Chapter 17

1. Chapter 17 Granof & Khumawala-6e Chapter 17 Federal Government Accounting

2. Thought to Ponder “Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new. Let’s invest in our people without leaving them a mountain of debt. Let’s meet our responsibility to the citizens who sent us here. Let’s try common sense.” President Barack Obama Granof & Khumawala-6e Chapter 17

3. Learning Objectives • Understand the unique characteristics of federal government • Roles of the main agencies responsible for federal accounting and reporting • Key objectives of federal financial reporting • Concept of a unified budget • Types of accounts maintained by federal government • Federal Reporting Entity • Form and content of government-wide and agency financial reports • Main accounting issues addressed by FASAB • Key International trends in governmental accounting Granof & Khumawala-6e Chapter 17

4. Unique Characteristics of theFederal Government • Range of its activities for ex., defense, social security • Diversity of its resources for ex., military hardware, national parks • Nature of its obligations for ex., social security benefits • Extent of its powers for ex., print currency, regulate commerce Granof & Khumawala-6e Chapter 17

5. Federal Accounting and Reporting • Federal accounting is: • Decentralized • Each agency and department has its own accounting system and prepares its own reports. • 3 Federal agencies responsible for financial management: • Department of the Treasury • Office of Management and Budget • Government Accountability Office Granof & Khumawala-6e Chapter 17

6. Department of the Treasury • Is responsible for broad range of financial functions. • Managing the public debt • Collecting receipts and making disbursements • Minting coins and printing currency • Managing government’s gold supply • Department’s divisions are: • IRS • Office of the Comptroller of the Currency • Office of Thrift Supervision • U.S. Mint • Financial Management Service (FMS) • FMS is the government’s central collection and disbursing agent. • Responsible for taking in revenue from IRS and writing checks. Granof & Khumawala-6e Chapter 17

7. Office of Management and Budget OMB: One of the most powerful agencies in federal government. • Assists in preparing federal budget • Supervises executive branch agencies in implementing • Has authority to make budgetary recommendations • Reviews each federal agency’s spending plans and evaluates the effectiveness of its programs. • Oversees and coordinates financial management, information, and regulatory policies. • Has responsibility of apportioning federal appropriations Granof & Khumawala-6e Chapter 17

8. Office of Management and Budget (cont’d) • OMB’s responsibilities for fiscal management were expanded by the CFO Act. • It established a new position of CFO of the United States and the corresponding CFO positions within each federal agency and department. • The CFO is the officially designated ‘Deputy Director for Management’ and reports to the head of the OMB. • The CFO Act mandated that: • The federal agencies submit annual reports for independent audit. • OMB prepare an annual report regarding its accomplishments and required improvements. Granof & Khumawala-6e Chapter 17

9. Government Accountability Office • GAO is the watchdog (audit, evaluation and investigative) arm of the US Congress (located in the legislative branch of the US govt.) • Created by the Budget and Accounting Act of 1921 • The act specified that GAO was to be: • independent of the executive departments and • Under the control of Comptroller General of the U.S.( a professional and non-partisan position in the U.S. government). • GAO’s responsibilities are: • Handles legal services • Provides advice to Congress on legal issues • Assist in drafting legislation • Adjudicating claims • Conducting special investigations into criminal and civil misconduct Granof & Khumawala-6e Chapter 17

10. Government Accountability Office (cont’d) • GAO also deals with accounting and information management policy. • It ensures that the Congress has current, accurate, and complete financial management data. • GAO participates with OMB and Treasury in prescribing accounting principles. • Advises other federal agencies on fiscal and related policies. • Prescribes standards for auditing and evaluating government programs. Granof & Khumawala-6e Chapter 17

11. Federal Accounting Standards Advisory Board • FASAB is responsible for promulgating federal accounting standards. • Mission is to establish accounting standards after considering the financial and budgetary information needs. • FASAB is composed of 9 members: • 1 from legislative branch: one from GAO or one from the Congressional Budget Office • 2 from the executive branch: one each from OMB and the Treasury • 6 “public members,” including the chair (not employees of the Federal Govt.) • It must submit each proposed standard for review to the Treasury, the GAO, and OMB. • If objected, the standard is returned back to the Board for reconsideration. Granof & Khumawala-6e Chapter 17

