Forest Service: Accounting Treatment of Roadbed Costs

Published by the Government Accountability Office on 1999-01-29.

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

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

      Accounting   and Information
      Management Division


      January 29, 1999

      The Honorable Frank H. Murkowski
      Chairman, Committee on Energy
       and Natural Resources
      United States Senate

      Subject:     Forest Service: Accounting Treatment of Roadbed Costs

      Dear Mr. Chairman:

      This letter responds to your request that we review the Forest Service’s change
      in accounting for roadbed costs recorded in its Timber Sales Program
      Information Reporting System (TSPIRS). The Forest Service changed its
      accounting treatment of umber roadbeds’ due to its interpretation of Statement
      of Federal Financial Accounting Standard (SFFAS) No. 6, Accounting for
      Prouertv. Plant. and Eauinment, which it implemented in fiscal year 1997.
      SFFAS No. 6 requires that the costs associated with certain federally-owned
      land, including national forests, be expensed rather than capitalized. As a result
      of the Forest Service’s interpretation of SFFAS No. 6, it reported an additional
      $53.9 million in costs for its timber sales program, which increased the
      program’s fiscal year 1997 loss to a reported $89 million.

      Because the accounting treatment of timber roadbeds can significantly impact
      reported annual net income or loss for the timber sales program, you asked us
      to answer the following questions: (1) How are federal accounting standards
      developed? (2) What is the rationale behind the treatment of stewardship land
      in federal accounting standards? (3) What is the rationale behind the Forest
      Service’s accounting change? and (4) Did the Forest Service appropriately
      implement SFFAS No. 6 as it relates to timber roadbed costs? Enclosure 1
      provides detailed information on our methodology used to answer these

      ‘The Forest Service interchangeably uses the term “road prism” for roadbed,
      which is the underlying foundation of a road. To describe road prisms in this
      report, we will use the term “roadbed,” which is consistent with the terminology
      used by the Federal Accounting Standards Advisory Board.
                                                    GAO/AIMD-99-48R Roadbed Costs
questions. We performed our review from August 1998 through January 1999 in
accordance with generally accepted government auditing standards.


The Forest Service, an agency of the United States Department of Agriculture
(USDA), administers approximately 192 million acres of national forests and
grasslands. Each year, the Forest Service sells billions of board feel! harvested
from its forested land. For fiscal year 1997, the Forest Service reported that it
sold 3.69 billion board feet of timber producing gross revenues of $577 million.

In order to have better information on the benefits and costs of selling timber,
the Forest Service developed TSPJRS,which was fully implemented in 1989.
TSPIRS consists of three components-the financid, economic; and employment,
income, and program level components. The financial component displays
annual revenues, expenses, and net profit associated with the harvesting of
national forest timber in a financial report called the Statement of Revenues and
Expenses. The economic component displays the long-term benefits and costs
expected to result from a given year’s timber harvesting activities. The
employment, income and program level component displays timber-related
employment and income, and the associated federal income tax generated by a
given year’s timber harvesting activities. Our report focuses on the financial
component because it relates to the financial treatment of timber roadbeds.

Prior to fiscal year 1997, the Forest Service capitalized timber roadbeds in its
land value and did not record any annual depreciation expense. The Forest
Service adopted this accounting treatment based on recommendations from a
1989 consultant report? which explicitly addressed how the Forest Service
should account for its timber roadbed costs. As expressed in that report, the
rationale for this treatment was that the umber roadbeds were a permanent
improvement to the land. In fiscal year 1997, the Forest Service changed its
accounting treatment of roadbeds built to harvest timber in national forests
when it undertook early implementation of SFFAS No. 6 and recorded all timber

‘A board foot is the equivalent of a piece of wood 1 inch thick, 1 foot wide, and
1 foot long.

3Brown and Company, 1989, Evaluation of Timber Sales Program Information
Reuorting Svstem. Brown and Company recommended that TSPIRS, to better
comply with generally accepted accounting principles, capitalize road
preconstruction and some construction costs as an addition to permanent land

 2                                             GAO/MMD-99-48R Roadbed Costs

roadbed costs incurred in fiscal year 1997 as direct timber sale expenses for
that year.


