Federal Accounting Handbook: Policies, Standards, Procedures, Practices 0471739286, 9780471739289

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Wiley

Federal Accounting Handbook SECOND฀EDITION

Policies,฀Standards,฀Procedures,฀Practices Cornelius฀E.฀Tierney Roldan฀Fernandez

Edward฀F.฀Kearney Jeffrey฀W.฀Green

KEARNEY & COMPANY

JOHN฀WILEY฀&฀SONS,฀INC.

Wiley

Federal Accounting Handbook SECOND฀EDITION

Policies,฀Standards,฀Procedures,฀Practices

Wiley

Federal Accounting Handbook SECOND฀EDITION

Policies,฀Standards,฀Procedures,฀Practices Cornelius฀E.฀Tierney Roldan฀Fernandez

Edward฀F.฀Kearney Jeffrey฀W.฀Green

KEARNEY & COMPANY

JOHN฀WILEY฀&฀SONS,฀INC.

This book is printed on acid-free paper.

∞

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. Requests to the publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http:/www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. ISBN 13: 978-0-471-73928-9 ISBN 10: 0-471-73928-6 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1

CONTENTS Preface

vii

Introduction

xi

Part 1 The Nature of Financial Management in the Federal Government 1

Financial Management Legislation and Policy

3

2

The Chief Financial Officers Act of 1990

21

3

The Federal Budget

41

4

Accounting Events of the Federal Government

63

5

Budgetary and Proprietary Accounting Practices

81

6

The Department of the Treasury

105

7

Federal Financial and Information Systems

133

8

Federal Financial Statements

155

Part 2 Accounting Practices for Selected Federal Activities and Transactions 9

Pay, Leave, and Allowances, and Travel and Transportation

183

10

Contracts

211

11

Interagency and Other Expenditures, and Receipts, Transfers, Reimbursements, and Refunds

229

12

Assets, Liabilities, and Net Entity Position

255

13

Nonappropriated Fund Activities

283

14

Costing Federal Entities, Programs, and Activities

311

15

Grants

335

Appendix The Federal Government and Sarbanes-Oxley

353

Index

369

PREFACE Knowledge of federal budgeting, accounting, costing, and reporting is essential for all doing business with the federal government. This includes the 50 U.S. states; tens of thousands of counties, cities, municipalities, special authorities, and districts; over 100,000 prime and subcontractors, and nonprofits, colleges, and university grantees to the federal government; and beneficiaries of federal loans and loan guarantee programs. All have a need to know what is accounted for, how, when, and why by the federal government. Hundreds of thousands of persons are involved daily with planning, budgeting, accounting, processing, and reporting on activities of the federal government—including those within and external to the federal government. Little, however, has been published on this field of financial management, and even less is taught about this financial specialty in universities, colleges, and business schools. Further complicating federal financial management is the fact that accepted and practiced federal accounting principles and procedures are not necessarily the generally accepted accounting principles of the private sector, nonprofit sector, or other levels of government. The accounting and reporting required by federal laws, federal program regulations and rules, and federal department and agency guides significantly affects decisions relating to federal subsidies, federal contract and grant funding and refunding, the availability of advanced federal funding, recoveries of overhead costs, loan guarantees, and the determinations of allowable and unallowable costs, among others. Knowledge of what federal financial executives must do to “keep the books straight” is information vital to all those doing business with the federal government and all recipients of federal assistance. Having a general awareness of federal finances and accounting provides federal stakeholders with an indication of ultimate financial decisions and positions concerning federal contract awards, grant funding, entitlements, claim payments, reimbursements, compensation for overruns, recovery of overhead costs, and payment of claimed overtime, to cite a few. The federal government, like other organizations and industries, has generated its own phrases, terms, words, and terminology—a jargon, or financial management language all its own. These descriptors are associated with or related to fiscal actions and economic events of federal organizations such as the Executive Office of the President, Congress, the Office of Management and Budget, the Department of the Treasury, and individual executive branch departments and agencies. Many of these terms permeate federal financial management, accounting, and reporting, and are defined and illustrated in this book. Most specialized are the terms relating to the budgeting, monitoring, and accounting for congressional appropriations and related revenues and expenditures. Additionally, requirements for concurrently performing budgetary accounting, accrual accounting, cash basis accounting, and cost accounting have resulted in the emergence of accounting procedures and processes that may be applicable only to the federal sector. The Federal Accounting Handbook, Second Edition, is written for the reader at all levels of management, professionals within and external to the federal government, academics and students, or really anyone who has or should have a continuing interest in or has repeated dealings with the federal government. This book addresses interests of a diverse constituency—legislators, their staffs, program managers and analysts, financial managers, budget examiners and analysts, accountants, academics, researchers, and those doing business with the government—depending on the level of detail desired by each constituent.

