJonredourse loans shall be recognized as assets when the
                    loan principal is disbursed. These loans shall be recorded at the amount of the loan
                    p+cipd. Merest income shall be recognised as it 3s earned and an interest receivable

                    97.         B.                   settlements are executed at the option of the producer
                    (seller). This creates an uncertainty regarding losses to be incurred by the purchaser.
                    At furancial statement dates a loss shall be recognized if information indicates that ,it
                    is ,prubable that a loss has been incurred on purchase agreements outstanding ,and the
                    amount of the loss csn be reasonably measured. The amount of the loss shall be
                    estimated and may be bssed on the contract price and the expected net realizable
                    value of the commodities to bs acquired.

                     98.        if the contingent ,losr is not recognized because it is less than prubable or it
                     is not reasonably measumble. disclosure of the contingency shall be made if it is at
                     least reasonably possible that a loss may occur.

                     99.        m            shall be recognized as assets and reported on the face of tk
                     ftnancial statements upon the producer’s surrender of titkto satisfy a nonrecourse loan
                     or upon purchase by the agency.

                     100.       bvenuq shall be recognized upon the sale of commodities. At the time of
                     sale, the carrying unouut of the commodities sold shall be removed from oouunodities
                     and repotted as cost of goods sold.

                                         Volume I. Version 1.0
                                           Februaty 28, 1997
                                               ‘,1.         ,.                                                       *As      Pm.   3
                               ,( ,. !.(
                                    lOl.*,.,,.: ge:m’if                            >om&ditics held for other p~lrpascs M be
                                   removed,, from the commod+ ,A&! t@$nt and reponCa AS nn expense upon Uunsfer
                                   ofthe commodity, ,                        : ./_ ;:,., ,’
                                         .;’ ..            ’ I~;;,~_,’         _:‘; I.I,\,I, A.
                                   102. ,.; :. Yaluatiqn. .,.A!! nonrec urse loans shallbe valued at the loan .amount.
                                  Losses .on nonrecou& +ts &lo@ moo8nizcd when it is more likely than not that
                                  the l~~will~.not be totaRy cqlleoted. :The phrase “more likely than not” means more
                                  than a 50 percent chance of lo~.~currence. The loan amount shall be preserved in
                                  the asset account AS tbe gross value of the loan. When the loss is recognized, l
                                  valuation rllowanie. ‘fallowance for losses”, (a oontra:asset) shall be established to
                                 ‘red& ‘the’~gross’valueto its expected net, rerlizablc value. The allowance shall be
                               !, r&siitited           im eqh fmacial reporting date.
                                                    I :.,,,>.‘_ ;; 1 :..
                              . i*“Nai(L.
                                   103. .\Tv       The ::.
                                             ,,,,.,*,,,<“+  lirbility for losses on P-Q&                shall be valued at ,thc net of
                                  the contract prtce and the tit iiilizable value of.the commodities described in the
                                  purchrse rgnement.”                                                .,
      :                           104.             Ai, the time of acquisition and for financial statement pgoses, all
                                 commodllles shell be valued at the lower of cost or net real&able vhlue.
                                  105.             The cost for commodities acquired vih A nonrecourse loan settlement is the
                                 amount of the loan principal (excluding interest), processing and pa&sing costs
                                 incurred after acquisition. plus other costs (e.g., trgsponation) incutred in taking title
                                 to the commodity.                                                                                 1

                               106.       The cost for commodities acquired via a purchase settlement is the. unit
                               price agreed upon in the purchase agreement multiplied by the number of units
                               purchased by CCC plus other costs (e.g.. transportation) incurred in taking title to the

                                107.      For financial statement purposes, any adjustments necessary to reduce the
                               carryin amount of commodities to the lower of cost or net real~able value shall be
                               reco8irized as a loss on farm price support and reportedin the current period. The
                               adjustment to the can$ng amount shall be recorded, in a commodity valuation
                               allowance. Recoveries’of losses hay be recogntzed up to the Roint of any previously
                               reco8nixed l&es on the commodities, and the commodity valuation allowance
                               reduced accordingly in the current period.

                               108.        For cost determination. any of the following cost flow assumptions may be
                               applied in arriving at inventory balances and cost of goods sold or transferred: first-
                               in. fint-out (FIFO); weighted avemie; moving averaBe; and specific identification.

                               Dbclosure Requirements.

                                109.       -          Basis for valuing commodities;includin8 the valuation method and any
                                                      cost flow assumptions.
                                           -          Changes from prior year’s accountin methods, if any.
                                           -          Restrictions on the use, disposal. or sale of commodities.

          ‘@Contract price is the emotmt the government would be committed to pay in exchange for the commodities.

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d.                                                           February 28, 1997

SiTAS   NO. 3

                -   An analysis of ~hrnge in the dollar vd~e a$ v~lume’of commodities.
                    incbiin& thou (1) on band at the keg             of the ,-ear, (2) acquired
                    during the year:(3) disposed of during the year by method of
                    disposition,    (4) on hand at the end of the year, (5) on hand at year’s
                    end and estimated to be donated or transferred during the coming              ?!
                    period, and (6) that may be received as a result of surrender of
                    coIlatua1 related to nonreootuse loans outstanding. The analysis should
                    also show the dollar value and volume of purchase agreement
                    c+qtmitme7lu ‘Q_                             2,.

                     .   The provisions of this stateme+ need not be
                                 applied to immaterial items.


                          Volrmre 1. vcmioa 1.0
                            Febntaty 28, 1997
                                                         /          , ~.,.                          SFFAS lw         3
                                      ,,    ..”        :, ..          ‘,,,i,       .,          .;
  APPENDIX    ‘A: BASIS      OF THE-BOARDYS            CONCLUSIONS                       .,i.I,
                                                 \.                                               ,:   ,,>
                                 L I+‘.’ -* ” ._ ,.m%’ (    .,,”     I/,
                                  ms,,App&dix .dis&es the substantive comments‘&             th! Board jeceived
                        f?fn ~~sp9nc+~s:~ the Exposure Draft, Accounting for Inventory and Ahad
                        Proper& issued in +&i$~ 1993. The Appendix explaik thi ‘BoardfS’Codolusions on
                        &I& iri&,d by ‘&.rkp&dents.      A se&rate sectiqn is ideFt$ed,,for each of the six
                        recommended standards.

                                                                                        t ,   :.,
” INVENTORY                                                                                t-
                          ,:,          :,         ,,- _:-.
                                                        :’ .*-’   “,   ;   “,.‘,.
                        111.          Several respondents quesboned the need for the various inventory categories

                        1rr: ‘. In the exposuk d&t: thf Board rkquested op’inions on two presentation
                        fo?tL for cost of goods sold and ilie chanie in the &lowance for holding gainsand
                        adds under Wit acquisitibn’ciht &AC) ‘(pa;$.87). The following two cost of goods
                        rold ~08~1puIatioas under the Iah acquisition cost method where presented:

    ,/,..                         ,               /     ,.     _,              ,    .

                                                      Volume I, Version 1.0
                                                       February 28, 1997
Rqmmed pfaamulion:
(Appadir A)
CoeIofooodr      sold:
etdaaiy&~rtLAC                                          Bcgilm&bl~mLAckuAttorraec,,,

CarcofGoo+Av&bkfaUk                                     baofGoodsAhikbkfa&k                                          i

                       11:.       IUIOS~reapolldears to the questioll re&iing the two rltetlutive cost of goods
                       roti compt&oiu      indicated a prefer&ti for the rltertutive presentation from
                     .,@)+jix,g?.?jq) c1c- ~spondenir     itated,   tht  CtUlt@S sift, dOSt WCS ‘QpCl’bf in .mtlWG
                       and should b; &Wed in the o&ating results. It was ilso noted that compambility
                      +uld be irhpioircd under the rlternative treatment si+e cost of goods sold would
                       ippiiiximie JAiiri~~ &ist. Two redpimdenti provided exiitnples of the “distortion of
                       cost of goodi sol& that may r&t           under the proposed Rkentation. The examples         1
                       showed that. cost of goods sold as ea~cuirted under ‘the ftit proposed treatment
                       (Appe&x ‘A of the ED) might rctudy ‘.Tbe less than it would have been under
                       hiyto&t cost.