Our detailed answers to your questions follow.

1. How are federal accounting   standards   developed?

Federal accounting standards are developed under authority of 31 U.S.C.
3511(a) using a deliberative due process established in I990 by the three
agencies with responsibility for federal financial management-the Department
of the Treasury, the Office of Management and Budget (OMB), and GAO
(referred to as the principals).4 The principals created the Federal Accounting
Standards Advisory Board (FASAB) to consider and recommend accounting
standards to the principals following rules of procedure developed to permit
timely, thorough, and open study of financial accounting issues and encourage
broad participation from the public and federal agencies. If the principals
accept them, FASAB’s recommendations are issued by OMB and GAO and
become effective. Section 3511 requires executive agencies to follow these
standards. OMB has directed that agencies must use these accounting
standards in preparing financial statements and in developing financial
management systems. A list of issued federal accountig standards currently in
effect is included in enclosure 2.

FASAB is composed of nine members selected from a broad range of federal
government entities as well as the nonfederal community. The composition of
FASAB is: one GAO member, one OMB member, one Treasury member, one
Congressional Budget Office member, one member from the defense and
international agencies, one member from the civilian agencies, and three
nonfederal members selected Tom the general financial community, the
accounting and auditing community, and academia. One of the nonfederal
members serves as the FASAB Chairman. To recommend an accounting
standard to the principals requires a majority vote of FASAB.

Based on overall direction from the principals, FASAB has established detailed
written rules of procedure to guide its deliberative process for considering and

4~ 1990, the principals signed a memorandum of understanding which reflects
the principals’ agreement on the procedures to be followed in setting federal
government accounting standards and the composition and operation of the
Federal Accounting Standards Advisory Board.

3                                                GAO/AIMD-99-48R Roadbed Costs
recommending federal accounting standards. These rules generally require that
FASAB (1) hold meetings open to the public, with notice of meeting times and
locations published in the Federal Register, (2) release exposure drafts of
proposed standards to the public for comment, (3) hold public hearings, at
FASAB’s discretion, to obtain oral public comment, (4) consider written and
oral public comments on proposed standards, and (5) maintain a public file of
all relevant documents supporting the development of each accounting

Our review of the public file for SFFAS No. 6 indicated that FASAB followed its
rules of procedure in developing this standard. During the period 1991 through
1996, FASAB held various open meetings to discuss how to account for federal
property, plant, and equipment. On February 28, 1995, FASAB issued an
exposure draft, Statement of Recommended Accounting Standards. Accounting
for Prouertv. Plant, and Eauipment, for public comment. Forty-one responses
were received, mostly from the auditing and accounting offices of federal
agencies. FASAB staff prepared a detailed schedule summarizing the responses
to various issues and questions raised regarding the proposed standard. On
May 24,1995, FASAB also held a public hearing on the exposure draft and
received comments from representatives of six federal agencies and one
nonfederal agency. Advance notices of these meetings and requests for
comments were provided in the Federal Register. FASAB issued its
recommendation to its principals in September 1995.6 After the principals had
considered and adopted the recommendation, GAO and OMB issued SFFAS
No. 6 on November 30, 1995.

2. What is the rationale   behind the treatment    of stewardship   land in federal
accounting standards?

SFFAS No. 6 defines stewardship land as federally-owned land that is not used
in providing goods or services. Land acquired in connection with general
property, plant, and equipment (PP&E), such as land supporting government

 5The public file is a collection of documents prepared or received by FASAB in
 connection with the development of its proposed accounting standards. These
 documents include reports by task forces, minutes of meetings, and exposure
 drafts and related comments on proposed standards.
 ‘?he Chief Financial Officers Act prohibits the adoption of any standard dealing
 with capital asset accounting until the standard has been submitted to the
 Congress and a period of 45 days of congressional session has expired. SFFAS
 No. 6 was submitted to the Congress and was adopted only after expiration of
 the 45day period.