ABOUT THE AUTHORS EDWARD F. KEARNEY, CPA, CGFM, is the Managing Partner of Kearney & Company. He is a former Senior Manager of Arthur Young & Company (a predecessor firm to Ernst & Young) and a former officer of a public company listed on the New York Stock Exchange. He also worked for the Department of Housing and Urban Development as an auditor and accountant, and is a coauthor of Federal Government Auditing: Laws, Regulations, Standards, Practices, & Sarbanes-Oxley and OMB Circular A-123 and Sarbanes-Oxley: Management’s Responsibility for Internal Control in Federal Agencies, both published by John Wiley & Sons. ROLDAN FERNANDEZ, CPA, CGFM, is a Senior Partner with Kearney & Company. He is a former Principal of Arthur Young & Company and the former Chief Financial Officer of a public company listed in the New York Stock Exchange. He has over 25 years of diversified experience in all facets of financial management in both the public and private sectors, and is a coauthor of Federal Government Auditing: Laws, Regulations, Standards, Practices, & Sarbanes-Oxley and OMB Circular A-123 and Sarbanes-Oxley: Management’s Responsibility for Internal Control in Federal Agencies, both published by John Wiley & Sons. JEFFREY W. GREEN, CPA, is a Senior Partner with Kearney & Company with more than 19 years of experience. He is responsible for federal audit engagements and internal control projects covered under the rules of OMB Circular A-123. He is a recent recipient of the Northern Virginia Association of Government Accountants’ Federal Financial Partnership Award, and is a co-author of Federal Government Auditing: Laws, Regulations, Standards, Practices, & Sarbanes-Oxley and OMB Circular A-123 and Sarbanes-Oxley: Management’s Responsibility for Internal Control in Federal Agencies, both published by John Wiley & Sons. CORNELIUS E. TIERNEY, CPA, CGFM, is a Director with Kearney & Company and is the author or coauthor of 12 books on governmental accounting and auditing, including The Federal Accounting Handbook; Federal Government Auditing: Laws, Regulations, Standards, Practices, & Sarbanes-Oxley; and OMB Circular A-123 and Sarbanes-Oxley: Management’s Responsibility for Internal Control in Federal Agencies, published by John Wiley & Sons. He served as the Chairman and National Director of Ernst & Young’s public sector accounting and auditing practice for nearly 25 years and was an original member of the Federal Accounting Standards Advisory Board. KEARNEY & COMPANY is a CPA firm that provides audit, accounting, and consulting services to the federal government. Additional details on Kearney & Company can be found on the Web at www.kearneyco.com.

INTRODUCTION Every day, tens of thousands of people work at the financial management of the federal government—planning, budgeting, accounting, processing, and reporting. Hundreds of thousands more, working for local and state governments; public-sector and nonprofit organizations; and federal contractors, subcontractors, and grantees, are also responsible for accurately accounting for and reporting on their use of federal funds. The accepted financial management practices and accounting principles of the federal government are not, however, those generally accepted practices of the private sector; neither are they the practices of state or local governments, nor those of the nonprofit sector. Nonetheless, these entities and any other entities or individuals receiving some form of federal funding or other federal financial assistance (e.g., grants, subsidies, loans, loan guarantees, contracts, appropriations, direct cash) should be conversant with federal financial management procedures. The nexus of federal financial management is no less than the Constitution itself, which states The Congress shall have the power to lay and collect taxes, duties, imposts, and excises, and to pay the debts and provide for the common defense and general welfare of the United States.…(Section 8, Clause 1)

[and] to borrow money on the credit of the United States….(Clause 2)

Furthermore, the Constitution requires that No money shall be drawn from the Treasury, but in consequence of appropriations made by law; and a regular statement and account of receipts and expenditures of all public money shall be published from time to time. (Section 9, Clause 7)

To say that the federal government is big would be an understatement. It employs millions, owns billions, and collects and spends trillions every year. The executive branch manages this activity, and is permitted only to implement the will of Congress, as expressed by law. Exhibit I.1 illustrates the composition of the executive branch—its several cabinet-level departments, agencies, administrations, offices, commissions, corporations, boards, systems, and so forth; the legislative branch—Congress, its responsible offices, the Library of Congress, the Government Printing Office, United States Tax Court, and others; and the judicial branch with its component units—the Supreme Court of the United States, courts of appeal, district and other courts, and the Administrative Office of the United States Courts.