                          116.       In reviewing the resjx+s, it was noted that the “nonoperating change”
                         seems io,hy ken confused by some respondents ,tith the ‘unrerlized holding
                         ga,tioss’ for the period. ‘III; full title, “Nonoperating Change - Change in the Balance
                         of the Allowance for kealiied       Holding Gsinshosses’ is. rlthough cumbersome,
                         more descri$ive. The change in the bduwc is made up of decreases, due to
                         hpi~tkn’     o~inventofy 6i’,c& dc~rcmes~ a&d incrccscs, due to holding more
                         inventoiy or cost increases. The net chsnge should not b&confused with the
                         “unrdiz~d holding grin/loss” for the periOa

                    117.        The Boqd, after much discu@on, decided to adopt the alternative
                    presentation (Appendix R of the ED). This would svoid (!) confusion 8s to the
                    significin~e’of the ‘nonoperating change’ and (2) distortion of the cost of goods sold.
                  . In addition, for those who ‘kish to know the change iu the allowance account. the
                    Boud de&d that line items should be included in the cniculation of the cost of
                    goi& sold & show the beginning and ending b&n&.

                         118.      aSome respodents believed that the Board should adopt the lower of cost or
                         mark& (U3vf) rule (traditional under Acoounting Resesrch Bulletin (ARB) 43) for
                         valuing inventory. Respondents supporting the LCM rule ststed that:

                                   -    it provides a basis for measuring the utility of inventory, and
                                   -    the operating performance financial reporting objective seems to
                                        require that matching or assigning revenues snd expenses to the
                                        rppropriate period be a primary concern.

                         119.      ln evaluating the LCM rule the Bosrd considered some of the unique facets
                         of the Federal environment:

                                            Volume I. Version 1.0
                                              Februuy 28, 1997
                              -   pricia&ir &a based on fall coat reoovey regardless of changes in
                                  mrfl=t pricing. agd ,.(
                              -  manqgqs are ,oftea rqaired .&&&      iav&ory based on legislative or
                           ..’ ’ mission cpncqm that are not driven, by +it    maxiakation (therefore,
                                 cod fiuctwtiom are pot as rejevaar to pe;fonaaace measaremeat).
                                               Y        .
                  12d., ., The Board cok&d         that thk was ao,aeed to include the LCM rule in the
                  iaveatory staadads.

‘W.          I
      ‘,‘,        124.    1~ a ‘&adh    &it system, va;aaces tktweea the l ctql per-uait cost and the
                 w       per-aaii rac ut ideagfied. Var&&r are typic& calculated for the
                 in&vu&u1 cost coaq@n~,ats, sac6 as mqials or labor, included ia the overall per-unit
      .                                                          .’

                  125.    * +dard    costi$so p&de awagers ruiful iafonn8tion for aaaaagiag
                 inventory Cost& As ati agency putdasy &eittory da+g the year aad iacars
                 operating costs:the act& costs are coqqed .with the standard costs to identify why
                 the cost ~ariaaccs occuriid~ &ah iavqn& ad opentiag.maangen are evaluated
                 l gaiyt the#aadan&
                                  themyagerihaveati ii&aliveto meetthestaafbn&
                 turn, providii for eff+e   @atory    cost control.

                 126.        ‘@e distiaktjoa betweea the traditioaar staadakcost system aad that
                 outlined ia the exposwe drafi &t&s to keplacemeai cost ‘kformatioa: The method oa
                 which coaaneats were reqae?ted would re&ire standard costs based on the aext
                 pekiod’s ixpected replakent     costs aad overhead rates. Further, ao l djastmeat to
                 h$orical cofi iraotaits would have b&a eqaired for extenq] report@ purposes.

                 127.       % .ga@rity-$ !J+&$a@ents cited .&st&tially      the sxa~ problems for
                 @tiSiaithod u:they -cited fo~.muket v& l ccottatiag ia g&r81: The calcal~tioas
                 were view*   as complexi costly aad subjective.

                                    Volame I, Venioa 1.0
                                     ‘F+uy     28.1997
     SITAS NO. 3

                           128.      Orie Board member is concerned that this method would be excluded under
                          the recommended standard. The Board does not believe that this is Vue. 8tanchrd Cost
                          systems, including replrcement cost, are used internally in private industry to getterate
                          valuable msnagemeat information. Standard cost information is then revised to
                         approximate costs urider historical cost bases because it is generally- accepted
                          sccouttting practices for financial nportiag purposes. Therefore, a meaagerisl oostiag
                          system em~loyiag stsndsrds or replacement cost iaformation that improves
                         maangement’s decision making could be entirely consistent with the stnadsrd so long
                         <esexternally reported informstion rpproximstes historical cost. Further, the Boerd
-.                        expects to -take up the issue,,ofoostiag systems in a future
                                                                                    ,. project on cost

                          129.       With n@rd to~iaveatoj held in reserve for future sele, one respondent
                         iadioated that the pbiise ‘either reported or dis@osed” (psr. 39) implies off-balaaee
                   ._    sheet reporting. ‘fhe re@xuieat believes that this category should be reported oa the
                         b@eocesheet ,mtherthaa .disolosid: Tlte~~Btird’eoticluded that the decision as to the
                         levei of detail showa on the balance sheet should b;e left to prepsren aaUor ruditors.
                         While the Bird did aot revise the standard to require reporting on the fete of ‘the
              ..         fiaaa~irls. the lsngusge describing the mrortiag sad disclosure optioas wes clarified
                          130.       One respondsot suggested that the &a&d          be revised so that excess,
                          obsolete mad tmsewidesble inventory would be valued at the lower’of cost or net
                          ~lixable inhte rather than at net rerlizsble value.. The respondent indicated that say
                          gains on excess, obsolete or unserviceable inventory due to valuation at net rerlizable
                          value should be recognized only upon dispoal of such iaventoy sad not when
                          ideatified as ‘such or upon periodic revalilitioris. Private sector GM,     per ARB 43,
                        . requires that losses be recogaixed prior .to’,diipbal of inventory but thst gains not be
                          recogitized until reslized. This one-sided-treaunent has been criticized over the years
                          but has survived based on the principle of coaservatism thst has prevailed.                 . .   .
                          131.      Since the Federsl governmcat &es not operate in a ‘for-profita environment
                          and does not seek financing from investors who rely on audited financial ststemeats to
                          make decisions, the coaservstive position taken ia the past is not as relevsat.
                          However, the Board concluded that no &sage to the standard was required.