 4                                                GAO/AIMD-99-48R Roadbed Costs

buildings, is excluded from the stewardship land category. Stewardship land
does not include mineral deposits, timber, or other depletable or renewable
resources. Examples of stewardship land given in SFFAS No. 6 include “forests
and parks and land used for wildlife and grazing.” A related standard, SFFAS
No. 8, Supulementarv Stewardshiu Renorting, provides guidance on the
reporting of stewardship assets, including stewardship land.

According to SFFAS Nos. 6 and 8, the accounting treatment and reporting of
stewardship land, including national forests and parks, is based on three related
characteristics of federally-owned stewardship land: (1) the cost or monetary.
value of stewardship land is often uncertain or not determinable, (2) when cost
is available, it is often not meaningful since it has been many years since the
land’s acquisition, and (3) stewardship land is held for the general welfare of
the nation and is intended to be preserved and protected. Since the cost or
monetary value of stewardship land is often not determinable, FASAB believed
that reporting nonfinancial information on the existence and the condition of
stewardship land in a separate supplementary report had more relevance to
decisionmakers and other users of federal financial statements than uncertain
or not meaningful monetary amounts reported on the balance sheet. For
example, the Forest Service states in the accompanying footnotes to its fiscal
year 1997 financial statements that it carries no asset amount on its financial
statements for approximately 80 percent of national forest lands because they
are public domain lands for which it incurred no cost when they were
transferred to the Forest Service.

Based on FASAB’s rationale for the accounting treatment of stewardship land,
SFF’AS No. 6 directs that (1) stewardship land should not be reported on the
balance sheet, (2) the acquisition cost of additional stewardship land should be
expensed in the period incurred,7 and (3) stewardship land previously
recognized as an asset for balance sheet reporting should be removed.

FASAB concluded that stewardship assets, such as stewardship land, warrant
specialized reporting to highlight their importance and to portray them in ways
other than provided by traditional l%-tancidlaccounting. For example, SFFAS
No. 8 states that stewardship land should be reported in terms of physical units
rather than cost, fair value, or other monetary values because (1) the cost or
value of stewardship land is often not determinable and (2) the most relevant
information about stewardship land is its existence, condition, and use.
Therefore, FASAB designated a new category of reporting to highlight the

7The acquisition cost of additional stewardship land should be recognized as a
cost on the agency’s Statement of Net Cost.

5                                             GAOMMD-9948R        Roadbed Costs

unique nature of stewardship reporting in SFFAS No. 8 in a new financial report
section called Required Supplemental Stewardship Information.

3. What is the rationale   behind the Forest Service’s accounting    change?

The Forest Service advised us that its decision to change its accounting
treatment of roadbeds built to harvest timber is based primarily on paragraph
232 in appendix B of SFFAS No. 6, Roads on Public Lands, which states, “For
land subject to stewardship reporting, the cost of establishing the roadbed
would be expensed in the year incurred since the land improved by the roadbed
is not capitalized on the balance sheet.”

The Forest Service said it applied this principle to its timber sales operations
because national forest lands are now classified as stewardship lands based on
paragraph 68 of SFFAS No. 6, which states, “Land and land rights owned by the
Federal Government and not acquired for or in connection with other general
PP&E will be referred to as stewardship land and will not be reported on the
balance sheet.” Therefore, applying paragraph 232, the Forest Service
concluded that the timber roadbeds are subject to the same accounting
treatment as land.

4. Did the Forest Service appropriately    implement    SFFAS No. 6 as it relates
to roadbed costs?

Based solely on the illustration in paragraph 232 of appendix B of SFFAS No. 6,
Roads on Public Lands, the Forest Service’s change in accounting for timber
roadbed costs would appear justified. However, paragraph 24 of SFFAS No. 6
states that “For entities operating as business-type activities,8 all PP&E shall be
categorized as general PP&E whether or not it meets the-definition of any other
PP&E categories.” All general PP&E is to be recorded on the balance sheet at
cost under SFFAS No. 6. Because the Forest Service’s timber sales program
operates like a business-type activity, under paragraph 24, the timber roadbeds
would be considered general PP&E and therefore capitalized on the balance

The application of paragraph 232 to roadbeds used for timber harvesting also
appears to be inconsistent with SFFAS No. 4, Managerial Cost Accounting

 8Business-typeactivity is defined as a significantly self-sustaining activity which
 tiances its continuing cycle of operations through a collection of exchange
 revenue. Exchange revenue arises when a government entity provides
 something of value to the public or another government entity at a price.