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Wiley Federal Accounting Handbook Exhibit I.1: The Government of the United States The Constitution

Legislative Branch

Executive Branch

Judicial Branch

The Congress Senate House Architect of the Capitol United States Botanic Garden Government Accountability Office Government Printing Office Library of Congress Congressional Budget Office

The President The Vice President Executive Office of the President White House Office Office of the Vice President Council of Economic Advisors Council on Environmental Quality National Security Council Office of Administration Office of Management and Budget Office of National Drug Control Policy Office of Policy Development Office of Science and Technology Policy Office of the U.S. Trade Representative

The Supreme Court of the United States U.S. Court of Appeals U.S. District Courts Territorial Courts U.S. Court of International Trade U.S. Court of Federal Claims U.S. Court of Appeals for the Armed Forces U.S. Tax Court U.S. Court of Appeals for Veterans Claims Administrative Office of the United States Courts Federal Judicial Center U.S. Sentencing Commission

Department of Agriculture*

Department of Commerce*

Department of Defense*

Department of Education*

Department of Energy*

Department of Health and Human Services*

Department of Homeland Security*

Department of Housing and Urban Development*

Department of the Interior*

Department of Justice*

Department of Labor*

Department of State*

Department of Transportation*

Department of the Treasury*

Department of Veterans Affairs*

Larger Independent Establishments and Government Corporations African Development Foundation Broadcasting Board of Governors Central Intelligence Agency Commodity Futures Trading Commission Consumer Product Safety Commission Corporation for National and Community Service Defense Nuclear Facilities Safety Board Environmental Protection Agency* Equal Employment Opportunity Commission Export-Import Bank of the U.S.* Farm Credit Administration* Federal Communications Commission* Federal Deposit Insurance Corporation* *

Federal Election Commission Federal Housing Finance Board Federal Labor Relations Authority Federal Maritime Commission Federal Mediation and Conciliation Service Federal Mine Safety and Health Review Commission Federal Reserve System Federal Retirement Thrift Investment Board Federal Trade Commission General Services Administration* Inter-American Foundation Merit Systems Protection Board National Aeronautics and Space Administration* National Archives and Records Administration

National Capital Planning Commission National Credit Union Administration* National Foundation on the Arts and the Humanities National Labor Relations Board National Mediation Board National Railroad Passenger Corporation (Amtrak) National Science Foundation* National Transportation Safety Board Nuclear Regulatory Commission* Occupational Safety and Health Review Commission Office of the Director of National Intelligence Office of Government Ethics Office of Personnel Management* Office of Special Counsel

Overseas Private Investment Corporation Peace Corps Pension Benefit Guarantee Corporation* Postal Rate Commission Railroad Retirement Board* Securities and Exchange Commission* Selective Service System Small Business Administration* Social Security Administration* Tennessee Valley Authority* Trade and Development Agency U.S. Agency for International Development* U.S. Commission on Civil Rights U.S. International Trade Commission U.S. Postal Service*

Indicates a significant entity included in the Financial Report. Original source: U.S. Government Manual 2005/2006.