                           132.       Some respondents comareated on the absence of the last-in, frrstout cost
                          flow (LIFO) method under acceptable cost flow a&taptioas; statiag that LIFO should
                          k included as so acceptnbie option tmder historical cost since it tends to metch
                          curreat costs with curreat revenues. The Board did aot include LIFO as an acceptable
                          cost flow assumption due to the stale inventory values reported on the hleace sheet
                          as a result. However, the Board did pennit -use of any method that reasoaably
                          approximates historical cost under one of the acceptable cost flow sssumptioas.
                          Therefore,, LIFO could he acceptable for an entity whose jnventoty tutas over rapidly
                           Since there may be little difference between LIFO sad any other oost flow assumptioe

                          133.      Oae respondent requested iht the standard specifically address goods: a)
                          held on coasigament. b) scquind through batter. c) doaated, d) that must be :
                          maiatained by statute but hsve no market value. or e) that will not k .sold or
                          consumed but which must be held (e.g. weights and measures). The Board eoachtded
                          that goods held oa consignment were not within the scope of this staadud. Goods
                          maintained by s&e but hsviag no market value, sad goods that will not be sold or
                          coasumed but must be held would presumably be categorized as stockpile rmtcrisls

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E                                                                                                                                spTAS NO. 3

                                                       and therefore no change to tba standards wss warranted. The Board did decide that
                                                       valuation of goods acquired through barter or donated should be ad+ressed under the
                                          .1           inventory, operating materials and supplic’s. and stockpile materials standards.
                                                                      ,.                      .I
      Jf c---l
                           OPERATING           MATERIALS   AND SUPPLIES
      ‘\ .---.

:,,                    b                                         Respondents suggested that if a’ valuation method such as latest acquisition
                                                      cost &AC) is acceptable for inventory it should also be rccoptablc for openting
                                   ‘*I.               materials end supplies. The Board agreed with this proposal since LAC appm~imrt~~
                                                      histori~l cod Further, the Board ,kliovos that eny method that approximates
                                                      historical cost should be acceptable. The .standard was revised accordingly.
        . 1’                      ‘,                      :‘.’
                                   ; ._                                                                  ~
;      ‘.(                 STOCkh,E     MAtEikAiS                   ‘:”                                                                             :
i                                             ,.,’           _,.           ,,.        ,.
             ,,                    ..‘. .,,
                                                      13% ‘, .    Respond&us    indicated that ~thedefiiition of stockpile materials would
                                                      o&o&ass routinely hold resetvos AI Well as major sto&pilos of materials. It %r tha
                                                      Board’s intention to include only ,those.items speoifioally,.i~ntified by law as kmg
                                                      ‘stockpiled.’ Items routinely used but held in unusually large quantities would not be
                                                      i&hrded ‘in this categoy but would remain components of inventory or opemtmg
                                                      titqrirls eird, supplies; possibly categor&d is held in rese~e for future sale ‘or UT. 1

                                                        136.       In addition, one respondent idantifiid~heliutn resecNesas being mandsted by
_:      j>                                             law for “conservation” purposes. The Board.concluded that it would be consistent to
                                                       include these reserves in stockpile materials. The definition has been clarified to lumt
;       ‘..;,                                          stockpiio tt$~rials to items held in -order to .comply: with legal requirementa
                                                       established for purposes of defense, cmergeticy. or conservation.
                                   ~:                                                               ‘/.
:                                                       137.       As was the case for &ant@ materials and supplies. respondents mdlcrted
        $2                                             that usa of LAC would k appropriate for stockpile materials. The Board reached tha
                       Y                               same conclusion for this standard, that any method that approximates historical cost
                                                       should be l cceptabIe. The standard was, revised accordingly.

                                                        138.      One respondent suggested that an &option to,,petmit market valuation for
                                                       items that are interchangeable, have a ready market, and for which the unit &ost is not
                                                       detiinablo    be added to the standard.,The inventory standard provides this exception
                                                       a&the respondent suggested that it k available for stockpile material so that items
                                                       such es strategic petroleum reserves could be valued,at market value. The Board
                                                       honcluded that since theaaitems are not routinely ‘sold in large quantities tho
                                                       recognition of holding pins/losses may have an adverse impact on measurement of
                                                       operating performance. Therefore. the exception was not ad&d to the standard for
                                                       stockpile materials.

                           SEIZED AND FORFEITED             ASSETS

                                                         139.        A respondent explained at the public heating that a good portion of the
                                                         forfoited assets ara seized and valued under conditions which mako l ccurate l ppraisa&
                                                         oxtr~~ly difhdt. As a result, there have been values reported for assets well in
                                                      ). oxcoss of what -is.eventtially rirlixed. -The.detetmination of the market value prior to
                                                         the’ actual sale of the item is very difftcult. The respondent has found that when the

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                                                                             February 28, 1997
    SFFAS NO. 3

                            best estimate of market value is made on an item by item,basis. the total value is still
                            found to be overstated.

                             140.       To avoid overstating deferred revenue, the respondent recommended that a
                            valuation allowance be created to adjust the reported value of assets in the financial
                            statements. The valuation .allowance would be based on histo&al trends or other
                            relevant information; in a manner similar to that used to establish an allowance for
                            uncollectible receivables. For example, information over the la,st six months may ahow
.                           sale proceeda were 5% to 10% less than appraised values. Further. the respondent.
                            believes that ~use.,ofthe.valuation.allowance would +o@xe the inherent difftculties
                            in estimating market values and would present better fmanbial information.

                  I          141.       Although the proposal is not without merit, it may be an unneceuUy
                          ,, exercise. Market value is an estimate of the amount to be tialiaed” upon disposal Of the
                             property and should tak e into account the marketpla& in whic,h,.e ,properIy ir
                             expectad to.be..dispord .of (e.g.,.auction. fire sale, retail or .wholesale dkets, etc.).
                             The use of valuation allowances against any asset category is not prohibited. However.
                             the.Boarddoes not believe it neo.essary to require theuse of a valuation allowance in
                            this cimmstance. :
                             142.       0ne respondent requested that the htandard require that, in addition to
                            recording deferred revenue, deferred distributions be recorded. A respondent at the
                            public hearing explanted that historically as much ‘as SOWof the forfeited property is
                            eventually distributed to federal, state. ad local law enforcement entities ivhich
                            participated in ,tlte case. It was furt@expla$ted   that once property has been forfeited
                            a participating state, .local, or federal agency,may have already applied to .nceive that
                            asset because of its@tticipation in the case. Therelore. the recording of defemd
                            revenue could beraccompanied. where appropriate. by .the recording of an estunate of
                             defemd~distributiona. The intent of this is to avoid reporting misleading infotmatton
                            in thefinrooial .statements.                                                                     z-L-- ,c
                              143.      ‘.‘l’he defemd distribution would represent another level of estimates related
                             to forfeitedproperry. Jttdiscwions with representatives from other agencies that
                             handle seixed ah-forfeited property, the Board has been told that no reasonable
                            ‘estimate of deferred distributions was available.
                              144.        In addition to the difficulty in estimating distributions, the Board notes that
                             there is no legal @remeat        to make a @ecific.distribution until an application has
                             been approved. Thiais similar in a ‘sense to dividends ,&Glared by for-profit
                             enterprises. There is no legal obli@ion to make a payment until the actual declaration
                              by the Board of Directors; and the entity does not record dividends payable until that
                              time. Ihenfore. the Board has not revised the standard as suggested. However, the
                              Board has added,a disclosure requirement for any nasoneble     ,, est$ttate of future

                              145.      The comment letters also included proposals for miscellaneous changes to
                             this standard?