 6                                               GAO/AIMD-99-48R Roadbed Costs
Standards, which contains cost accounting concepts and standards for
determining the cost of an entity’s activities, programs, and outputs. SFFAS
No. 4, as well as No. 6, requires that the consumption of general PP&E be
recognized as depreciation expense. This accounting treatment, if applied to
timber roadbeds, would more accurately measure the timber program’s
operating performance because it better allocates the cost of roadbeds over the
periods that benefit from harvesting timber.

Because of the potential for different interpretations of SFFAS No. 6 as it
relates to the accounting treatment of timber roadbeds, and the apparent
conflict between the illustration in paragraph 232 and SFFAS Nos. 4 and 6, we
requested in a November 16, 1998, letter that FASAB examine this issue.
Specifically, we asked FASAB to determine whether the proper application of
SFFAS No. 6 should be to treat the cost of constructing timber roadbeds as
(1) a permanent improvement to stewardship land, annually expensed, (2) an
inherent part of timber operations, capitalized and depreciated over the
roadbed’s useful life, notwithstanding specific language in appendix B of SFFAS
No. 6, or (3) a capitalized asset, not depreciated.

In a letter dated January 5, 1999, the Chairman of FLAB responded to our
letter regarding the Forest Service’s accounting treatment of timber roadbeds.
The Chairman suggested that FASAB’s due process procedures must be
followed to definitively and authoritatively answer the question asked.
However, the Chairman provided an analysis of relevant portions of existing
accounting literature that was prepared by the FASAB staff. In summary, based
on this analysis, the letter stated that the staff believes that the body of
authoritative literature taken as a whole would lead to capitalizing and
depreciating the cost of roadbeds which provide access to timber. The letter
further stated that the depreciable life should be based on the period of time for
which the roadbeds were expected to be useful in accessing timber. The
Chairman asked FASAB staff to prepare an interpretation for FASAB’s
consideration at its February 25 and 26, 1999, meeting and to consult with
appropriate parties to ensure that FASAB is fully informed on the issues.
Enclosure 3 includes a copy of the Chairman’s letter.

In addition, FASAB has established a task force to study the accounting
treatment of federal natural resources. The natural resource task force will
shortly publish its research report. FAME! will then begin deliberating these
natural resource issues and may choose to more fully address the accounting
for umber in connection with the natural resource project. However, FASAB is
not expected to issue an exposure draft before late 1999.

7                                              GAO/AIMD-99-48R Roadbed Costs

We requested comments on a draft of this report from the Secretary of
Agricukure and the Executive Director of FASAB. On January 25, 1999, and
January 22, 1999, respectively, we received oral comments from the Chief
Financial Officer, USDA and the Chief Financial Officer, Forest Service. On
January 21, 1999, we received oral comments from the Executive Director of
FASAB. They generally agreed with the answers to the questions in this report
Forest Service staff indicated that they intend to have further discussions with
FASAB to determine how to properly account for timber roadbed costs. The
Executive Director of FASAB provided clarifying comments that we have
incorporated into our report as appropriate.

We are sending copies of this report to the Ranking Minority Member of your
Committee; the Secretary of Agriculture; the Chief of the Forest Service; the
Chief Financial Officer, USDA; the Director of the Office of Management and
Budget; the Executive Director of FASAB; and other interested parties. Copies
will also be made available to others upon request. If you or your staff need
further information, please contact me at (202) 512-9508 or McCoy Williams,
Assistant Director, at (202) 512-6906.