12. Federal Budget • Federal operations are accounted for in 4 types of funds: • General fund • Special fund • Trust fund • Revolving fund • The general fund includes both capital and operating expenditures. • Special fund: maintained to account for resources designated for specific programs or activities. Examples: • National Wildlife Refuge Fund • Land and Water Conservation Fund Granof & Khumawala-6e Chapter 17

13. Federal Budget • Trust Funds: • Used to account for resources restricted for specific purposes. • Similar to special revenue funds • Ex: Hospital Insurance Trust Fund, Old-Age and Survivors Insurance Fund, Supplementary Medical Insurance Fund. • Revolving Funds: • Comparable to municipality’s enterprise funds • Accounts for federal government’s business-type activities. • Generate their own receipts and hence, the sponsoring agencies are expected to expend their resources without annual Congressional appropriation. • Ex: U.S. Postal Service. Granof & Khumawala-6e Chapter 17

14. Unified Budget • Objective: To capture in a single tabulation the impact of federal activities on national economy. • It encompasses all four types of funds • Intended to provide a comprehensive measure of cost of the government’s programs. Granof & Khumawala-6e Chapter 17

15. Government-Wide Federal Statements • Financial report is based on full accrual basis. • The annual report presents budgetary results and focuses on cash, monetary assets and liabilities. • Annual financial report is divided into 6 sections: • Letter of transmittal and management’s discussion and analysis • Auditor’s report • Six basic financial statements (stewardship information on assets) • Notes to the financial statements • Supplemental information Granof & Khumawala-6e Chapter 17

16. Government-Wide Statements (cont’d) 7 basic financial statements • Statement of operations and changes in net position • Statement of net cost • Balance Sheet • Statement reconciling the net operating revenue orcost with unified budget surplus or deficit • Statement reconciling the change in government’s cash position with the unified budget surplus or deficit • Statement providing certain actuarial information pertaining to social insurance program obligations • Statement that indicates the changes in social insurance obligations during the year Granof & Khumawala-6e Chapter 17

17. Financial Reports FASAB established three criteria for a component to be considered a reporting entity: • There is a management responsible for controlling and deploying the component’s outputs and outcomes and for executing it’s budget. • The Component is of sufficient size and significance. • Users are interested in the information to be reported in financial statements and could use it to make resource allocation and related decisions. Granof & Khumawala-6e Chapter 17

18. Federal Entities Dual system of accounts is used: --Budget accounts and proprietary accounts • Budget accounts: • Ensure that entity complies with budgetary mandates • Does not overspend. • And is able to fulfill uniform budgetary reporting requirements. • Proprietary accounts: • Provide information for financial statements based on FASAB standards. • Intended to provide an economic, rather than a budgetary, measure of operations and resources. Granof & Khumawala-6e Chapter 17

19. Federal Agencies • FASAB reporting model for federal agencies is similar to that of federal government. • Seven Basic financial statements of agencies are: • Balance Sheet or Statement of Financial Position • Statement of Net Cost • Statement of Operations and Changes in Net Position • Statement of Budgetary Resources • Statement of Financing • Statement of Custodial Activities • Statement of Social Insurance Granof & Khumawala-6e Chapter 17

20. Financial Statements Statement of Financial Position: • Shows entity’s assets, liabilities, and net position. • It is presented on a full accrual basis • All long-lived assets are reported on this statement except • Parklands, historic sites, national monuments (Stewardship assets). • These assets are reported in the supplements of the basic financial statements. Granof & Khumawala-6e Chapter 17

21. Financial Statements (cont’d) Statement of Net cost: • Most significant of the six statements • Is presented on a full accrual basis • Reports on program operating costs and revenues. • Provides decision makers a basis on which to assess agency performance Statement of Changes in Net Position: • Summarizes all entity transactions other than those reported in statement of net cost • Explains how entity financed its net cost • It also includes prior period adjustments and amounts received from appropriations Granof & Khumawala-6e Chapter 17