                                        1)   In that the @ovemment does not have ownership, seized monetary
                                             instrun~e~~ts:should k- disclowd rather
                                                                                 II than repotted on the face of the

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                                                                                                                                          SFFAS    NO. 3      -
                                                                        2)       Seized property other than monetary instnnnents should be epfied as
                                                                                 assets, like monetary instruments; with a liability for possible
                     f---h                                                       remittance ‘of dqtil value~recorded..
                     t. )                                                  3) For non-monetary forfeited assets ~thedisclosure requuemenu are
                                                                                 adequate to ensure information is .avAilable to users. Therefore, IIOn-
                                                                                 monetary forfeited assets should not bereported on the face of the
                                                                                 fmincial~stitcments~                               ‘.
                                                                           4) At the time that forfeiture judgement .is obtained, ownership of the
                                                                                 prcipcrtf is effectively transferred to the federal agency and the
                                  ” ..::                                         gov&itehtshouid         recognize..the revenue earned at that time rather
                                  , ,““”        ‘,
                                                                                 than defeiring it.            I ,“
                                                                                       :,,,’.+ ,(. ,.,_   .,” i ,t,_,, ‘.         :

                                                             iraY          The first twii suggestions ralate~,to seized property. The Board considered

                                                             these suggestions during itsdiscussions of&xed property. The Board did not revise
                                      /                      the standard; this was based on (1) the desire to esiabltsh strong controls over
                                                      .      monetary ‘instr&enrS and (2)thi,‘ difftculties in valuing and uncertainties regarding
                                                             dis@$$&so$ted                  5th seized non-monetary propem.
                                          . .                              .,, I ,:, I/, ,,,I ..:P            ,.( ;    ,, ,;/,,_,
L,   ‘,
                                                              1’47. : Thi third ‘ittd ‘,fourtb i t emsrelateto forfeited property. The suggestion to
                                                             disclose forfeited non-monetary instruments. ,item.3, would result in understatement of
                                                             the ,&y’s   l    &e~.~Diaflosure requimments~should .emphasixe that the value reported is
                                                             m&1) an ‘estimate”‘~of the propet+ vrlui.. The suggestion to recognize revenue
                                                             up&t fotieituri. item.4, &tile theoretically correct wasnot adopted by the Board. Due

                                                              t6 the ‘difftrdulties in valtiing: forfeited property and the risk of overstating the revenue
                                                              the Board’decided to defer revenuerecognition, until the property was sold.
/         :.+                                                 148.        One respondent requested that the standard address valuation.of property for
               :                                             which them is no value, which cannot be legally sold, -but,which: can~,,ionated to
                                                             museums or other non-profit 0rgani.l) 3ns (e.g.. stuffed endangered species) or
                                                              desvbyed (e.g.. narcotics):The-stanoard was revised to clarify the disclosure
                                                              requirements and to indicate that no financial.value need be reported for.thesc items.
                             ”                                Entities are not prohibited from, reporting information regarding the dollar value of
                                                             ‘illegal assets se&d if they so chose. The standard only relates to financial recognition ‘.
                                                              and disclosure.         ‘-             t
                                                               149.       One respondent indicated that the analyfis of change in seizures disclosure
                                                              requirement is very detailed and should not be required for agencies with only
                                                              incidental seizure l cttvity. The ,Board’has indicated that the standard is not intended to
                                                              be applied to immaterial items. ’
                                                                     .                   :
                                                               150.        One respondemnoted that the definitions of seized and forfeited property
                                                               seem to be limited to monetary instruments, real property and tangible personal
                                                               property. The respondent asked that this definition be extended to intangible assets
                                                               (e.g.. savings and loan ohrrtct-sj.The Board did broaden the definition to address         ..
                                                           : ’ intangible property.

                                                               151.      One respondent ,explrined that the exposure draft can be interpreted to
                                                              advise agencies to account for the assets through the. seizing agency’s propercy records
                                                              and financial statements. However, in most cases, .the seizing agency is different from
                                                              the custodial agency whiohmay take:pc&session .of seized properry. in addition. there
                                                              may b; a central fund created to support activities of multiple agencies. It was
                                                              recommended that the standard be modified to recognixe the distinction among

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SmAS   NO. 3

                     “seizing agencies”, “custodial agencies”, and the “central fund” responsible for
                     accounting and reporting for the seized property; and, to remind seixhg agencies     of
                     their responsibilities to maintain sufftcient internal records to carry out their
                     stewardship responsibilities.                                                                              I

                       152.         Th’~xposute draff had defmed ‘,seixed property” ‘as being ‘in the actual or       ;7... .
                      constructive possession of the seizing l gettey.’ The &portdent has correctly pointed
                      out that this. ismot always the case sitrae custodial agencies frequently take possession
                      and/or responsibility for seixed property. Depending on the circumstances,    each party
                      rmy,:hm.a:n aed’ tomaintainpropertymcords        regarding seized. property. For example,   .
                      a seizing agency may wish to. track property that may he ultimately ~distributed to it.
                       la addition, seizing agencies may maintain physical possession of the prom        during
                       the forfcittue process. The Board has modified the definition to include seized
                      m           held hy custodial l gepoies.          .’
                                    ,‘_                 ‘_:’ ,,
                        lS3. ” With reghd ,to the rqu+ .for,‘i .cleqr $&emktt of -which agency is to
                       maintain recordi onseixed property, the Board b&ves,that central fund would be
                       responsible for accounting for and reporting seixid property, but that seizing agencies
                       or custodial l gencics~mey have a need for pro&y records related to seized property
                     . and doemot wish to prccluds them frog. doing so. However, in preparing
                       consolidated financial statements care should be taken to avoid double counting these
                       items. With regard to’forfeited property, ownership should be the determinant for an
                       entity’s recognition of an l sseL However, an aghcy ‘et maintains physical custody,
                       but not ownership, of forfeited,properey is not precluded from maintaining property
                       records   l ithotqhnomet should be recognized.

                            .’ I
                      154.          Many respondents objected to the requirement to value post-1991 fondlosed
                      prop&~       at net present value (NPV). The primary objections to the use of NPV were:

                                    -    NPV, is not a more accurate valuation basis than net nalixable value
                                     -   NPV does not improve the information presented
                                    .-   Difference between NPV and NRV is immaterial
                                     -   Loss of comparability with commemial enterprises
                                     -   Maintenance of two systems to value foreclosed property (pre-1992
                                         and post-1991), is costly and unnecessary
                                    -    Changes in existing systems would be complicated and expensive
                                    -    Cash flows may not be forecast with sufficient accuracy to measure

                      155.         In proporing present value l ccountmg, the Board’s primary considerations
                      were to cay out the intent of the Federal Credit Reform Act of 1990 (the Act) and to I
                      make financial reporting compatible with the budget. Since foreclosed property is a
                      rrsttlt of the original lorn transaction or km guarantee, reporting on this activity
                      should be guided by the provisions of the Act.

                      156.       An extensive discussion of the Bosrd’s~overall decision to require present
                      value accounting is presented in Recommended ‘Accounting 8tandard No. 2.
                      Aceountin~  for Direct Lwrrt and Ltmn Guarantees (see Appendix A). One of the

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                                                                                                I     SITAS NC& 3

                           objectives of .fmntzial reporting is tii’enable :the reader to &ermine the status of
                           bud&&      resources, and whether ‘those resources were acquired and used in
                           accordance with the enacted budget.” The’ Board believes that only by using the same
                           basis can financial information be used to compare. the actual results of operations
                           with th&‘bud&t
                                       :, 7           >     ‘)
                             157. ” However, the Board wishes to acknowledge that respondents may be correct
                           in stating thst’in certain cases theremay be only~immaterial differences between net
h’I                        &i&tile    ‘&e     (or other niethods) and NPV. The standard has been revised to
i.                         indiite that if no material dif’fennce~ results. other valuation methods may be usid as
                           an rppr&ution        of the ‘bet,prorent value ‘of .foreclosed property.

                           The Board has not revised the standard as a result of this request. The Board believes
                           that there are no unique circumstances in’this case which would preclude conformance
                           to tile standard.


