Exam 2 . Section III . Chapter 5 Federal Financial Accounting Standards and Illustrations

1. Exam 2 . Section III . Chapter 5Federal Financial Accounting Standards and Illustrations AGA Montgomery Chapter CGFM Exam Review Presented By Steven H. Emerson, CPA, CGFM, CGAP, CFE, CITP, CGMA

2. Case Study – Department of Monitoring Authorizing legislation that created the department authorizes the department to: • Establish two agencies and lease space for department and agency operations • Charge high speed internet and wireless communications service providers a fee to offset operating costs • Hire 250 full-time equivalent staff • Contract for web support and telephone services • Establish advisory committee to advise staff on its research and issue final reports on growth and regulation of the industry

3. Case Study – Department of Monitoring - continued For the first year of operations, appropriations are made for: • Salaries and benefits of $22 million • Leasing office space at $4 million • Travel funds for advisory board members of $25,000 • Equipment purchases of $375,000 • Furniture purchases of $500,000 • Supplies of $50,000 • Web support and telephone services of $1.7 million

4. Revenue and Other Financing Sources • Exchange Revenue • A government entity provides goods and services to the public or another government entity for a price • Non-Exchange Revenue • A government’s power to demand payment from the public in the form of taxes, duties, fines and penalties • Donations are also classified as non-exchange revenues • Other Financing Sources • Appropriations • Transfers among entities without reimbursement

5. Revenue and Other Financing Sources - continued • Statement • Exchange Revenue • Reported on the Statement of Net Costs and where feasible, is offset against the related program costs • Non-Exchange Revenue • Reported on the Statement of Changes in Net Position • Appropriations Used • Reported on the Statement of Changes in Net Position • Recognition • Exchange Revenue • When goods and services are provided

6. Revenue and Other Financing Sources - continued • Recognition – continued • Non-Exchange Revenue • When a specifically identifiable, legally enforceable claim to resources arises and the amount is reasonably estimable • Appropriations Used • Until used, appropriations are not a financing source. When made available for apportionment, appropriations are recognized as an element of net position (unexpended appropriations) and an asset similar to cash (fund balance with Treasury). When used, appropriations are recognized as a financing source (appropriations used)

7. Revenue and Other Financing Sources - continued • Measurement • Exchange Revenue • Actual price paid or to be paid less and allowance for returns, allowances, price redeterminations or other reasons apart from credit losses • Non-Exchange Revenue • Cash collections less refunds and including the accrual adjustment for net charges in accounts receivable (net of allowance for bad debts and refunds) during the period • Appropriations Used • Actual amount expended

8. Revenue and Other Financing Sources - continued • Disclosures • Exchange Revenue • Among others, disclosure is required for pricing policies if full cost is not charged • Non-Exchange Revenue • Among others, the basis of accounting should be described and changes in asset and liability balances shown • Appropriations Used • Most detailed information on appropriations and their status is provided on the Statement of Budgetary Resources

9. Revenue and Other Financing Sources - continued • What to Do if the Entity Does Not Retain the Revenue for its Own Use • Exchange Revenue • Because exchange revenue results from the entity’s operations, standards require that the full amount of exchange revenue be recognized without regard to requirements to transfer collections to other entities. Transfers out are then recognized as a negative financing source • Non-Exchange Revenue • Non-exchange revenue is most often collected by one entity and transferred to the Treasury. Collecting entities provide custodial reporting related to the collections and receivables BUT do not recognize non-exchange revenue. Non-exchange revenue is recognized by the entity for which resources were received • Appropriations Used • N/A

10. Case Study – Department of Monitoring - continued • Our illustrative department has two sources of financing: • Exchange revenues • Appropriations • Federal accounting standards provide that regulatory user fees are exchange revenue • Because the government may incur costs in order to regulate the identifiable entity • Because the revenue charged is closely related to the cost of operating the entity • Our department is charged with monitoring activity – which is an exchange revenue

11. Case Study – Department of Monitoring - continued Appropriations bills are passed for the fiscal year and our department receives a Treasury warrant for its appropriations in the amount of $28.65 million. OMB apportions $8 million to cover equipment and furniture purchases and about 25% of routine operating funds

12. Case Study – Department of Monitoring - continued Budgetary Entries To record appropriations of funds by Congress

13. Case Study – Department of Monitoring - continued Budgetary Entries – continued To record apportionment of funds by OMB

