1. Federal Government Accounting
Chapter 17
Federal Government Accounting
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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
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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
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4. Unique Characteristics of the Federal 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
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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
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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.
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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
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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.
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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
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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.
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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.
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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
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13. Federal Budget Trust Funds: Revolving 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.
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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.
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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
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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 or cost 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
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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.
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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.
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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
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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.
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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
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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.
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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
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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.
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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.
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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.
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27. Accounting for Plant and Equipment
FASAB groups assets into two categories:
General
Stewardship
Stewardship assets are further classified into:
Land:
Heritage Assets
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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