                           159.       The proposed standard required that nonrecourse loans be adjusted at time
                           of disbursement to recognize n 101sif the market rate is lower than the loan rate.
                           This constituted a’ departure from current practice that is to,,adjttst the loan values to
                           their expected nel realizable value at report date. Respondents’ expressed concern that
                           the proposed method would tesuli in r&ognizing losses without consideration of the
                           underlying economic transaction (i.e., will the loans be repaid).

                           160.       Based on two respondents’ comments, the ,Board found that the approach
                           originally proposed ignored the “probability”, component in recognizing unrealized
                           losses; these losses have typically been recognized only if they are “probable and
                           measurable. Nonrecourse loans, being short-lived, are similar in nature to notes or
                           accounts receivable. Therefore; the Board referred to its recommended standard for
                           accounts receivable. That standard states that:

                                 Losses on receivables should hs recognized when it is more likely than not,,
                                 that the receivables will not be totally co!lected. The phrase “more likely
                                 than not” means more than a 50 percent chance of loss occurrence.

                                 An allowance for estimated uncollectible amounts should be recognized to
                                 reduce the gross amount of receivables to its net realizable value. The
                                 allowance for uncollectible amounts should be reestimated on each fiMnoia1

      “FASAB Exposure Draft, Objectives of Federal Financial Reporting, Vol. 1, par. 13.

                                           _’   Volume I. Version 1.0
                                                 February 28, 1997

                    report@ date and when infomtion  indicates that the latest estimate is no
                    longer correct. (PAM@. Recommended Accounting Standard 1, Paragraphs
                    44 and45) .’
                161.      In l dditioa, one respondent indicated that tbe,origi~lly propoaed standard
?              would have excluded loss recognition due to factors other than fluguations in the
               markat rates. Lames can occur due to (1) farmera’ minrrc or handling of the pledged
               wmmodities, or (2) bud. Clearly the concept of loss recognition should be broadened
               in order to recopixe them events. The Boqd modified the standard for nonrecourse
               1~. p be more consistent with the cco& receivable stamhrd a& to encompass
               the Bowl’s cumat thhkitq on the liability, proj,+.

                162. ’ One respondent rqued that put&se agreements Constitute a contingent
               liability. Tbc-proposed star&&would     gt@re reeom        a liability and ,a lore If tbc
               eomtnct price es&&d        .#he.espected net reekable ,+uc oft&e commodltiea. It is
               clear that et any iveo ,time the market ,pricc &y be lover than the eontraot priae but
               that due to cycles in the harvest-and post-hen&t market thi8 may ‘not he k indication
               that the contract will be executed end l loss +zed.   ‘@e Bti      revird the star&d      _..,,..
               to provide for 1088 recogtiti~ in connection with purchsc agnements if the Id&- ir
               both probable and measurable.



                                                                                                               i             i
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                                                                       ..-., -,, , . . ... .

                                                                                                                   ,. __
                                  Volume I, Version 1.0                                                                     j
                                    Fcbntuy 28, 1997
              STATEMENT       ‘OF FEDi3RAl, ‘FINANCI.AIi
                 A~Co~T~~.’           STmbmS .,. ,. No;; a,,                                             ‘.
                  *.    I. ,.: ., .,’ ,, ,,~; ; :: 1,. ;. ,‘,
                               Managerial     Cost Accounting Standards>, *’:’”


            hssud          ’            July 31.1995
           ‘,!                                                                     I
            1Effective~Date:            for fiscal yearsbeginningafter September30, 1996.’          .’

           j,,.Volume I References:     SFFAC No. 1, Oejectives of FTdemf Financia! Reporting
                                        @&id& &scb’. ton of tire dataandenvironmental‘datai weII
                                       ,.~‘typfs.~ofrepb*) ,;                ,:’   r    ,:.; .,‘,
                                        SFFASNo. 13,AcccGring]or ‘Ziabil~iiek bf thi’Fede&l.; .’
                                        Government,(providesinformationon’pensionand other
                                        retirementbenefitcoststo arrive at full cost)
                                        SFFM* No. 7, Rc&+in~ foi Rei;)riiie and Oiher Fiironcing
                                        Swrrcs (paragraphs’  73 and 333-338addressim@rtedfinanking
                                        for inter-entitycosts)

            Volume II References:       Managbid,~CdstAccounting(M20)

            Interpretations:            InterpretationNo. 2, kouniing   foi Treasury Jud&ment Fund
                                        Tmnkicrions             a       ‘,
            Affects:                    No other.statements.
            Affected by:                No other statements.


                    The managerialcost accountingconceptsandstandardscontainedin this statement are
            ‘aimedat providing reliableand timely informationon the full cost of federalprograms,their
            activities,and outputs. The conceptsof managerialcost accountingcontainedin this
            statementdescribethe relationshipamongcost accounting,financial repotting,and budgeting,
            The five standardsset forth the fundamentalelementsof managerialcost tiwunting.

            Mmtgerial Cost AcCouatingCoaccpts

                  Managerialcost accountingshouldbe a fundamentalpart of the financialmanagemeat
            systemand, to the extent practicable,shouldbe integratedwith other parts of the system.
            Managerialcostingshoulduse a basisof acwunting, recognition,andmeasurement

                                                 Volume 1,version 1.0
 t ---..                                          Febnuy 28,1997

 332,                        ,,             ,’      _.   ”    a,    ‘.
 SmAS   Iyo.   1”’      ‘_        :   .’

 apjxopriate‘for the intended purpose.’Cost infotmation developedfor different purposes.
 shouldbe draw from a commondata source,andoutput reportsshouldbe reconcilableto
 eachother.                                        ,’
                                                                                                !9         1
 Mmrgkhl             Cost Accounting Standards
       rementfor cost accounttag- Eachreportingentity shouldaccumulateand report the
 costsofitsactivities on’a regular basis:for managememinformation.putposes.Costsmay be
 8ccumht~ either throughthe useof .costaccountingsystemsor through the useof cost
 finding ttthniques.
           ,,I          ‘. j
           . . . ,...s.
 &ggggastbtlttvsenmentsTManagementof eakhreporting’entityshoulddefine and establish
.&sponsibilitysegments.Managerial,cost’,,accounting.should be,performedto, measureend
 report the costsof eachsegment’soutputs,. Specialcost studies,if necessary,shouldbe
 performed to determinethe costsof outputs.           ,,

Full cost- Reportingentitiesshouldreport the full-costs of outputs in generalpurpose
financial reports. The full cost of an output producedby a responsibilitysegmentis the sum
of (1) the costsof resourcesconsumed’bythe segmentthat directly or indirectly contributeto
the output, and (2) the costsof identifiablesupportingservicesprovidedby other
responsibilitysegmentswithin thereportjng ,entity, and by;;otherreporting entities.

Jnter-entitvco- - Eachentity’sfull cost shouldincorporatethe full cost of goodsand
se&es that it receives’from other entities. ,Theentie,&-oviding the goodsor setices has            ..“”
the responsibilityto provide the receiving,entitywith ,xr,iormationon the full cost of such     /’
goodsor serviceseither through billing or other advice.                                         k2 ,1

Recognitionof inter-entity coststhat are not fully reimbursedis limited to materialitems that
(1) are significant to the receivingentity, (2) form an integralor necessarypart of the
receivingentity’s output, and (3) can be identifiedor matchedto the receivingentity with
reasonableprecision. Broad and generalsupportservicesprovidedby an entity to all or most
other entities generallyshouldnot be recognizedunlesssuchservicesform a vital and integral
part of the,operationsor output of the receivingentity.

         methodology- Costs of resourcesconsumedby responsibilitysegmentsshouldbe
accumulatedby type of resource. Outputsproducedby responsibilitysegmentsshouldbe
accumulatedand, if practicable;measuredin units. The full costsof resourcesthat directly or
indirectly contribute to the productionof outputsshouldbe assignedto outputs through
costing methodologiesor cost finding techniquesthat are most appropriateto the segment’s
operatingenvironmentand shouldbe foBowedconsistently.

