Financial Reporting by the Federal Government Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 14 Financial Reporting by the Federal Government McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Overview of Chapter 14 Federal government reporting standards Reporting requirements of federal agencies Consolidated Financial Report of the U.S. government. Journal entries for typical transactions of a federal government unit, applying budgetary and proprietary accounting practices.

Federal Accounting Standards The Office of Management and Budget, together with the Government Accountability Office (GAO) and the Department of the Treasury are the primary organizations charged with financial management of the federal government. Together they created the Federal Accounting Standards Advisory Board.

Federal Accounting Standards Federal Accounting Standards Advisory Board (FASAB). The purpose of the FASAB is to develop and issue federal accounting standards. The Board is comprised of ten members; two from the executive branch, two from the legislative and six who are not employees of the federal government.

Federal Accounting Standards Advisory Board The standards (called Statements of Federal Financial Accounting Standards) are recognized as the highest level of authoritative standard in the AICPA’s Code of Professional Conduct for federal government entities. Like the FASB and GASB, the FASAB has developed a conceptual framework to guide the Board in the development of new standards

Reporting requirements of federal agencies – Financial Statements Balance Sheet, Statement of Net Cost Statement of Changes in Net Position Statement of Budgetary Resources Statement of Custodial Activity (if applicable), and Statement of Social Insurance (if applicable).

Reporting requirements of federal agencies – Financial Statements Balance Sheet - Assets and liabilities are measured on the accrual basis. The difference between assets and liabilities is net position and is comprised of unexpended appropriations and the cumulative result of operations. Statement of Net Cost - This statement displays the cost (measured on the accrual basis) of the federal agency by strategic goal. Statement of Changes in Net Position - identifies all financing sources used to support its operations. The statement articulates with net position appearing on the balance sheet.

Reporting requirements of federal agencies – Financial Statements Statement of Budgetary Resources - The statement provides information on how budgetary resources were obtained and the status (e.g. expended, obligated, etc.) of those resources at year end. Statement of Custodial Activity (if applicable) - This statement is required only if the government agency collects non-exchange funds to be turned over to Treasury and is analogous to an agency fund of a state or local government. The SEC, U.S. Customs and Border Protection and the IRS prepare this statement.

Reporting requirements of federal agencies – Financial Statements Statement of Social Insurance (if applicable). - A statement of social insurance is required for federal agencies administering social insurance programs such as Social Security and Medicare. The Statement projects income and benefit payments so that users of the statements can evaluate the long-term viability of the programs

CONSOLIDATED FINANCIAL REPORT OF THE U.S. GOVERNMENT The consolidated report presents the financial position and results of operation of the federal government, measured on the accrual basis. The report includes Managements’ Discussion and Analysis, Financial Statements, Supplemental and Stewardship Information (unaudited), and the Auditor’s (i.e. GAO’s) Report

CONSOLIDATED FINANCIAL REPORT OF THE U.S. GOVERNMENT Financial Statements include: Balance Sheet, Statement of Net Cost, Statement of Operations and Changes in Net Position, Reconciliation of Net Operating Cost and Unified Budget Deficit, Statement of Changes in Cash Balance from Unified Budget and Other Activities, Statement of Social Insurance

CONSOLIDATED FINANCIAL REPORT OF THE U.S. GOVERNMENT The consolidated report is over 200 pages long. For this reason, the federal government also publishes an annual Citizen’s Guide to the Financial Report of the U.S. Government . The Guide presents plain language explanations of key terms It provides graphic displays of revenues by source and the cost of operating the government by function. Finally, it includes an abbreviated financial report, called a Snapshot of the Government’s Financial Position and Condition.