14. Case Study – Department of Monitoring - continued Proprietary Entries To record receipt of an appropriation warrant

15. Case Study – Department of Monitoring - continued Department of Monitoring Balance Sheet as of October 1, 200x (dollars in thousands) Fund balance Net Position: with Treasury $28,650 Unexpended appropriations $28,650 TOTAL NET TOTAL ASSETS $28,650 POSITION $28,650

16. Case Study – Department of Monitoring - continued Department of Monitoring Statement of Budgetary Resources as of October 1, 200x (dollars in thousands) Budgetary Resources: Budget Authority: Appropriations Received $28,650 Total Budgetary Resources $28,650 Status of Budgetary Resources: Unobligated balance – apportioned $8,000 Unobligated balance not available 20,650 Total Status of Budgetary Resources $28,650

17. Fund Balance with Treasury The department has a fund balance with Treasury at the outset. This fund balance with Treasury represents the aggregate amount of funds the department is able to use to make expenditures and pay liabilities. The fund balance with Treasury is an intragovenmental asset from the department’s prospective because it represents a claim to federal resources. On the U.S. Department of Treasury’s financial statements it represents a commitment to make resources available to federal departments and is recognized as an intragovernmental liability in the Treasury’s financial statements. Both of these intragovernmental amounts are eliminated in the government-wide consolidated financial statements.

18. Fund Balance with Treasury - continued Fund Balance with Treasury is increased by: • Receiving appropriations, reappropriations, continuing resolutions, appropriation restorations and allocations • Receiving transfers and reimbursements from other federal entities • Borrowings from Treasury • Offsetting collections the entity is authorized to spend

19. Fund Balance with Treasury - continued Fund Balance with Treasury is decreased by: • Disbursements to pay liabilities or to purchase assets, goods and services • Investments in U.S. securities • Cancellation of expired appropriations • Transfers and reimbursements to other entities of to the Treasury • Sequestration or rescission of appropriations

20. Accounts Receivable Accounts receivable is established when a federal entity has a claim to cash or other assets from other entities. An allowance for estimated losses should be established is credit losses are “more likely than not” and a bad debt expense should be recognized. If individual accounts represent a significant portion of the total receivable, the entity should estimate the loss for the individual accounts. Factors to consider include • The debtor’s ability to pay • The debtor’s payment record and willingness to pay • The probable recovery of amounts from secondary sources such as liens

21. Accounts Receivable - continued Federal entities are required to separate entity and nonentity assets for reporting purposes • Entity assets • Those assets available for use by the entity • Nonentity assets • Those assets the entity is holding in a custodial capacity Any receivables arising from fees at the Department of Monitoring (our case study entity) would be considered nonentity accounts receivable. Our department would recognize exchange revenue when it has established its fee structure and billed companies in the industry. Bad debts would be estimated periodically and an allowance established.

22. Advances and Prepayments Advances • Cash outlays made my a federal entity to its employees, contractors, grantees or others to cover all or part of the recipients’ anticipated expenses or as advance payments for the costs of goods or services the entity acquires Prepayments • Payments made by a federal entity to cover certain periodic expenses before those expenses are incurred Advances and prepayments are recorded as assets and are held as assets until the conditions of the advance or prepayment are satisfied. Once the conditions are met, an expense is recognized and the asset is reduced or eliminated.

23. Direct Loans and Guarantees Federal agencies provide financial support to certain activities through direct loans or loan guarantees. The cost to the government arises primarily from: • Differences in the interest rates paid by the government and charged to the borrower • Defaults on scheduled payments SFFAS 2 as amended by SFFAS 18 and 19 requires that financial statements present assets, liabilities and costs for these financial instruments in a manner consistent with the Credit Reform Act of 1990.

24. Direct Loans and Guarantees - continued Cost of Direct Loans • Some direct loans are made at an interest rate that is less than the rate incurred by the government to provide the funds • Department of the Treasury borrows fund on the open market at 4% and the Department of Education borrows these funds from Treasury and loans them to a student at 3%. The interest subsidy is the present value of the difference

25. Direct Loans and Guarantees - continued Cost of Loan Guarantees • A loan guarantee is a pledge to pay a commercial enterprise all or part of the principal or interest on an obligation of a third party to that enterprise • The Department of Education guarantees to a bank that make a loan to a student that it will pay the difference between the interest the bank pays to obtain the money and the interest it can charge the student • When a third-party disburses a loan that is guaranteed by a federal agency, a liability and related cost must be recognized. Liabilities for loan guarantees are valued at the present value of the cash outflows less the present value of related inflows.