Introduction

xiii

IMPACT OF THE FEDERAL GOVERNMENT In the State of the Union message, the President comments on the austerity of his budget requests; promises to hold expenditures to an absolute minimum; and then outlines programs and initiatives that seem, more often than not, to cost more than they did in the prior years. Regardless, or perhaps because of, explanations and good intentions, however, the federal government’s spending and the national debt are both in the trillions of dollars. By any measure, the economic impact of the federal government is “big.” Annual federal outlays account for approximately 25% of the country’s gross national product. These direct outlays do not include the expenditures and contingent liabilities of the Federal Reserve Board, several government-sponsored enterprises, and government corporations. These independent boards and hybrid corporations are responsible for various other direct expenditures and risks related to insurance programs, loans, and loan guarantees, and for federal-related guarantees and financings that are considered “off-budget” (which in federal parlance means “off the books”), but which, nonetheless, are in the trillions of dollars. FEDERAL FINANCIAL MANAGEMENT BACKGROUND Prior to the 1990s, government-wide efforts to improve federal financial management were sporadic and sometimes uncoordinated; at times these efforts received less than enthusiastic support from the Department of the Treasury (Treasury), the Office of Management and Budget (OMB), and Congress. Today, however, several laws set overall guidelines and establish detailed uniform federal financial management policy. The executive branch now places additional emphasis on changing and improving financial management practices in the federal government. OMB has issued several government-wide regulations to implement and enforce financial management improvement driven by congressional mandates. Since the Constitution, the federal budget process—from the budget preparation phase through the budget execution phase—has been the continuum on which federal financial management rests. The federal budget is simply the money and expenditure authority, given by Congress, that forms the financial corpus that must be planned, budgeted, controlled, managed, accounted for, and ultimately reported upon by federal departments and agencies. As noted, until 1990, laws of Congress gave the Government Accountability Office (or GAO, formerly General Accounting Office), Treasury, OMB, and the heads of just about every individual agency some role in defining selected aspects of federal accounting, reporting, and controls for the budget. Over the years the federal government has tested certain concepts to provide more precision in the estimation of budgets, monitoring of expenditures, cost accounting for programs, and so on. Concepts such as zero-based budgeting (ZBB); planning, programming, and budgeting systems (PPBS); and to a lesser degree, management by objectives (MBO) have been required by presidents, although not always with the full agreement or support of Congress. More recently, concepts such as activity-based costing (ABC) and Six Sigma (borrowed from the private sector),

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and service efforts and accomplishments (SEAs) adopted from state and local governments, are being tried at the federal level as well. In the 1950s, the Comptroller General of the United States had, pursuant to law, issued federal accounting and reporting standards. Decades later, half of the federal departments and agencies had not yet complied with these guidelines, and no pressure was exerted by Congress to force compliance. Uniformity and consistency of accounting and financial reporting among other federal entities—and even within an individual federal entity—was nonexistent. In the 1980s and 1990s, several factors influencing Congress and federal executives led to the adoption of uniform federal accounting and reporting. The adopted standards, however, were not the accounting practices of corporations, state and local governments, or governmental nonprofits. At the federal level, departmental and agency financial managers found that they would have to require accounting: to ensure compliance with legal conditions and limitations; to do internal costing to manage their program and functional operations; to meet externally imposed reporting requirements; to compile the information necessary to monitor programs with state and local governments, nonprofits, and even individual citizens; and more. All of this complex activity must conform to the specifics of the Constitution, the bedrock accounting guide for expending all federal monies. Generally accepted accounting principles are the accounting rules, practices, and conventions used for decades to account for and report on financial operations of the private sector, state and local governments, and nonprofit entities. These accounting rules, with regard to the private sector, have been promulgated since 1973 by the Financial Accounting Standards Board (FASB), with close oversight by the federal Securities and Exchange Commission (SEC) for corporations with registered securities. For state and local governments, certain public-sector nonprofit organizations, and many colleges, generally accepted accounting principles have been promulgated since 1984 by the Governmental Accounting Standards Board (GASB). State and local government securities are specifically exempted from SEC oversight unless fraudulent practices are involved with government securities. None of these widely accepted accounting and reporting guidelines was adopted to describe or report on the breadth of the federal government’s financial management activities. Further, until 1990, the responsibility for federal accounting and financial reporting was split between one legislative branch agency—the U.S. GAO—and two executive branch agencies—OMB and Treasury—and other federal executive branch departments and agencies. By laws dating back to 1921, GAO prescribed forms, systems, procedures, and accounting standards for the federal government. By these same laws, heads of each federal department or agency were required to develop and maintain the systems of accounting, reporting, and internal controls that best met that department’s or agency’s needs. The accounting and reporting that did exist was an amalgam of congressional laws and the practices of several departments and agencies, supplemented and refined by miscellaneous regulations, rules, and directives. Over many years, GAO, Treasury, OMB, and scores of separate departments and agencies contributed to the body of practices that comprised federal financial management.