Sincerely yours,

Linda M. Calborn
Director, Resources, Communily,
  and Economic Development, Accounting
  and Financial Management Issues

 8                                              GAO/AIMD-9948R Roadbed Costs
ENCLOSURE 1                                                                ENCLOSURE 1

Our objectives were to provide answers to the specific questions you asked in connection
with the Forest Service’s implementation of SFFAS No. 6 as it relates to roadbeds built on
national forests for use in harvesting timber.

To obtain information describing how FASAB standards were developed, we reviewed the
October 1990 Memorandum of Understanding signed by the Secretary of the Treasury, the
Director of the Office of Management and Budget (OMB), and the Comptroller General of
the United States; FASAB’s Rules of Procedure; the FASAB Mission Statement; minutes of
FASAB meetings; FASAB’s public file for SFFAS No. 6; and various FASAB and GAO
documents relating to FASAB’s mission. All documents made available to, or prepared
for, or by FASAB are part of the public file of FASAB. Documents in the public file
include reports by task forces, minutes of meetings, and exposure drafts of proposed

To obtain information explaining the rationale behind the treatment of stewardship lands,
we reviewed SFFAS No. 6, including appendix A: Basis for Conclusions; and SFFAS No. 8,
including appendix A: Basis for Conclusions. We also discussed the rationale behind the
accounting standards for stewardship lands with FASAB staff and GAO’s Chief

To determine the rationale behind the Forest Service’s changes in accounting for timber
roadbed costs, we interviewed Forest Service program and financial staff, including the
Forest Service official responsible for preparing the TSPIRS financial statement, which
reports annual revenues and costs for Forest Service timber sales.

We also reviewed the Forest Service’s written rationale, explaining why it expensed
timber roadbed costs as part of its implementation of SFFAS No: 6, included in its fiscal
year 1997 Forest Management    Program   Report.

To determine whether the Forest Service appropriately implemented SFFAS No. 6 as it
relates to timber roadbeds, we reviewed SFFAS Nos. 4, 6, and 8. We discussed the
interpretation of the federal accounting standards with Forest Service tiancial staff,
FASAB staff, and GAO’s Chief Accountant. To assist us in determining the proper
application of SFFAS No. 6 to account for timber roadbeds built on national forests, we
requested that FASAB determine the required accounting treatment for stewardship lands
as it applies to roadbeds constructed to harvest timber on national forests in a
November 16, 1998, letter to the FASAB Executive Director.

We performed our review from August 1998 through January 1999 in accordance with
generally accepted government auditing standards. We requested comments on a draft of
this report from the Secretary of Agriculture and the Executive Director of FASAB.

9                                                       GAO/AIMD-99-48R Roadbed Costs
ENCLOSURE 2                                                           ENCLOSURE 2

                                                                      Effective for
 Standards currently in effect                                           fiscal year
 SFFAS No. 1, Accounting for Selected Assets and Liabilities                    1994
 SFFAS No. 2, Accountimz for Direct Loans and Loan Guarantees                   1994
 SFFAS No. 3, Accounting for Inventor-v and Related Proper@                     1994
 SFFAS No. 4, Managerial Cost Accounting Concents and Standards                 1998
 SFFAS No. 5, Accountin9: for Liabilities of the Federal Government             1997
 SFFAS No. 6, Accounting for Pronertv. Plant, and Eauiument                     1998
 SFFAS No. 7, Accounting for Revenue and Other Financina Sources                1998
 SF’F’ASNo. 8, Supnlementarv Stewardship Reuorting
 SFFAS No. 9, Deferral of the Effective Date of Managerial Cost                 1998
              Accounting Standards for the Federal Government in
              SFFAS No. 4

 10                                                    GAO/A&ID-99-48R Roadbed Costs
ENCLOSURE 3                                                                                                     ENCLOSURE’3

                            ADVISORY BOARD

         ‘ki‘ederal Accounting Standards                                          441 G Strect, NW Suite 3B18
                                                                                       washin~Dc         20548
          Advisory Board                                                                         (202) 512-7350
                                                                                          FAX (202) 512-7366

         Janllaty $1999

         Ms. Linda Calbom
         Resources, Community, and Economic Development. Accounting and Financial Management
         Accounting and Information ManagementDivision
         General Accounting Office
         Washiigton, DC 20548