22. Financial Statements (cont’d) Statement of Budgetary Resources: • Prepared on budgetary basis • Reports on amounts available from both current and prior year appropriations and entity’s cash outlays, newly incurred obligations Statement of Financing: • Links the statement of budgetary resources to the statement of net cost. • Reconciles agency’s obligations incurred on budgetary basis with net cost of operations on a full accrual basis. • Ex: On a budgetary basis plant and equipment are recognized as expenses when acquired; on a full accrual basis they are recognized as expenses over their useful lives. Granof & Khumawala-6e Chapter 17

23. Financial Statements (cont’d) Statement of Custodial Activities: • Similar to that of agency fund • Is required only of an entity whose primary mission is to collect funds to be turned over to the Treasury or other organizations. Ex: IRS • It shows amounts transferred to other agencies and amounts not yet transferred. Statement of Social Insurance: • Required only of few agencies charges with administering the government’s major social insurance programs. • Example: Dept. of Labor, Black Lung Disability program Dept. of HHS, Medicare program Granof & Khumawala-6e Chapter 17

24. FASAB Model • FASAB deals with recognition of revenue and expenses and correspondingly with the valuation of assets and liabilities. • FASAB distinguishes between two types of revenues: • Exchange (earned): arise from sales transactions where both parties benefit. • Nonexchange: government commands resources but gives nothing (directly) in exchange. Ex: Taxes and fines. Granof & Khumawala-6e Chapter 17

25. FASAB Model (cont’d) FASAB asserts that: • Revenues from services should be recognized when the service is actually performed. • Revenues from long-term contracts are recognized on percentage of completion basis. • Revenues from sale of goods should be recognized upon delivery of the goods to customers. Granof & Khumawala-6e Chapter 17

26. FASAB Model (cont’d) • According to FASAB: a federal entity should accrue revenues ‘when a specifically identifiable, legally enforceable claim to resources arises, to the extent that collection is probable and measurable. • Income taxes should be recognized when assessed by the taxpayer. • Fines and penalties may be accrued: • Upon the expiration of the period during which the offender may contest a court summon • When the offender pays the fine before a court date • When the court imposes a fine. • Donations are recognized when the entity has a legally enforceable claim to the donated resources and the amount is measurable. Granof & Khumawala-6e Chapter 17

27. Accounting for Plant and Equipment • FASAB groups assets into two categories: • General • Stewardship • Stewardship assets are further classified into: • Land: • Heritage Assets Granof & Khumawala-6e Chapter 17

28. Accounting for Plant and Equipment (cont’d) General Assets: • Comparable to those of business. • They are capitalized and depreciated over useful lives. Exception: Land • Includes assets that are: • Used to produce goods or services • Used in business-type activities • Used in activities where costs can compared with other entities. Military Assets: include aircraft, ships, vehicles, tanks etc. • Their useful lives become shorter than and less certain during times of war. • They are accounted for as general assets. Granof & Khumawala-6e Chapter 17

29. Accounting for Plant and Equipment (cont’d) Space Assets: Assets used in the government’s space program and are accounted for as general assets. Stewardship Assets: Land: Includes national forests, national parks etc. • Neither used in government operations nor held for sale. • It is not capitalized and not reported on the balance sheet. • It is expensed as acquired. Granof & Khumawala-6e Chapter 17

30. Accounting for Plant and Equipment (cont’d) • Heritage Assets: Has historical, natural, cultural, educational, or artistic significance. • Examples: Museums, monuments, and historical sites. • Some assets might have characteristics of both operational and true heritage assets. • FASAB rules that all multi-use heritage assets be capitalized as general property, plant, and equipment and depreciated over their useful lives. • Assets with only historical value will be treated as stewardship assets. • They will not be capitalized and should be reported in the stewardship report. Granof & Khumawala-6e Chapter 17

31. Accounting for Human Capital • Investments in human capital are intended to increase the nation’s productive capacity. • The costs of educational and training programs should be capitalized as incurred and amortized over the periods to be benefited. • The reported expenses for physical assets will be reported over the life of the assets. • Those of human assets would have to be recognized as the costs were incurred. • FASAB rejects the notion of capitalizing investments in human capital due to the practical difficulties. • It mandates supplemental disclosure of such investments in the financial report. Granof & Khumawala-6e Chapter 17