Introduction

xv

A CHANGING ENVIRONMENT The more important forces of change in federal financial management were less financial in nature, but nonetheless contributed to an environment that required or permitted changes and improvements not possible in earlier decades. In Congress The 1980s witnessed an almost total generational change in Congress. Newer members may have been more business oriented, and unquestionably, they were younger. Older, more experienced members, who served in the 1960s, 1970s, and into the 1990s, had grown up with a federal government that was growing ever larger. To these latter members, the 1960s were simpler; growth had happened by steady evolution. Years of experience had provided many of the senior members with an intuitive feel for the numbers. Federal finances were not yet out of control; large deficits and an ever increasing federal debt were problems for future generations. The newer congresses of the 1980s and 1990s found that there was no overall financial statement for the federal government, no enforcement of consistent accounting standards in departments and agencies, antiquated and unreliable department and agency reporting systems, and no history of annual department and agency financial statements. The newer, younger members of Congress, lacking the knowledge and history of what had gone before their elections, were aghast at the state of federal financial management. In Individual Federal Entities Almost at the same time, within departments and agencies, senior financial personnel changed. To reduce the federal budget and expenditures, early retirement options and buyouts were offered by Congress. These initiatives precipitated an unanticipated wholesale retirement or resignation of federal financial managers. Within a very few years, the expertise of an entire generation of experienced financial managers left the federal government; it was a government-wide brain drain. The succeeding financial managers lost their mentors, those who knew what had gone before and who could make the systems work. Like members of Congress, the senior federal appointed executives of the 1980s and 1990s were new to the higher levels of government and were both younger and less experienced. These financial executives needed data that did not exist or that could not be produced without great effort. At best, some systems generated data that was “close” or may have been “good enough” for governments of past years. These executives were now charged with the financial management of a government that, in the 1990s, was spending over $1.6 trillion annually, and with overseeing a federal debt that may never be paid in full. The failure to require or implement essential accounting standards, consistent financial reporting, program and activity cost accounting, and departmental and government-wide financial statements all contributed to a crisis not publicly known, but one that was exacerbated by past inadequacies. Heretofore, while there had been

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a system of federal financial management, most of the data elements and details of that system were known to only a few executives and managers. No single manual, repository, or source existed where one could find a comprehensive description of the accounting and reporting processes of the federal government. Further, up-todate, continual financial management training had not been a high priority of past congresses and presidencies. With minimal formal training and few books available, even those who wanted to learn the federal system ran into considerable difficulty. Budget requests for new or improved systems, and training for more financial managers and larger staffs, were the perennial targets of congressional and executive branch budget cuts. Governmental financial managers learned by doing, living, and being inside of a federal entity. Over many years, the diligent financial executive became well versed, but in only one system—his or her own. Even with the support of later congresses and presidents, and despite the best efforts of all federal financial managers, better accounting, timely reporting, and adequate controls may not have been possible in those years. The federal government was enormous and the financial management task daunting. Managers were faced with the challenge of budgeting, accounting, and reporting on trillions in federal spending. To meet this challenge, they needed detailed budgeting and reporting of funds by every U.S. congressional district, and at all levels of government—50 states, more than 3,000 counties, and tens of thousands of cities, towns, and special government districts. This mass of information also needed to come from tens of thousands of federal contractors and grantees and from more citizens receiving direct federal assistance than one would care to count. But this growth in size and complexity was happening at a time when computers and software technology were in their infancies. The data processing technology was not advanced, and almost no federal financial manager had tools to meet the data and information challenge. Slowly, the availability of friendlier, more advanced computer technology increased, and more sophisticated databases and application software were developed. In the late 1980s, a series of systems improvement efforts were identified, codified, and published by teams of federal financial executives under the auspices of the government’s Joint Financial Management Improvement Program (JFMIP). Although the success of new financial systems implementation has been at times erratic, today, with available funding, departments and agencies are steadily acquiring the acumen—tools, software, people, training, improvement in internal controls, and so on—that they have long needed. Major Federal Initiatives In the 1980s, three products of the JFMIP had a significant impact on improving federal financial management: (1) a comprehensive compilation of federal financial information requirements and standard financial reporting requirements; (2) a document outlining core financial system requirements for the federal government; and (3) the Standard General Ledger (SGL) for the government. Each of these initiatives was a first-time effort, and all were needed to provide the systems of accounting and controls desired by Congress and federal managers.

