United States GAO General Accounting Office Washington, D.C. 20648 Accounting and Information Management Division B-280811 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 B-280811 questions. We performed our review from August 1998 through January 1999 in accordance with generally accepted government auditing standards. BACKGROUND 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 value. 2 GAO/MMD-99-48R Roadbed Costs B-280811 roadbed costs incurred in fiscal year 1997 as direct timber sale expenses for that year. RESPONSES TO QUESTIONS ON THE ACCOUNTING TREATMENT OF FOREST SERVICE ROADBED COSTS 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 B-280811 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 standard.5 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 B-280811 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 B-280811 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 sheet. 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 B-280811 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 B-280811 AGENCY COMMENTS 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 OBJECTIVES. SCOPE, AND METHODOLOGY 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 standards. 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 Accountant. 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 STATEMENTS OF FEDERAL FINANCIAL ACCOUNTING STANDARDS (SFFASJ AND THEIR EFFECTIVE DATES 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 JANUARY 5.1999. LETTER FROM THE F’EDERAL’ACCOUNTING STANDARDS 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 Diitor Resources, Community, and Economic Development. Accounting and Financial Management ISSUCS 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~. 1 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 timber. 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 project. EXISTING STANDARDS 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 industries. 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~ 2 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 roadbedsgenerateaexchangerevenue. 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. 3 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. 7). 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.) 4 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.) SUMMARY 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 6 (913834) 16 GAOMMD-99-48R Roadbed Costs Orderinn Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Mastercard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by maik U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 or visitz Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 612-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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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)