26. Investments in Treasury Securities • Nonmarketable Par Value Treasury Securities • Special series debt securities that the U.S. Treasury issues to federal entities at face value. The securities are redeemed at face value on demand. The investing entity recovers the full amounts invested • Market Based Treasury Securities • Debt securities that the U.S. Treasury issues to federal entities without statutorily determined interest rates. Their terms mirror the terms of marketable Treasury securities, however they are not marketable • Marketable Treasury Securities • Treasury bills, notes and bonds initially offered by Treasury to the marketplace and can then be bought and sold on securities exchange markets

27. Inventory and Operating Materials and Supplies Inventory • Tangible personal property that is held for sale, used in the production of other goods to be sold or in the process of being developed for sale Operating Materials and Supplies (OM&S) • Goods that have been acquired for use in normal operations Consumption method • Recognition of the historical cost including all costs to bring the item to its current condition and location as an asset when received • Use of flow assumptions to assign costs to the items consumed • FIFO • Weighted and Moving Average • LIFO is not permitted for federal entities

28. Inventory and Operating Materials and Supplies - continued Disclosures of inventory and OM&S are required • Regular or normal inventory levels • Held in reserve for future use or sale • Excess, obsolete or unserviceable • Held for repair Value of Inventory and OM&S • At cost • Regular or normal inventory & OM&S held & OM&S held in reserve for future use or sale • At net realizable value • Excess, obsolete and unserviceable inventory & OM&S • Historical cost less an allowance for cost to repair • Inventory held for repair • There is no classification for OM&S held for repair

29. Inventory and Operating Materials and Supplies - continued OM&S may be accounted for under the purchases method instead of the consumption method if any of the following criteria are met: • OM&S are not significant amounts • The end user controls the OM&S • i.e. the OM&S are stored in a program office closet • It is not cost-beneficial to apply the consumption method The purchases method allows the entity to expense OM&S upon receipt of the OM&S rather than consumption of the OM&S

30. Inventory and Operating Materials and Supplies - continued Stockpiles • Strategic and critical materials held due to statutory requirements for use in national defense, conservation or national emergencies • Are to be recognized as an asset upon receipt of title of goods and expensed upon disposal, use or sale • Valued at historical cost or other valuation methods that approximate historical cost unless they have suffered a permanent decline in value to an amount less than cost. They would then be reduced to net realizable value

31. Inventory and Operating Materials and Supplies - continued Seized and Forfeited Property • Seized Property • Monetary instruments, real property and tangible personal property • Valued at its market value when seized • Forfeited Property • Monetary instruments, intangible property, real property and tangible personal property acquired through forfeiture proceedings • Property acquired by the government to satisfy a tax liability • Unclaimed and abandoned merchandise • Revenue should be recognized when the property is sold • Property not held for sale may be: • Placed into official use • Transferred to another federal government agency • Distributed to a state or local law enforcement agency • Distributed to a foreign government

32. Inventory and Operating Materials and Supplies - continued Commodities • Items acquired, held, sold or otherwise disposed of to stabilize or support market prices • Upon receipt, they are recognized as an asset and valued at the lower of cost or net realizable value • If the net realizable value is less than cost, a loss is recognized upon receipt of the commodities • An expense is recognized upon disposal or use

33. Property, Plant and Equipment and Internal Use Software Property, Plant and Equipment (PP&E) • Tangible assets, including land, that meeting the following characteristics • Estimated useful live of two years or more • Not intended for sale in the ordinary course of operations • Have been acquired or constructed with the intention of being used or being available for use by the entity

34. Property, Plant and Equipment and Internal Use Software - continued Capital Leases • Leases that transfer substantially all of the benefits and risks of ownership to the lessee • Capital Lease Criteria (One of the following is met) • Ownership is transferred at the end of the lease • Option to purchases the PP&E at the end of the lease at a bargain price • Lease term is equal to or greater than 75% of the estimated economic life of the lease property • Present value of lease payments is equal to or exceeds 90% of the fair value of the leased property

35. Property, Plant and Equipment and Internal Use Software - continued Three Categories of PP&E • Heritage Assets • Stewardship Land • General PP&E • Could be used for alternative purposes, but is used in government operations to produce goods and services • Used in a business-type activity • Used by entities in activities whose costs can be compared to those of other entities performing similar activities