         Dear Ms. Calbom:

         Your letter ofNovcmber 16,1998 requestedthat the Fedcnl Accounting StandardsAdvisory
         Board (the Board) examine the acc.ounringucannent’for roadbedsconstructedto harvest timber
         on national forests. Specifically, you asked whetherthe propor application of Statementof
         Fcdcral .Financial Accounting StandardNo. 6, Accounlingfor Properr~; Plc~nr.rendEquipment
         (SFFAS No. G) should be to treat the cost of constructingroadbedsas:

                  (1) a capitalized assetwhich is not depreciated,
                  (2) a permanentimprovement to stewardshipland which is expensed,or
                  (3) an inherentpart of timber operations,capitalized and chargedto depreciation expense
                  over the roadbed’suseful life.

         My response is intendedto clarify both the Board’s due process proceduresand IO present the
         staffs analysis of the existing standards. It is not intended to establish new standardsor to direct
         the Forest Service to one of the options you offered. The Board’s due processprocoduresmust
         be followed in order to establish new authoritative literature and to definitively answer the
         question that you asked.

         In summary.   staffbelievcs that the body of authoritative literature taken as a whole would lead to
         capitalizing and depreciatingthe cost of roadbedsto provide accessto timber. Depreciable 1%
         should be based on the period of time for which the roadbedswere expected to be useful in
         accessing timber. I have asked staff to preparean Interpretation for the Board’s consideration al
         its February 25 and 26.1933 meeting and to consult with appropriateparties to cnsurc that the
         Board is fully informed on the issues.

         DUE PROCESS

         The Board is required to follow pmccduns that have loug standing in the accounting comnumi~.

                                                                                  GAOhUMD-9948R Roadbed Costs
ENCLOSURE 3                                                                                                  ENCLOSURE 3

          For any new standards,the Board conducts extensive research,gencmlly forming an in&-agency
          task force to support the effort. The Board deliberatesthe rosearchfindings and
          recommendationsat public meetings before proposing accountingstandards. The resulting
          proposalsare lhen issued in an exposuredrawlrequesting public comment. After comments are
          received, the Board may hold a public heating. Additional deliberationstake place in open
          meetings. The Board then prcparcs its rcconunendedstandardsand submits these
          recommendationsto its sponsors. For standardsdezdingwith capital asset accounting, the CFO
          Acl requires a 4S-day Congressionalrcvicw period. This processwas followed for the standards
          now in question.

          Preparersand auditors have a number of vehicles to use in seeking clarification horn theBoard.
          They may request an interpretation from the Board. lntetpretations are intended to clarify the
          intent of existing standards. Alternatively, the Accounting and Auditing Policy Committee may
          addressspecific issuessubmiittedby preparersand auditors. However, thesevehicles are limited
          to clarification of existing standardscreatedthrough due process. Prior to your request,the
          Board had not received any inquiries on the pruper accounting for roads providing accessto

          The Board is currently working on a project to addressnatural resources. Timber is included in
          this project. The Board speci5cally excluded natural resourcesfrom its definition of land.
          Paragraph67 of SFFAS No. 6 statestbd! “excluded from the definition of land are materials
          beneaththe surface (i.e., depletableresourcessuch as mineral deposits and petroleum), Ihe space
          above the surface (i.e., renewahlc resourcessuch as timber), and the outer-conrinental shelf
          resources.”TheBoard’s inlent, which is being carried out in the current natural resources
          projecl, was to addressthe complex issues associatedwith nahual resourcesin a project focusing
          solely on natural resources.