                                           v01uahe I, Version 1.0                               [,’ -4 )
                                             Felmuy 28. 1997                                           f
                                                                                                                                                                    ,‘., ‘33,
                                                                                                                                                    ’ S?‘FASNd4

  The cost assignmentsshouldbe performedusingthe following m&ho~:listed @ WCMkr of
  preference:(a) directly tracing costswhereverfeasibleandeconoxkcallypracticable,(b)
  assigningcostson a cause-and-effect   basis,or (c) allocatingcostson a reason+!? and

         ,I%                                                 ,. ;
       *,nY                                                  Pangnpbs in
  contents:                                            Origid Pronouncements:                                                                                       P*

  In*tion:               ‘,                                                ..
 ,,’ B8clq&nd               ... . ........             i: ........ 13-0 : .. ': .... .,.‘I .‘I .... : .. ; . : ....................                                        334
     U&iof    F&j&,. .....~&ernmen,                 :,
        Con Infoluution                  .............               18-21 ................                      :. .......................                                335
     Objectives ..........................                              22  ........................................                                                       336
~~,‘S&@e : ..; .........          . ...............             ..;. 231-25 ::. .:.:.           .... .;. .........................                                         336
     Terminology  ......................                             26-27  ........................................                                                       337

  Rtrporciof’Us~CGn.Infonnrlidn              ......                    31-32 . ; ..... ; .................................                                                 338
   Bud8eLin8endCostControl.i         ... . ........                      ,33 ... . .. . ..................................                                                 338
   Performance Measurement ............                                34-36 .......................................                                                       338
   De(ermining Reimbursements and
       %tingFeerendPrices..        ..........                          37-j8 ........................................                                                      339
   PrognmEV8luaiOna ..................                                    39 ............                  ..* .....   ...‘.        ...............                        339
.. E&n&nic Chciice ‘DkksiOni .............                               ,40 ......         1) .......................                             c.........              340
      I. ,,‘G        :
  Mu%&iel Cost Ac&miq                         Concepts . . . . 41-66 . . . . . . . . . . . . . . . . . . ;,a . . . . . . . . , . . . . . . . . . . 341
       _:        :
 kM8Wid             cost Accounting %mdds                                         ‘.                 ”
    Rquirement for Cost Accountin                :          :. . . . 67-76         ,   .....        .............,;......                     ..   ...   ...    ....       347
    Res$orisibility Segmcntj . . . . . . . .                . . . ; . 77-88        .   .....        .....................                     ..   ,..   ...    . . . ‘.   351
    Full Cost ; : . . . . . :. . . . . . . . . . .          , . . . 897104         .   .....        ............,.,......                     ..   ...   ...    ....       354
    Inter-Entity Costs . . . . . . . . . . . . .            . . . 105-l 15         .   .....        ..........,..........                     ..   ...   ...    . .. .     359
    Cost@ Methoyblogy . . . . . . . . . .                   . . . 1i6-162          .   . ‘. . . .   ...,..........,......                     ..   ...   ...    ....       364

  APPEND@,A:              Basis for Conclusions . . . 163-270 . . . . . . . . . . , . . . . . . . . . . . . . . i . . . . . . . . . . . . . 374

  ParagraphsI-12 and 28-30omitted.

                                                                      Volume I, vemion 1.0
                                                                       F&wry ,28; 1997                                                                                           .
  SF’FAiNO.     4

  INTRODUbTION~                               ~.                         ,

                             13.       Reliable information on the costs of federal programs an&activities is crucial
                             for effective management of government operations. In Statement of Federal Financial
                            Accountin Concepts @WAC) No. 1, Objectives qf Fedeml Finaneid Repming.
                            issued in 1993, it is state+ thit the objectives of fedenl f-&l        repotting are to
                         ., provide .wefitl ,inforrmioa to .assist&enul.~~      ~externalIuser8:in aueuing the bu@et 1.
                            integrity, operating pcrfonmnce. $ewudship, and systems and control of the fechnl

                             14.        Managerial cost accounting is especially important for fialfilliq the objective
                             of assessing opera-      performance. In relation to that ‘objective, it ir’ stati in’ S&AC
                             No.. 1 .that. feden ,fuuncial reporting shoirid.+rovide iafon~tion~ thit ~hel+sera to       >
                             detemine:                         . .

                                   l     Costs of specific pro&s      and rctivities ‘mb the composition of, aqd changes
                                   in. tbofe costs;

                                   l   Effor&s and rccomplishments associated with fedekl programs and t&ir
                                   changer over tiine and in relation to costs; and

                                   l      Efficiency and effectiveness of the govemmeqt’s man&nent      ot its usetr and

                              15.       It is further stated in SFFAC No. 1 that ‘The tqics of costs and performance
                             measurement are related because it is by rssacirting cost with rctivities or cost
                             object+       that accounting can make much of.its.contribgtion to..reporting on
                             performrace .‘I . Cost’ is the monclry value df resources used or sacrificed or
                             liabilities incumd to achieve m.objective, such as to ?cquire or produce a @d or to
                             perform an activity or service. Cogs incurred mry ben$t curmk end funrrr peri&.
                             In financial recounting and reporting, the costs that apply to an entity’s operations for
                             the cumnt accounting period are recognized IS expenses of that period.

                             16.      The Chief Financial Off@ers AC! of 1990 ikluder among the functions of
                             chief facial   offlcen ‘the development and reporting of cost information mad “the
                             systematic mkurement of performance.” In July 1993, Congress pused the
                             Governnq     Performance and Results Act (GPRA) which mandrtes performance

    ’ Statement of Federal &uncial Accounting Concepts No. 1. Objecrivrr o/ Fedeml Financial Raparting
(September 2. 1993). pars. 110 l d 1 Il.

   ’ Ibid., pars. 126-130.

   ’ Ibid., per. 192.

   ’ 104 Sut. ‘2938 (See pnniculrrly        3 1 U.S.C. set 902).

                                                   v01umc I, venion    1.0
                                                     F’ebtuuy 28, 1997
                                      ‘ileUU&dnt       by fedem1 Agencies.’    h      ‘-’
                                       on the Netionel p&o-
                                       wtipn which requhd tk Federal Accoy,eg Sundsrds Adviror); Boerd to iti               l ret
                                       of ‘q&t l ccotiting stadh’for        4a fedml rctivities.‘:~lhose stand&s will provide l
                                       metkd f& ideriti@iag tk &it cod’of           ,& ~over&en~‘ictivitics.
                                                                                              i <L,
                                                               ., : l;,’ 71 .:‘,.;J.
                                      Ii.          In dy     1994, t@ Federal Accoytjq Stuuhis Advisoty Boerd (tk Baud)
                                      co&u+          rh +vioijy @up ” help ‘+ircldp‘ Naduds for Mnrgerir1 cast •c@Sm~
                                      iQtbCf&8Oi&Ul+                    *   @'Oll+hdd+flikn            fiOUi8OvCmmen   s-
,’                                    anti uad+.     lkC~ew#~e+popo$ls.kve                    b& ooruidered by tk Boerd, end
     i                                tkir iiork contrib&d greatly h develop&his               document.
                                 .I                    .(,

                ;                                                                                     well as to tk federal
                                                                                                rbc,omplishments ,ceaaot k
         8.             “’                                                                          *~ is 00 ‘ktlom *inc.
                    ’                                                                              Hdwever; government
                                                                                             usixq both fwirl      end non-
                                      fmenciel ,meuuru. and ‘cost” is an imporhnt ‘finmoirl m&sure for govetnment
                                      propuns. Intend end cxteraal federal information users ide@fied k!ow will fred
                                      tkw stendards helpful irl rsseuirrg operating perforrMllce, stewardship, syh.       end

                                      ,19.     Gowmmmr man&           we the primary usen bf cost infonnetion. Tky are               .
                                      responsible for cerrying out program objectives with resourcc~ entrusted to tkm.
                                      Reliable end timely &a ihfon&on      helps them ensure tkt resources l re spent to
                                      achieve expected results end &puts, ind alerts tkm to wrs!c end inefficiehcy.

