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Federal Government Accounting

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  1. 1. Chapter Twelve Accounting and Reporting for the Federal Government
  2. 2. Learning Objectives <ul><li>After studying Chapter 12, you should be able to: </li></ul><ul><li>Describe the financial management structure of the federal government. </li></ul><ul><li>Describe the process for establishing GAAP for federal agencies. </li></ul><ul><li>Explain the concepts underlying federal agency accounting and financial reporting. </li></ul>
  3. 3. Learning Objectives (cont’d) <ul><li>Identify the financial statements required of federal agencies. </li></ul><ul><li>Contrast and compare budgetary accounting with proprietary accounting. </li></ul>
  4. 4. Learning Objectives (cont’d) <ul><li>Make budgetary and proprietary journal entries and prepare financial statements for federal agencies. </li></ul><ul><li>Contrast and compare accounting for state and local governments with federal agencies. </li></ul><ul><li>Describe government-wide financial statements for the federal government. </li></ul>
  5. 5. <ul><li>Federal Financial Management Improvement Act of 1996 (FFMIA) </li></ul><ul><ul><li>Requires federal agencies to comply with established accounting and reporting standards </li></ul></ul><ul><ul><li>Must follow the U.S. Standard General Ledger </li></ul></ul>Federal Government Financial Management Structure
  6. 6. <ul><li>The “three principals” of the Joint Financial Management Improvement Program (JFMIP) are: </li></ul><ul><ul><li>Comptroller General </li></ul></ul><ul><ul><li>Secretary of the Treasury </li></ul></ul><ul><ul><li>Director of the OMB </li></ul></ul><ul><li>The three principals have joint responsibility under federal statutes for establishing and maintaining a sound financial management structure within the federal government </li></ul>Federal Government Financial Management Structure
  7. 7. <ul><li>In 1990, the three principals established the Federal Accounting Standards Advisory Board (FASAB) </li></ul><ul><li>The FASAB’s standards are “recommended” standards until approved by the three principals. To date the FASAB has issued: </li></ul><ul><ul><li>3 Statements of Federal Financial Accounting Concepts (SFFAC) </li></ul></ul><ul><ul><li>14 Statements of Federal Financial Accounting Standards (SFFAS) </li></ul></ul><ul><ul><li>3 Statements of Recommended Accounting Standards (SRAS) </li></ul></ul>FASAB
  8. 8. <ul><li>SFFAC No. 1 identifies four objectives of federal financial reporting, based on the foundation of accountability, which are to assist report users in assessing </li></ul><ul><ul><li>budgetary integrity </li></ul></ul><ul><ul><li>operating performance </li></ul></ul><ul><ul><li>stewardship </li></ul></ul><ul><ul><li>adequacy of systems and controls </li></ul></ul>SFFAC No. 1 - Objectives
  9. 9. <ul><li>Specifies the types of entities that should provide financial reports </li></ul><ul><li>Establishes the guidelines for defining each type of reporting entity </li></ul><ul><li>Identifies the types of financial statements each type of reporting entity should provide </li></ul><ul><li>Suggests the types of information each type of statement should convey. </li></ul>SFFAC No. 2 - Entity and Display
  10. 10. SFFAC No. 2 - Entity and Display (cont’d) <ul><li>The federal government can be viewed from three perspectives: </li></ul><ul><ul><ul><li>Organizational (collection of departments and agencies) </li></ul></ul></ul><ul><ul><ul><li>Budget (collection of expenditures or receipt budget accounts) </li></ul></ul></ul><ul><ul><ul><li>Program (aggregation of programs/functions or activities) </li></ul></ul></ul>
  11. 11. <ul><ul><li>Criteria an entity must meet to be considered a reporting entity </li></ul></ul><ul><ul><ul><li>Existence of a responsible and accountable management </li></ul></ul></ul><ul><ul><ul><li>Scope of entity would provide meaningful representation of operations and financial condition </li></ul></ul></ul><ul><ul><ul><li>Existence of potentially interested users </li></ul></ul></ul>SFFAC No. 2 - Entity and Display (cont’d)
  12. 12. <ul><ul><li>The conclusive criterion is an inherent conclusion that an organization should be included in the reporting entity. </li></ul></ul><ul><ul><li>The indicative criteria may further indicate that an organization should be included (in condensed form): </li></ul></ul><ul><ul><ul><li>Exercises sovereign federal powers </li></ul></ul></ul><ul><ul><ul><li>Owned by the federal government </li></ul></ul></ul><ul><ul><ul><li>Subject to the direct or continuing administrative control of the reporting entity </li></ul></ul></ul>SFFAC No. 2 - Entity and Display (cont’d)