The Government’s Financial Position and Condition Citizen’s Guide to the Financial Report of the United States Government A Snapshot of The Government’s Financial Position and Condition 2010 2009 Gross Costs $ (4,472.3) (3,735.6) Earned Revenues 309.2 300.9 Loss from Assumptions 250.9 247.8 Net Cost (4,296.0) (3,434.7) Total Taxes and Other Revenues 2,216.5 2,198.4 Other (0.8) (17.4) Net Operating Cost $ (2,080.3) (1,253.7) Assets $ 2,883.8 2,667.9 Less: Liabilities, comprised of: Debt Held By the Public (9,060.0) (7,582.7) Federal Employee & Veteran Benefits (5,720.3) (5,283.7) Other Liabilities (1,576.3) (1,257.4) Total Liabilities (16,356.6) (14,123.8) Net Position (Assets Minus Liabilities) $ (13,472.8) (11,455.9)

BUDGETARY AND PROPRIETARY ACCOUNTING The accounting systems of federal agencies must serve both the external financial reporting needs mandated by the Chief Financial Officers’ Act and the necessity of having internal budgetary controls over the spending of public resources. This is accomplished through the maintenance of two self-balancing sets of accounts, termed budgetary and proprietary accounts.

BUDGETARY AND PROPRIETARY ACCOUNTING The purpose of budgetary accounts is to provide a record by which federal expenditures may be traced back to the budgetary authority granted by Congress through appropriations. Proprietary accounts are those accounts which comprise the accrual basis financial statements prepared by the federal governments and its agencies.

Federal Government Budgetary Authority Process

Proprietary Accounting Typical Journal Entries - Federal Agency Comparison of Budgetary and Proprietary Accounting Event Description Budgetary Accounting Proprietary Accounting Appropriations: Treasury notifies the agency that Congress passed legislation (signed by the President) granting budgetary authority to fund its activities Debits Credits Appropriations realized 12,000,000 Unapportioned authority 12,000,000 Debits Credits Fund balance with Treasury 12,000,000 Unexpended appropriations 12,000,000 Apportionment: OMB apportions ¼ of the appropriated amount which may now be expended for first quarter activities. Unapportioned Authority 3,000,000 Apportionments 3,000,000 No journal entry required Allotment: The head of the agency allots a portion of the apportionment to the heads of subunits within the agency. The subunits may now expend resources. Apportionments 2,500,000 Allotments 2,500,000 Obligations (commitments): A unit of the agency places orders for goods and services related to its activities. Allotments 1,900,000 Obligations – undelivered orders 1,900,000 Expenditure: Some of the items ordered above (equipment of $ 100,000 and services of $ 800,000) are received and approved for payment. Obligations – undelivered orders 900,000 Expended Appropriations 900,000 Equipment 100,000 Operating (program) expense 800,000 Accounts payable 900,000 Accounts payable 900,000 Fund balance with Treasury 900,000

How the budgetary accounts work Under federal budgetary accounting, budgetary resources (appropriations) are represented by debits. Credits reflect the status of the resources within the spending process.

Credits reflect the status of the resources within the spending process Amount Status   $ 9,000,000 - Unapportioned authority: this amount will be apportioned to the agency by OMB over the remaining 3 quarters of the year. 500,000 - Apportionments: current quarter resources that have not yet been allotted by the head of the agency to specific subunits of the agency. 600,000 - Allotments: resources currently available to agency offices, but have not yet been committed by placing orders for goods or services. 1,000,000 - Obligations for undelivered orders: commitments for outstanding purchase orders for goods and services that have not yet been received. 900,000 - Expended appropriations: amounts that have been expended on goods and services received. $ 12,000,000 Total appropriation

How the proprietary accounts work Proprietary accounts measure assets, liabilities, revenues and expenses (including depreciation) in much the same manner as accrual basis accounts of state and local governments.

How the proprietary accounts work Unexpended appropriations, represents a source of funds to the federal agency and is similar to a transfer in account in a state or local government fund. Fund Balance with Treasury. Federal agencies do not typically maintain cash balances. Instead, the ability to draw cash from the Treasury is recognized as an asset at the time of an appropriation with this account. Payments made by Treasury on behalf of the agency are reflected with a credit to this account.