36. Property, Plant and Equipment and Internal Use Software - continued Internal Use Software • Software that is internally developed, contractor developed or purchased off-the-shelf • Accounted for in a manner similar to general PP&E • Full cost incurred to develop the software is capitalized and depreciated • Data conversion costs are an expense not a capitalizable cost amortized in a systematic and rational manner over the expected useful live of the software

37. Liability Recognition Liability • Probable future outflow or other sacrifice of resources resulting from past transactions or events • Federal financial included liabilities as a result of: • Past exchange transactions • Accounts payable, salaries payable • Non-exchange transactions • Welfare benefits payable • Government-related events • Cleanup costs related to operation of government programs • Government-acknowledged events • Commitment to restore nonfederal property damaged in a hurricane

38. Accounts Payable • Amounts owed by a federal entity for goods and services received from other entities • Other liability accounts are established for large ongoing continuous expenses such as employee’s salaries and benefits • Federal entities must report intragovernmental liabilities separately from liabilities to nonfederal entities

39. Contingent Liabilities Contingency • An existing condition, situation or set of circumstances involving uncertainty as to the possible gain or loss to the entity When a loss contingency exists, the likelihood that the future event or events will confirm the loss or the incurrence of a liability can range from probable to remote • Probable • Future confirming event or events are more likely than not to occur • Reasonably Possible • The chance of the future confirming event or events occurring is more than remote but less than probable • Remote • Chance of future event or events occurring is slight

40. Pensions and Other Benefits Pensions and post-employment and retirement benefits other than pensions are a cost of the agency for which the employee works but are administered by the Office of Personnel Management (OPM). Actuarial methods are applied to determine the accrued liability retirement benefits The amount paid to OPM is on average less than the annual costs. Accounting standards require recognition of the actuarially determined cost of benefits • Imputed cost • The difference between the actual resources transferred to OPM and the actuarially determined cost

41. Cost Accounting Federal accounting standards require: • Entities to accumulate and report the cost of activities on a regular basis • Cost information to be collected by responsibility segments identified by management • Recognition of the full cost of outputs including the cost of resources consumed by the responsibility segment that directly or indirectly contribute to the output and cost of identifiable support services provided by other responsibility segments within the reporting entity or by other reporting entities • Recognition of costs of goods and services it receives from other entities (inter-entity costs) • A costing methodology that makes cost assignments – in the following order of preference – by directly tracing costs whenever feasible and economically practical, assigns costs on a cause-and-effect basis, or allocates costs on a reasonable and consistent basis

42. Case Study – Department of Monitoring – First Quarter • An allotment is issued making the full apportionment available for central operations • A team of 20 detailed employees is working out of another agency’s offices. The estimated rental cost of the space is $25,000 per quarter. The quarterly salary of the detailed staff is $400,000. Staff members are detailed without reimbursement for the first quarter • The federal benefit rate is 22%. This rate includes current benefits and post-retirement benefits. Employing entities are required to reimburse OPM for benefits at the rate of 17.33% • Supplies are ordered in the amount of $12,000. The supplies are received and only cost $10,000 due to a pricing error by the ordering clerk. Payment is made during the quarter

43. Case Study – Department of Monitoring – First Quarter - continued Budgetary Entries for the Allotment To record allotment of funds to finance first quarter activities at headquarters

44. Case Study – Department of Monitoring – First Quarter - continued Budgetary Entries for the Supplies Order To obligate funds for supplies ordered but not delivered

45. Case Study – Department of Monitoring – First Quarter - continued Budgetary Entries for the Supplies Received To record expenditure of a portion of allotment and restore unused funds to allotments (de-obligate funds)

46. Case Study – Department of Monitoring – First Quarter - continued Proprietary entries for the Supplies Received To record receipt of supplies accounted for under the purchases method To record use of appropriations to finance purchases of supplies

47. Case Study – Department of Monitoring – First Quarter - continued Budgetary Entries to De-obligate Funds To de-obligate the portion of the original estimated obligation that was not needed to fund the final invoice

48. Case Study – Department of Monitoring – First Quarter - continued Budgetary Entries when the Disbursement Schedule is Sent to Treasury to Pay for the Supplies To reflect the obligation as paid

49. Case Study – Department of Monitoring – First Quarter - continued Proprietary Entries when the Disbursement Schedule is Sent to Treasury to Pay for the Supplies To record request to Treasury to pay an accounts payable

50. Case Study – Department of Monitoring – First Quarter - continued Proprietary Entries when Treasury Notifies the Department that Payment has been Made to Pay for the Supplies To reduce fund balance with Treasury for outlays made