  13. 13. SFFAC No. 3 - MD&A <ul><li>In 1999, FASAB provides guidance for a Management Discussion and Analysis (MD&A) to be included in the general purpose federal financial report (GPFFR). </li></ul><ul><li>Its purpose is to </li></ul><ul><ul><li>communicate managers’ insights </li></ul></ul><ul><ul><li>increase understandability and usefulness of the GPFFR </li></ul></ul><ul><ul><li>provide accessible information about the entity </li></ul></ul>
  14. 14. <ul><li>Derived from general taxing and revenue powers and from business operations </li></ul><ul><ul><ul><li>General fund (one for entire federal government) </li></ul></ul></ul><ul><ul><ul><li>Special funds (receipts earmarked for a specific purpose) </li></ul></ul></ul><ul><ul><ul><li>Revolving funds (similar to internal service funds) </li></ul></ul></ul><ul><ul><ul><li>Management funds (including working funds) </li></ul></ul></ul><ul><li>Held by the government as custodian or trustee </li></ul><ul><ul><ul><li>Trust funds (both expendable and nonexpendable) </li></ul></ul></ul><ul><ul><ul><li>Deposit funds (similar to agency funds) </li></ul></ul></ul>Funds used in Federal Accounting
  15. 15. <ul><li>OMB Bulletin 97-01 requires a: </li></ul><ul><ul><li>Balance sheet (see Ill. 12-2) </li></ul></ul><ul><ul><li>Statement of net cost (see Ill. 12-3) </li></ul></ul><ul><ul><li>Statement of changes in net position (see Ill. 12-4) </li></ul></ul><ul><ul><li>Statement of budgetary resources (see Ill. 12-5) </li></ul></ul><ul><ul><li>Statement of financing (see Ill. 12-6) </li></ul></ul><ul><ul><li>Statement of custodial activity (see Ill. 12-7) </li></ul></ul><ul><li>Required supplemental information </li></ul><ul><ul><li>Summary information on stewardship property, plant, and equipment </li></ul></ul>Required Financial Statements
  16. 16. <ul><li>OMB Bulletin No. 97-01 permits agencies latitude in the level of aggregation. </li></ul><ul><li>The balance sheet can be single-column (consolidated) or multiple-column. </li></ul><ul><li>A separate column showing intra-entity transactions is required if consolidated reporting used </li></ul>Balance Sheet
  17. 17. Balance Sheet: Asset Classification Assets Entity Assets Nonentity Assets Intra- Governmental Governmental Intra- Governmental Governmental
  18. 18. <ul><li>Entity assets are those the entity has authority to use for its own operations </li></ul><ul><li>Nonentity assets are held by the entity, but cannot be used for operations (example, income taxes held by the IRS) </li></ul><ul><li>Intragovernmental assets (liabilities) arise from transactions between the entity and another federal entity </li></ul><ul><li>Governmental assets (liabilities) arise from transactions between the entity and nonfederal entities </li></ul>Balance Sheet: Asset Classification
  19. 19. <ul><li>Most federal entities do not have their own cash. </li></ul><ul><li>They draw against their “Fund Balance with Treasury” account. </li></ul><ul><li>Checks are sent by the Department of Treasury to pay the entity’s obligations </li></ul>Balance Sheet: Asset Classification
  20. 20. <ul><li>Four categories (see pp. 558-559) </li></ul><ul><ul><li>General PP&E (used to provide general government goods and services) </li></ul></ul><ul><ul><li>Federal mission PP&E (e.g., military weapon systems) </li></ul></ul><ul><ul><li>Heritage assets PP&E (e.g., Lincoln Memorial; Statue of Liberty that possess educational, cultural, or natural characteristics) </li></ul></ul><ul><ul><li>Stewardship land PP&E(e.g., Yellowstone National Park) </li></ul></ul>Balance Sheet - Property Plant and Equipment (PP&E)
  21. 21. <ul><li>FASAB standards provide nine criteria for recognition of liabilities, including </li></ul><ul><ul><li>Generally, accrual basis recognition including amortization of premiums/discounts on Federal debt and pensions </li></ul></ul><ul><ul><li>Contingencies are generally recognized in the notes, except for government-acknowledged events (e.g., those arising from natural disaster) </li></ul></ul><ul><ul><li>Capital lease obligations follow essentially same criteria as for-profit organizations and state and local governments </li></ul></ul>Balance Sheet: Liabilities
