1 Federal Accounting Update Tom Allen, FASAB Chairman

2 Disclaimer Views expressed are those of the speaker. The Board expresses its views in official publications.

3 FY2008 CFR Presented Key Information – Deficit vs Cost Table 1: Budget Deficit vs. Net Operating Cost Dollars in billions Budget Deficit $ $ Change in: Federal Employee and Veteran Benefits Payable Environmental & Disposal Liabilities Capitalized Fixed Assets, Net (46.6) (2.6) Other 50.3 (11.6) Net Operating Cost $ 1,009.1 $ 275.5

4 A Snapshot of The Government's Financial Position & Condition billions of dollars Gross Costs $ (3,891.6) $ (3,157.3) $ (3,127.7) Earned Revenues Net Cost (3,640.7) (2,909.5) (2,901.3) Total Taxes and Other Revenues 2, , ,440.8 Other (29.8) Net Operating Cost $ (1,009.1) $ (275.5) $ (449.5) Assets $ 1,974.7 $ 1,581.1 $ 1,496.5 Less: Liabilities, comprising: Debt Held by the Public (5,836.2) (5,077.7) (4,867.5) Federal Employee & Veteran Benefits (5,318.9) (4,769.1) (4,679.0) Other Liabilities (1,023.1) (940.1) (866.4) Total Liabilities (12,178.2) (10,786.9) (10,412.9) Net Position (Assets Minus Liabilities) $ (10,203.5) $ (9,205.8) $ (8,916.4) Sustainability Measures: The Statement of Social Insurance provides certain fiscal sustainability information concerning Social Security, Medicare, and other social insurance programs. Statement of Social Insurance Closed Group (current participants) $ (49,135.0) $ (45,062.0) $ (44,145.0) Open Group (current + future participants) (42,970.0) (40,948.0) (38,851.0) Budget Results Unified Budget Deficit (454.8) (162.8) (247.7)

5 Changes in Future Expenditures and Revenues Table 3: Social Insurance Future Expenditures in Excess of Future Revenues Increase (Decrease) $% Closed Group (Net) Social Security $ 17,188 $ 16,265 $ % Medicare: Part A 13,590 12,044 1, % Part B 12,615 10,347 2, % Part D 5,605 6,273 (668)-10.6% Subtotal - Medicare 31,810 28,664 3, % Other % Total Social Insurance Expenditures, Net (Closed Group) $ 49,135 $ 45,062 $ 4,0739.0% Expenditures, Net (Open Group) $ 42,970 $ 40,948 $ 2,0224.9%

6 Accounting for Social Insurance

7 When does a liability exist for future social insurance benefits? Liability: a present obligation of the federal government to provide assets or services to another entity at a determinable date, when a specified event occurs, or on demand. (SFFAC 5, par. 39) A present obligation is incurred when the government takes a specific action or an event occurs that commits or binds the government. (SFFAC 5, par. 42) …if an item meets the definition of a liability at the reporting date, the power of the government to subsequently change the law so that the item no longer meets the definition does not eliminate the existence of the liability at the reporting date. (SFFAC 5, Par. 17)

8 Historical Controversy Liability debate centers on whether an obligation exists: –after work in covered employment occurs; –when fully insured status is reached; or –when a payment becomes due and payable. Liability debate impacts costs recognition: –Costs arise as a result of work; or –Costs arise as benefits are due. Incremental progress with greater disclosure of information over the years.

9 Preserving and Enhancing Current SI Information – A Compromise ___________________________ Critical information in management’s discussion and analysis Closed group measure on the balance sheet but not totaled Summary section for the statement of social insurance presenting the closed and open group summary totals New basic financial statement explaining changes Disclose the accrued benefit obligation (future benefits attributable to work completed as of the balance sheet date)

10 Two Alternative Views Five members support recognition of a liability greater than the due and payable amounts currently recognized. Three members do not support: –Presentation of the closed group net present value on the balance sheet, –Analysis of changes in the closed group net present value on the statement of changes in social insurance (instead they would analyze changes in the open group NPV), or –Disclosure of the accrued benefit obligation.

11 Fiscal Sustainability Reporting

12 Fiscal Sustainability Reporting Reporting to help users assess the likelihood that future budgetary resources will be sufficient to sustain public services and meet obligations as they come due. (Based on continuing current policies without change)

13 Illustrative Statement of Fiscal Sustainability Based on GAO’s Alternative Simulation 75 Year Projection Period FY FY Change PV dollars (in trillions) % of PV of GDP PV dollars (in trillions) % of PV of GDP PV dollars (in trillions) % of PV of GDP Receipts a $ % $ % $ % Spending Medicare$ % $ % $ 4.0(0.3%) Medicaid $ % $ % $ 1.4(0.2%) Social Security $ % $ % $ 4.4(0.2%) Rest of Federal Government $ % $ % $ % Total Spending $ % $ % $ 20.6(0.5%) Spending in excess of receipts $ (51.7)(6.4)% $ (49.5)(6.9)% $ (2.2)0.5% a This specific illustration does not include a breakdown of receipts as these amounts are not broken out in GAO’s model. However, disaggregated amounts for Social Security and Medicare would be reported under the ED. Source: GAO’s April 2008 and April 2007 simulations. Note: Numbers may not add to totals due to rounding.

14 Proposed Disclosures ___________________________ Narrative discussion of fiscal sustainability concepts and caveats— “Plain English” Major factors Trends Historical and projected annual cash flows Impact of delay Alternative scenarios/sensitivity Analysis of annual changes

15 Remaining Issues ___________________________ Amount of information Projection period –Finite/Infinite –Flexibility Understandability

16 Natural Resources Proposal in prior ED: –Capitalize royalty value for existing oil and gas leases based on current quantity oil and gas prices and royalty rate (undiscounted) with a gain or loss each year based on re-valuation. –Show earned royalties offset by depletion expense to highlight annual resource flows. Responses revealed ability to calculate present value for flows. Staff is developing this option for re-exposure.

17 Reporting Model Developing an inventory of user needs (including internal and external users). –Focus groups –Structured interviews –Literature review The existing reporting model will be assessed against these needs to determine if needs are met. –Any voids will be filled. –Unnecessary requirements eliminated.

18 Economic Stabilization Activities Raises Issues Regarding: –Valuation of assets and liabilities, particularly in illiquid markets Accounting basis Applicability of Credit Reform accounting and appropriate discount rates –Scope of federal reporting – Federal Reserve, GSEs, AIG, etc. FASAB believes the hierarchy can resolve immediate issues. Long- term these issues will be addressed in related projects.

19 General PP&E Proposal to extend guidance in SFFAS 23 regarding the use of estimates for general PP&E Accounting and Auditing Policy Committee task force developing implementation guidance –Acquisition of PP&E –Use of PP&E –Cleanup Cost –Record Retention Evaluation of Existing Standards –Replacement Cost?

20 Deferred Maintenance and Asset Impairment Deferred Maintenance –SFFAS 6 as amended results in RSI - experimental –Deferred maintenance viewed as critical management issue. –Task force formed Asset Impairment –SFFAS 6 covers complete impairment –How does deferred maintenance relate to: Depreciation Asset Impairment

21 Contact and Website Information General inquiries can be directed to Phone: –Listserv –Exposure Drafts –Active Projects