          Presentedbelow is a staffanalysis of the relevant portions ofthe existing 1itcracUre.II is this
          analysis that would form the basis for a proposed Interpretation to be presentedby staff lo the
          Board. Note that ‘thenatural resourcesproject is soon to publish a rcscarch report. The Board
          will then begin deliberating issuesbut is not expectedto issue an exposuredraff heforc late 1999.
          The Board may chooseto more fully addressaccounting for timber in connection with that


          The Board’s first eight standardsmake up a core body of accountingstandards. While there is
          substantial detail in the eight standards,they do not addresseachunique federal activity. In
          practice, preparersmay tid that certain unusual circumstancesdo not fit a general standard and
          may seek altcmativs that are consistentwith broad principles. For example, privalc sector
          accounting literature offers industry speciiic guidance on transactionsor events peculiar to those

           Despite tit absenceof specific standardsfor timber activities, there is much to draw on in the
           existing literature to guide preparcrs. The existing litcnture may not presentan explicit anwc~

 12                                                                            GAO/W-9948R                     Roadbed Costs
ENCLOSURE 3                                                                                                   ENCLOSURE 3

          to a specific question but it does provide guidancefor the preparer to capture the economic
          substanceof transactionsand events. Specific referenceswe will discuss are:

                 1. Paragraphs229 - 232, Illustration 3B, Appendix 8: Illustrations of Categories, SFFAS
                 No. 6
                 2. Paragraph23, General PP%E, SFFAS No. 6
                 3. Paragraphs102 through 104, Full Cost, SFFAS No. 4, Munagerial Cost Accounting
                 Standad for the Federal Government

          Illustrations of Categories

          The Botid provided the illustrarions in order to clarify for users the appropriate categories for
          actual assets(see paragraphs200-201). The illustrations are not intended to have the same
          authoritative standing as the standardsincluded in the document. The Board’s Codification of
          Federal Financial Accounting Standardsstatesthat appendicesto the individual standards are
          “explanatory text.”

          Further evidence that the Board did not intend theseillustrations to be binding is that in SFFAS
          No. 7, Accountingfir Re-uenue    oad Other Finuncing Sources,the Board explicitly indicated that
          an Appendix addressingthe categorizationof revenuesbetween exchangeand nonexchangewas
          aulhoritative. The illustrations included in SFFAS No. G were not intended to bc comprehensive
          or to prevent the application of authoritativeguidancefound in the text of actual standards.

          The illustration is undoubtedly confusing since it appearsto explicitly addressaccounting for the
          roadbedsin question. However, the illustration relied on by the Forest Service is a general
          illustration for public lands and is appropriatefor many uses of public lands. However, it is not
          specific to the case ofroads constructedby Forest Service to provide accessto timher. This
          function is part of a business-typeactivity while most usesof roads on public lands are not.

          Roadbedsproviding accessto timber may differ from olher roadbedson public lands in two key
          aspects. One, the roadbedsmay not bc a permanentimprovement to the land since the useful life
          of the roads relates to the needfor accessto an exhaustibleresource, timber. Two. use of the

          Unfortunately, taking the illustration alone--thatis, absentconsideration of more authoritative
          portions of SFFAS Nos. 4 and 6 as well as the unique aspectsof these roadbeds--could lcad one
          to perceive that the specific question of how to account for all roads on public lands was asked
          and answered.

          Given its illustrative and generalnature and the diverse uses of public lands, Ihc illustration does
          not constrain Ihe Forest Service in selectingan accountingtreatment that is more appropriate in
          light of the underlying economics of its specific situation and authoritative accounting standards.
           As discussed below, staffbelieves that the accountingstandardssuggestdifferent treatment than
          is indicated in the illustration.


13                                                                             GAO/AIMD-99-48R Roadbed Costs
ENCLOSURE 3                                                                                                   ENCLOSURE 3

              General PP&E Definition

              The category ‘gcnerdl property, plant. and equipment” is the only category of PP%E that is
              capitalized and depreciatedper SFFAS No. 6. PP%E included in this category typically has one
              or more of the following characteristics:

                     1) it could be used for altemalive purposesbut is used lo produce goods or services, or to
                     support the mission of the entity, or
                     2) it is used in business-typeactivities, or
                     3) it is usedby entities in activities whose costs can be comparedto those of other entities
                     performing similar activities.