  22. 22. <ul><li>Net position section of balance sheet is where fund balances are reported </li></ul><ul><li>Components of net position are: </li></ul><ul><ul><li>Unexpended appropriations (unexpended budget authority still remaining) </li></ul></ul><ul><ul><li>Cumulative results of operations (net cumulative difference between expenses/losses and financing sources, including appropriations, revenues, and gains) </li></ul></ul>Balance Sheet: Net Position
  23. 23. <ul><li>Federal entities do not prepare a single operating statement </li></ul><ul><li>The statement of net cost presents a matrix showing the full cost of organizational subunits as columns and programs as rows </li></ul><ul><li>Deferred maintenance is reported as a cost </li></ul><ul><li>The “bottom line” is termed Net Cost of Operations </li></ul>Statement of Net Cost
  24. 24. <ul><li>Similar to an operating statement in that it shows changes in all the components and subcomponents of net position </li></ul><ul><li>Financing sources are subtracted from net cost of operations to obtain Net Results of Operations (similar to operating income) </li></ul><ul><li>Net Results of Operations is adjusted by prior period adjustments and changes in cumulative results of operations and unexpended appropriations to reflect Change in Net Position </li></ul>Statement of Changes of Net Position
  25. 25. <ul><li>This statement presents the budgetary equation: </li></ul><ul><li>budgetary authority = status of budgetary resources </li></ul><ul><li>Also reports all budgetary outlays including those from prior year’s appropriations </li></ul>Statement of Budgetary Resources
  26. 26. <ul><li>Reconciles the </li></ul><ul><ul><li>budgetary basis financial information reported in the Statement of Budgetary Resources to the accrual basis Net Cost of Operations </li></ul></ul><ul><li>Essentially </li></ul><ul><ul><li>resources and costs that do not fund accrual-basis costs (or costs that do not require resources) are added/subtracted (as appropriate) to reconcile total budgetary obligations and nonbudgetary resources to Net Cost of Operations </li></ul></ul>Statement of Financing
  27. 27. <ul><li>Required only by agencies (such as the IRS) that collect nonexchange revenue for </li></ul><ul><ul><li>the General Fund, </li></ul></ul><ul><ul><li>a trust fund, or </li></ul></ul><ul><ul><li>recipient agencies </li></ul></ul><ul><li>Used to report sources and dispositions of such revenues. </li></ul><ul><li>This statement would not be prepared by most federal agencies </li></ul>Statement of Custodial Activity
  28. 28. Required Supplemental Information <ul><li>Disclosures are also required about </li></ul><ul><ul><li>stewardship PP&E to highlight their long-term benefit nature </li></ul></ul><ul><ul><li>deferred maintenance for both general and stewardship PP&E </li></ul></ul><ul><ul><li>stewardship investments - beneficial investments of the government in such items as </li></ul></ul><ul><ul><ul><li>nonfederal physical property, </li></ul></ul></ul><ul><ul><ul><li>human capital, and </li></ul></ul></ul><ul><ul><ul><li>research and development </li></ul></ul></ul>
  29. 29. <ul><li>Federal agencies are required to comply both with budgetary accounting requirements and accrual basis proprietary accounting requirements </li></ul><ul><li>Many transactions require an entry to record the budgetary effect and a separate entry to record the proprietary effect (i.e., the effect on net position of the entity) </li></ul><ul><li>Ill.12-8 presents a comparison of the kinds of transactions and events that affect each track’s accounting requirements </li></ul>Dual-Track Accounting System
  30. 30. Flow of Budgetary Authority Through the Budgetary Accounts Budgetary resources Status of resources Unapportioned authority Apportionments Allotments Commitments Undelivered orders Expended authority Other appropriations realized
  31. 31. <ul><li>The agency is notified its appropriation for the new fiscal year is $1,000,000. It would make the following general journal entries: </li></ul><ul><li>Budgetary : Dr. Cr. </li></ul><ul><li>Other Appropriations Realized 1,000,000 </li></ul><ul><li>Unapportioned Authority 1,000,000 </li></ul><ul><li>Proprietary : </li></ul><ul><li>Fund Balance with Treasury 1,000,000 </li></ul><ul><li>Unexpended Appropriations 1,000,000 </li></ul>Illustrative Transactions for a Hypothetical Federal Agency
  32. 32. <ul><li>OMB approved four equal quarterly apportionments to the agency. The agency head, in turn, allotted the full amount to subunits within the agency: </li></ul><ul><li>Budgetary : Dr . Cr . </li></ul><ul><li>Unapportioned Authority 1,000,000 </li></ul><ul><li>Apportionments 1,000,000 </li></ul><ul><li>Apportionments 1,000,000 </li></ul><ul><li>Allotments 1,000,000 </li></ul>Illustrative Transactions (cont’d)