32. Inventory • Inventories can be valued at either: • Historical cost or • Latest acquisition cost • Other types of inventories, such as operating materials and supplies and stockpile materials are valued at historical cost. Granof & Khumawala-6e Chapter 17

33. Liabilities and Expenses Government related events: • accidents for which government is responsible and required to reimburse for the damages. • Liability and related expense are recognized as soon as the event occurs and the anticipated outflows are probable and measurable. Government-acknowledged events: • occurrences for which government is not responsible but provides relief to the victims. Ex: Natural disasters. • FASAB requires liabilities to be recognized for: • Nonexchange transactions when due • Government-acknowledged events when the financial responsibility is acknowledged and the amount is due and payable as a result. Granof & Khumawala-6e Chapter 17

34. Social Insurance Programs • FASAB specifies that social insurance costs should be accounted for as non exchange transactions. • Reporting entities should recognize a liability and related expenditure only when the payments are actually due. • FASAB also requires extensive disclosure of information: • Statement presenting actuarial present values • Long-range projection of ratio of contributors to beneficiaries • Long-range cash flow projections in nominal dollars and a percentage of both payroll and Gross domestic product. Granof & Khumawala-6e Chapter 17

35. Direct Loans • Federal entities make low-interest direct loans and guarantee loans made by banks and other institutions. • FASAB directs that when a subsidized direct loan is made, the government should recognize as an asset the present value of its estimated net cash receipts, including both the interest and repayment of principal. • The government should report an expense equal to the difference between the face value of loan and the present value of the estimated net cash receipts. Granof & Khumawala-6e Chapter 17

36. Fiscal Management Steps to improve fiscal management: • Each agency must prepare a performance plan that includes: • Objective, measurable goals • Description of the process to meet the goals • Basis to compare actual results to the goals • Means of verifying and validating actual performance • In addition, it must also submit a report that: • Reviews achievement of prior year goals • Evaluates the current year’s performance plan • Explain any deviations Granof & Khumawala-6e Chapter 17

37. International Standard-Setting Agency • Governmental accounting standards are highly influenced by the institutional characteristics of individual countries. • No standard setting organization has the authority to establish accounting standards for governments other than those within its own country. • Given the global crisis, as of June 2012, the International Public Sector Accounting Standards Board (IPSASB) has issued 47 standards intended to improve both the quality and comparability of financial reporting for governments at all levels. • IPSASB makes clear that public sector accounting should be on a full accrual basis, not a cash basis. • IPSASB cannot require individual countries to adopt its standards, it merely encourages. • By 2012, over 100 countries and organizations like OECD, NATO, UNDP and others have adopted IPSAS for their financial statements. Granof & Khumawala-6e Chapter 17

38. International Standard-Setting Agency (cont’d) As per the standards: • Property, plant, and equipment should be capitalized and depreciated • Revenue from exchange transactions should be recognized when measurable and probable • Inventories for sale should be recognized as expenses in the period in which related revenues are recognized. • Borrowing costs should be recognized as an expense when incurred. IPSASB requires four basic financial statements: • Statement of financial position • Statement of financial performance • Statement of changes in net assets/equity • Cash flow statement Granof & Khumawala-6e Chapter 17

39. Summary • The Federal Government is unique due to its size and complexity. • The three federal agencies with oversight responsibilities for Federal Financial Management are the Department of Treasury, the Office of Management and Budget and the Government Accountability Office. • The Federal Accounting Standards Advisory Board is responsible for promulgating accounting standards for the federal government. • The federal government’s unified budget is intended to show the impact of federal activities on the national economy. • Budgetary accounts ensure that a federal entity complies with budgetary mandates. • The FASAB established three criteria for a component to be considered a reporting entity. • The FASAB’s comprehensive reporting model helps ensure that the financial statements of the federal government focus on all economic resources and are on a full accrual basis. • The Government Performance and Results Act is intended to further improve federal accounting and fiscal management. • The IPSASB has issued standards for governments at all levels intending to improve both the quality and comparability of financial reporting. Granof & Khumawala-6e Chapter 17