              The Board also provided that entities operating as business-typeactivities should categorize all
              PP&E as generalPP&E whether or not it meets the definition ofany other PP&E categories
              (SFFAS No. 6, Paragraph24). Business-typeactivities are defined as “significantly self-
              sustaining activity which financesits continuing cycle of operationsthrough collection of
              exchangerevenueas defined in” standardsfor revenue and other financing sources (SFFAS No.
              The Board included this provision to support assessmentof the operating results of business-type
              activities. That is: so that business-typeenrities would capturein their financial statements the
              full cosl of operations.

              Full Cost

              The costs related IOproperty, plant, and equipment are discussedin SFFAS No. 4. The relevant
              portions of that standardare presentedbelow:

                     102. Depreciation expense. Generalproperty, pIant; and equipment are used in the
                     production of goods and services. Their consumption is recognized as depreciation
                     expense. The depreciationexpenseincurred by responsibility segments should be
                     included in the full costs of goods and services that Ihc sepents produce.

                      103. Recognizing propem acquisition costs as expenses. The costs of acquiring &
                      constructing federal mission and heritage property, plant, and equipment may be charged
                      to expensesal the time the acquisition costs are incurred. Since the recognition of these
                      expensesis linked to property acquisition rather than production of goods and
                      services, those expensesshould not be included in the full costs of goods and
                      services. However, they are part of the costs of the entity or the program that makes the
                      pmpcrty acquisition. (Emphasis added.)


 14                                                                               GAO/AIM&99-48R                    Roadbed Costs
ENCLOSURE 3                                                                                                ENCLOSURE 3

                 Nonproduction costs

                 104. A responsibility segment may incur and recognizecosts that arc linked t0 cvcnts
                 other than the production of goods and services. Two examples of these non-production
                 costs were discussed earlier: (1) OPEB costs that arc rceognized as expenseswhen in
                 OPEB event occurs, and (2) certain property acquisition costs that arc recognized as
                 expenseat the time of acquisition. Other nonproduction costs inciudc rcorganizition
                 costs, and nonrecurring cleanup costs resulting fium facility abandonmentsthat are not
                 accrued. Since these costs are recognized for a period,in which a particular event occurs,
                 assigning these costs lo goods and services produced in that perind would distort the
                 production costs. In special purpose studies, managementmay have reasons to
                 determine historical output costs by disbibuting some of these costs to outputs over a
                 number of past periods. Such distribution would be appropriatewhen: (1) experience
                 shows that the costs are recurring in a regular pattern, and (b) a nexus can be established
                 between the costs and the production of outputs that may have benefited from those costs.
                 (Emphasis added.)


          Taking SFFAS Nos. 6 and 8 as a whole, staff believes that the cost of roadbedsused in timber
          operationsshould not bc expensed when incurred. Staffbelieves that roadbedsused in timber
          operationsare more appropriately categorizedas generalPP&E. (Note that the Natural
          Resourcesproject may result in other alternatives being considered.) This is based on the
          requirement that all PP&E used in business-typeictivities be categorizedas genera1PP&E. In
          addition, sraff believes that the roadbeds used in timber operationsarc not permanent
          improvements to the land. Rather, these roadbedsare an improvement nccdcd to provide access
          to timber and thus the cost more closely relates to the timber than to lhe land.

          With regard to the question of useful life, staff does not have enough information on which to
          addressthis question. We offer that depreciation is basedon the useful life of an item ofPP&E.
          While roadbedsgenerally may be consideredpermanent improvements to land, this may not hold
          true for roadbedsthat provide accessto timber. The Board defined useful life as “the normal
          operating life in terms of utility to the owner.” (Emphasis added.) If the roadbeds are not of
          permanentutility to the owner - that is, their economic life is less than their poten5al physical
          life - then we recommend that the roadbedsbe depreciatedbasedon their expected utility to the
          Forest Service in its programs (c.y., both timber harvesting and other USC@.

15                                                                           GAO/m-9948R                       Roadbed Costs
ENCLOSURE 3                                                                                                   ENCLOSURE 3

              The Board will consider this issue at its February meeting. Please provide any further input that
              you believe the Board would need on this matter as soon as possible.

              cc:     Members of the Board



 16                                                                               GAOMMD-99-48R                   Roadbed Costs
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