  33. 33. <ul><li>Commitments were recorded in the amount of $700,000 for goods and services expected to be ordered during the year (note: these are not yet obligations). Purchase orders for goods were issued in the amount of $650,000 </li></ul><ul><li>Budgetary : Dr. Cr. </li></ul><ul><li>Allotments 700,000 </li></ul><ul><li>Commitments 700,000 </li></ul><ul><li>Commitments 650,000 </li></ul><ul><li>Undelivered Orders 650,000 </li></ul>Illustrative Transactions (cont’d)
  34. 34. <ul><li>Goods were received at an actual cost of $640,000 for which purchase orders had been issued for estimated amounts of $620,000. </li></ul><ul><li>Budgetary : Dr. Cr. </li></ul><ul><li>Undelivered Orders 620,000 </li></ul><ul><li>Commitments 20,000 </li></ul><ul><li>Expended Authority 640,000 </li></ul><ul><li>Proprietary : Operating Materials & Supplies 640,000 </li></ul><ul><li>Accounts Payable 640,000 </li></ul><ul><li>Unexpended Appropriations 640,000 </li></ul><ul><li>Appropriations Used 640,000 </li></ul>Illustrative Transactions (cont’d)
  35. 35. <ul><li>Payrolls were paid in the amount of $100,000. The agency does not record commitments for payroll. </li></ul><ul><li>Budgetary : Dr . Cr . </li></ul><ul><li>Allotments 100,000 </li></ul><ul><li>Expended Authority 100,000 </li></ul><ul><li>Proprietary : </li></ul><ul><li>Operating/Program Expenses 100,000 </li></ul><ul><li>Disbursements in Transit 100,000 </li></ul><ul><li>Unexpended Appropriations 100,000 </li></ul><ul><li>Appropriations Used 100,000 </li></ul>Illustrative Transactions (cont’d)
  36. 36. <ul><li>In the preceding proprietary JE, Disbursements in Transit is a current liability account signifying the agency has requested payment from the Treasury. Assume, that payment has also been requested for the Accounts Payable to vendors for goods received (see previous transaction). </li></ul><ul><li>Proprietary : Dr. Cr. </li></ul><ul><li>Accounts Payable 640,000 </li></ul><ul><li> Disbursements in Transit 640,000 </li></ul>Illustrative Transactions (cont’d)
  37. 37. <ul><li>The agency received notification that all disbursements in transit had been paid . </li></ul><ul><li>Proprietary : Dr. Cr. </li></ul><ul><li>Disbursements in Transit 740,000 </li></ul><ul><li> Fund Balance with Treasury 740,000 </li></ul>Illustrative Transactions (cont’d)
  38. 38. <ul><li>There are many other transactions, including adjusting entries and closing entries, that a typical federal agency would have to record (illustrated in the text). </li></ul><ul><li>Only simplified illustrative entries were shown here. </li></ul><ul><li>Further study of the illustrative transactions in the text may be required before you feel comfortable with the unique dual-track accounting system employed in the federal government. </li></ul>Illustrative Transactions (cont’d)
  39. 39. Government-wide Statements <ul><li>The Government Performance and Results Act of 1993 expanded the requirements of the Chief Financial Officers Act of 1990 and required 24 federal agencies to be audited and comprehensive government-wide financial statements to be prepared. </li></ul><ul><li>The Financial Report of the United States Government for FY99 is the second annual report issued by the Department of Treasury, after years of prototype Consolidated Financial Statements. </li></ul>
  40. 40. Government-wide Statements (cont’d) <ul><li>The report follows FASAB standards. </li></ul><ul><li>The Comptroller General of the GAO issued a disclaimer of opinion on these statements. Deficiencies included: </li></ul><ul><ul><li>converting cash basis budgets to accrual </li></ul></ul><ul><ul><li>confirming accounts receivable (e.g., IRS) </li></ul></ul><ul><ul><li>inventorying capital assets (e.g., Dept of Defense) </li></ul></ul><ul><ul><li>determining the cost of heritage assets </li></ul></ul><ul><li>7 of 24 federal agencies did receive unqualified opinions on their individual statements. </li></ul>
  41. 41. <ul><li>Much progress is being made in the quality of federal financial management, accounting, and reporting through federal initiatives. </li></ul><ul><li>The three principals of the Joint Financial Management and Improvement Program (the Comptroller General, Secretary of Treasury, and Director of the OMB) created the FASAB, whose statements become GAAP upon approval by the principals. </li></ul><ul><li>A variety of unique financial statements are required of federal agencies, including both budgetary and proprietary accounting requirements. Thus, they practice a dual-track system of accounting. </li></ul>Summary