                                   20.       Ca~grws and fid#ml l ~~eutier. i~cluditq ,the President, make policy
                                 . decisiona on program priorities end ell&rte resources among programs. These
                                   offbls     wad cost information to compare rltemrtive courses of r&on end to make
                                   progrun l borizat’ion decisions by ruissing costs rad kircfiu. They also need cost
                                   infonlutioll to cveluete
                                                       ,,    prc@ua
                                                              .)     perfor&nce.

                                      21.       Ciriwu. includiq news medie end interest groups, are concerned with tk
                                      costs md ruul~ of federal programs t+at &feet their interests. l%e need piom
                                      eosi inform&ion tb jhe wktkr     rc~~~cs are rlhcated to programs ntionally-aad           if
                                      tk pmgims operate efficiently end tffectively.


              ’ 107 Stat 285 (see puticuhrly,
                                           31 U.S.C. wctionr 1101. 1105,1115, 11161119,9703.9704).,
                                                             .                                      .
              ‘ Vioc Prbident ‘Al ‘bon, vt                        Wo&&ter     Bt cbru       AccompanyingRaport
         of tk Nationel Performauce Review (September 1993). p. 39.

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                            22.     The auasgerisl c&t rccountin~ concipts .aad staadsrds presented here are          ,;““*4
                            it&&d    for all the user groups identified above. These standards UC aimed (II
                           rchieving three +&xl      obj,ectives:     -                                               “i i F

                                l    Provide   program &114pif   with XdeVMt      d relieble id~rmrtion relating
                                costs to, outpuu aad +ities.    Bared on ,ti ‘iaformstioa, program xaxaegers caa
                                respond to inquiries rbout the costs ‘of the ikivities they auaagc. The cost
                                iaformrtioa will.rs&t them ia improving opcritiohl economy aad efircieacy;

                               l   Provide nlevaat and reliable cost iafdrmation to assist the Coagus aad
                               executives ia makiag decisioas rbout rllo+iag feel     resources, l uthorixiag aad
                               modifyiag programs, aad evrlkiag Prognm perfokace;          and

                               l       sasu+             beiw~&‘~co& &rted
                                                    y*,ncnty                         ia general purposk f-ii)
                               reportil d,costs   tipoqed IO pkgrqm k&&s.              This iacludes staadudixiag
                               tCll&OlOgY   for tlUl?ljiJCtil COst&?COUd!t~ ttii+~VC          COUUllrmiUtiOn  Ml0n8

                               federal orgmizations sad users of cost information.


                          23.     This statement coau&s mekagerirl cost concepts and five stsadards for the
                          fedenl goverameat.. The five standards address the followiag topics:

                                        (1) Requirement for cost rcdouaiing,
                                       (2) Respoasibility egments,
                                       (3) Full cost,
                                       (4) Iater+ity    costs, end      *
                                       ‘(5) Costing &e@d?logy.

                                    The esseak of each stqadard is briefly stxted ia a box followed by detailed
                          explanations. However, both the words, ia the boxes xad the entire text of
                          explanations constitute the reqoirementa of the rtafbdardr

                           24.       These standards ate bud on sound cost accounting concepts sad allow
                          sufftcimt flexibility for agencies to de-velop maaagtial cost l ccouating practices that
                          l e suited to their specific opentiag environments. Also, it is expected that cost
                          rccouatiag standards md practices will evolve aad improve as agencies gsia
                          experience   in usiqg them.

                          2s.        Other Sta?emeats of Fe&n1 .Fiaaacirl Accounting Stmduds (SFFAS) rddress            .
                          recognition end mea-eat        of assets aad lirbilities. For l dditioaal guidsa& niders
                          should coasult: SFFAS No. 1. Accounting for Selected Assets ond Liabilities; SFFAS
                          No. 2. Accounting for Diner Loons ond Loom Guoronters; cad SFFAS No. 3,
                          Accounting    for inwttqy  ond Related Property. The Baud is work@ on cad will

    ’ Strtemeat of Federal Fiaancirl Accounting Concepts No.1. Objectives of Finonciol Reporting. defmed
‘Progmra XBkge&       as individuals who meaege federal programs, and stated that ‘Their coacezns include
opentrng plaas; program operations, aad budget execution.’ SFFAC No. 1, par. 85.

                                                        Volume I. Vmioa 1.0
                                                          February 28, ‘1997
                                                                       ‘,.                                   .
                         26.      h4mBgerid cou~rccoun~     inforrtlaion, to be useful, must rely on wMluutlt
                         and unifoml ttmiaology for coaccpts, practicer. 8nd tectiqucs.    coasistent uld
                         uniform use of tkrminology can help avoid eoofusion and mis-oommunibbtiw      UDO~
                         orgmimions end individurls.                       ‘I
           ” ,;          27.      As l start towud developing con&tat     Mnrgerhl cost l couu~
                         tetminology witbin the federal $overnmcn 5 this statement .iaclger a glossuy of basic
!           ”
1,                       wst wcoutlting terms.
Ii          <                                                            -5                           ,.I,
                         [purgnphr 28.30. omitted.]
                                             ! .:                    :‘:

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                             31..      nwfc Ire tnmy different purposes for which coat iafotTMtiotl uuy be used by
                             tile feden1 govertuncat. l-k focus of this statement is on cost ~ormetion weded to,
                             iltlpmve fcdenl fwiel     ~gement      +td mlugeriel de&ion uukiag.

                              32.     .In tmqiag   fedeml goVernment progru& colt informtion is mentie izt the
                             following five arms: (1) budgeting end cost control, (2) petfontume m         (3)
                             determining reimbursements and setting fecr and prices, (4) progmm evalu&ms, md
                             !S) ~m&iag:eooaomi~ choice decisions. Exch of these uses is discussed below.


                             33.      IllfonMtioa  on the costs of   program   rctivities   cm   he used   as l b&s   to
                             estimate future oostl in pmperitqmd    reviewing budgetr. Once budgeu UC approved
                             ad   executed, c&t informdon   serves  as l fcedbrck to +dgets. Using cost
                             iafomaioa, federxl m+mgers cm control md reduce costs, ead fti md avoid wmte.
                             For exxmple, with rpproprirte cost inform&on, federal mmxgers cm:

                                 l    Compare costs with known or l sauned benefits of rctivities, identify v&e-
                                 aided end aon-vxlue-edded activities, cad m&e decisions to reduce resourcea
                                 devoted to rctivities that are not cost-effective;

                                 . Compare md determine reasons for vrrimcer ktween rctual xnd budgeted
                                 costs of 111Activity or a product;

                                 l      Compare cost changes over tir8-d        identify their CIWS;

                                 l      Identify and reduce excess cqucity costs; l nd

                                 l      Compue costi of s&tiler rctivities md find causes for cost differences, if


                            34.         Mwsuring perfonlunce is l mexas of improviag progmn efftciency,
                            effectiveness, UXI progrm r&&s. One of the stated puqmes of the GPRA of 1993
                            is to . . . improve the cotideace of the Americut people in the cqubility of the
                            fcdsnl government, by ystcmutiorlly holding federal rgencier rccouauble for
                            rchieving progmal results.’

                            35.       ~Gortrirmintegnlpurofm~perfonrrrnocintermrof
                            efficiency xad cost-effectiveneir. EffSency is mewred by +ing               outputs to iqmta.
                            It is ofka expressed by the cost per init of output. while effectiveness in itself ia
                            meuured by the outcome or tk degree to which I predetermined objective is met, it
                            is comtnoaly combined with cost infotm&a           to show l cost~ffe~tiveness.~ ‘Ilm. the
                       c    smice marts ina rcwttt~liihmonu        of I’ -goifemmat entity cm be avxluB&Kl with the
                  w         follow&g -:

                                                  Volume I, Vmion 1.0
                                                    Februuy 28. 1997
                                              ‘.       (1 j    MNSWS         0fbice         effom whi& idudc the ~ortr 0f -                        d      to
                                                               provide the sewices l d aon-fd              V

                                                       (2) Meuurer of rckomplisbmenU which are outputs (the quantity of eerviecs
                                                           provided) and OUtcOmes(the mulb of tllok mrvices); end

                                                       (3) ~rtht~~~effo~torccomplirhmmtr,Suohu~ortperurritOf
                                                           output or aost4fectiveness.

                                        36.     Thus. u steted previously, perko~e    meeswem eat lwpirer both finulcirt
                                        and non-f-id     meesuree. coet ia i neceesey element for performulce
                                        l#mummmG but is not ille only element.

                DtRRMMMC         REIMBURSEMENTS
                AND Sm7xNG      FEEs’AND PRICES

                                        37.            Cort’ infornution is an imporbnt berir in setting fees end                 fcimbrmnacntr.
                                        pricjng       and     costing,   howyer,      are   two   different   concepb.   sMin#   prker      i8 a policy
                                        mater, sotneti&r governed by statutory proviaio~ end ngulr~ons, end othertimer
                                        by mmegeriel or public policies. Thus, the price of e good Cr’eervice doen not
                                        neeessudy equal the cost of the good or the #emice detmai&d under l puticu& Kz
                                        of piaciples. Nkertheleu, cost ie en importent considemtion in wtting govetmmt
                                        pica. With certain exceptiotu, OMB rquirer:’

                                                   . With mpect to goods end KtiGeS that, the ~OWnrment        providei in ite
                                                   mmeign cepecity to I perticulrr group of individuals es a specie1 benefit, ueer
                                                   cherges should .k ruffGnt  to recover the full cost of those goods end reivicer;
        ” .?     ..,
‘6;1’                                         l      With respect to goods end services thet the gqvemment~ provides under
                                              business-like conditions, user cherges for thorn goods end rexvices need not be
                                              limited to tbe remvery of Ml co+ end mey yield e net revenue.
                                        38.          Also,  cost iafdrmrtion  is impomnt in ~lculeting reimbursements for products
                                        and services provided by one government rgency to mother. Even if fees or
                                        reimbunemenb           do not recover the full costa due to policy or econpmic oonetfeintr,
                                        management         peeds  to bel wui of the difference between cost mad price. With this
                                        information, progrun nmnegen cm properly inform the public, the Congress. and
                                        federal executives about the costs of providing the goods or services.

                PROGIUM      EVALUATIONS

                                        39.       Cosb of federal resources required by programs ue ea important factor in
                                        rlmkiq policy decieiona relrted to prognm ruthorixetion. modificUion, and
                                        discontinuation. Theas decisions rrc usuelly subject to policy ~oantminte, and often
                                        require the consideration of social end economic GON end benefib'rffecting   different
                                        s+on of the maocoy end eociscy. Neverthelerr, the COSUof federal mouroee

                     ’ OMB Circulu A-23 , m                         (Revised July 8, 1993).

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                       required UC an i#mrtan~ factor. In’onnrtion   on progrun   costs   can be used aa a basis
                       for tort-benefit coasidemioas.


                        40;       Often, agencies and programs face decisions involving choices amon               .
                        rltemative dons, such as whether to do l project in-house or contract it out; to
                        rceept or reject 0 proposal; or to continue or drop l pzoduct or acmice. M&in8 time
                     ., decisionr ,xquircs. oost com~na      ~atno~. rvailrble alter~tiver.

                                         volume I, vetlion 1.0                                                               A
                                           Febtuuy 28, 1997                                                                      ?


                                                                                                                                                         r.     ‘..
                                                                                                                 .:.          .,,   tii”   ,,       __    .:.
                                                                                                                       .s ”

                                                                                                               splrAs‘lkG.4,                    :

            MANAGERIAL            COST ACCOUNTING                               CONCEPTS
Y-i                                      h
                                                      .Muagerid   eort mcomntiog ahoold be a fundamental part ef
                                            tbr flnao+l    maoyeiaeot    nyrtem and, to .tbbr ixtent p~ticabk,      WmId
                                            b :hte#nted with l tbcr partr of the iyaemL Mamprial            carting
                                            rboald..ow a buW of accaaating, mce@ioo,           and murpnmcat
            :&                              lppioprtte    lor the intqded parpow      Cost hformatioo      developed Lr
                                            differcot pwporir ahiuld bcdnh,       from a common data aomrce, d
                                            oatpmt reports rboald be mconcikbk to each other.                            1
                                                          ‘.        ,,
                                  41.    I’ Minrpial   cost mcouritig should. be ,111essential element of proper diamcirl
                                  lAumin& contr61, .mdWalWion for my oqmization or activity that WI -
                         1        ha*     mop+uy value. Managerial cost accounting is a basic put of the fin&W*
                                  rmnagement. ystem in that it supports and provides &tm to the budgetary aud
                                  fmnkl     iccounting functiona and, by it&f, provides usehil information fao both                         ,
                                  intern1 nd exte~l users.

                                  42.      -@A1          GOSt WCOUlltiXQ iS the proCSU  Of ~CCWZlUhtill& lNWhU&
                                  analyzing, interpreting, and reporting cost information usetkl to both internal and
                                  external pups concerned with the wry in which the organization uses, accomts fiw,
                                  safeguards, l nd controls ituesources to.lirect its objectives. ‘Managerial tort
                                  recounting. th-fore, ir the servant of both budgetmy l d .ftnmcirl l ccouut& rrd
                                  reporting koruse it assists those systems in providing information. Also. it provider
                                  usefut ix$otmation directly ti management. These relkionships arc shown in Figure I-

                                  Fieurc l:, Financial Manaecmcnt Information                    Framewar&
                                     Dam            ”              Accounting   Aetkities      WPM

     . ..
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          SWAS ,NO. 4

                                  43.        The information flow within a financial management system begins with a
                                  basic iaformation pool or common data source. This data source consists of all
                                  frrrurcial and programmatic information used by the budgetary, cost, and facial
                                  ncoounting processes. lt.includes all finucial and much non-fmanoial data, such as
                                  ouvironmental data, that are necessary for budgeting and finrncial reporting.” The
                                 common data source also includes evaluation aud decision information developed as a
                                  result of prior reporting and .fecdback., Other types of data may be iucluded based
                                 apon prceivcd neads and putper related to the ultimate users of the iuformation.

                                  44.        The couubon data source may include many different kinds of data. It is far
                                  mom than the information about fiaracial transactions found in the standard getteral
                                 .lodger, although that is a signifioant patt of the dau a0urce. Few organizations or
                                 .eoiities. maintain all .these.&to .in any dne system or. looation. Furthetutote. the use of
                                  the term ‘data soyce’ is not meant to imply tbe,use of computeri@ systems for