Introduction

xvii

In 1990, the Chief Financial Officers Act (CFO Act) gave the OMB the main responsibility for federal financial reporting, and financial managers in the Treasury began to support departments and agencies wanting to improve federal accountability. The Treasury also became a more active partner with the OMB in conducting research and experimenting with alternatives to enhance accounting and reporting within departments and agencies government-wide. Following the passage of the CFO Act, the U.S. Comptroller General (who heads the GAO), the Secretary of the Treasury, and the Director of the OMB established the Federal Accounting Standards Advisory Board (FASAB). The FASAB was instructed to develop and recommend accounting and reporting standards for use by each federal department and agency, as well as for government-wide applications. With the mandate of the CFO Act, initiatives to improve financial management moved forward in the 1990s. The OMB became the authoritative source for agency financial statement auditing, financial management, accounting, and reporting policies. By 1993, the newer policy direction, uniform accounting and reporting standards, and government-wide systems requirements with which federal departments and agencies must comply were well established. In 1992, the FASAB began recommending accounting policy. By 1993, the OMB had directed departments and agencies to establish and maintain an integrated financial management system that complied with FASAB, OMB, and Treasury 1 promulgations. FEDERAL ACCOUNTING AND REPORTING TODAY The Federal Reporting Entity Until the 1990s, there had been no uniform resolution of what constituted a federal accounting and reporting entity. There is only one overall economic entity: the federal government as a whole. But the federal government operates by a network of somewhat autonomous, subordinate departments, agencies, commissions, and other federally funded organizations. Each entity manages activities, legally obligates the government, and spends federal monies. The FASAB recommended that the federal accounting and reporting entity would be the organization that issued general-purpose financial statements. That is, departments and agencies would be the reporting entities of the federal government. This was a long-needed clarification. Historically, many had supported the view that the congressional appropriation (i.e., the funds made available by Congress) was the accounting and reporting entity. Others, with different responsibilities, believed that budget accounts or Treasury accounts (and they are not the same) would provide more accurate and revealing financial disclosures of the operations of the federal government. Still others thought the primary reporting entity ought to be the special funds or trust funds established pursuant to law. 1

OMB Circular A-127, Financial Management Systems, 1993, which updated and, in part, revised an earlier OMB Circular A-127 of December 1984.

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Some federal entities have a single appropriation as their primary financing resource for operations. Other federal departments and agencies may be responsible for two or more congressional appropriations. When a single department or agency is responsible for multiple appropriations, these funds may, by law, support a variety of operations or a combination of programs. There may be instances when an agency, by law, must operate programs without having received any direct appropriation, but is provided spending authority through an allocation from another agency’s appropriation. Congressionally enacted appropriation laws have a unique status in federal accounting. The passage of revenue and expenditure appropriation legislation by Congress provides the basis for federal departments and agencies to collect taxes, revenues, and other fees from the public and to incur obligations and make expenditures from the Treasury. These laws form the legal, economic, accounting, and reporting criteria for federal entities. To illustrate, prior to the 1990s, congressional appropriations were viewed as accounting entities; the federal departments and agencies, as reporting entities. The ideal condition, of course, from an accounting, financial, and reporting point of view, would exist if all operations of a federal entity were supported by a single congressional appropriation. This considerably simplifies the budgeting, managing, accounting, and reporting issues. Since an appropriation is an accountable happening, the recipient federal entity must record, account for, and report assets, liabilities, and investments of the government, as well as its expenditures and any revenues, by each individual appropriation. Stated another way, an integrated set of records is required to account fully for the stewardship of all funding to an entity; the details, with respect to each appropriation, must be separable in the records of the entity. However, accounting and reporting by appropriations only is not satisfactory for managing and measuring program performance. Accounting only by appropriation portrays departments and agencies in a somewhat fractured perspective. Nonetheless, accounting by appropriations was the prevalent form of accounting and financial disclosure in the federal government through the 1960s, until computer technology permitted reporting on other bases and dimensions. In 1994, the FASAB recommended that federal organizations report on all of their stewardship responsibilities provided by congressional authority. The FASAB, in its federal accounting concepts, stated that a basic postulate of accounting is that federal accounting information pertains to the federal reporting organization. Included within the federal government are other entities, such as governmentsponsored enterprises. These entities, while they are federally chartered and overseen by Congress and have private stockholders, are no longer directly financed by congressional appropriations. The accounting for assets and liabilities of these entities is off the books of the federal government; such assets and liabilities include their guaranteed debt, the liability for which has never been clarified by Congress. In addition, other federal organizations, such as the Federal Deposit Insurance Corporation and the Federal Reserve Board, are subject to congressional oversight, but

Introduction

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their operations are financed by levies on the constituencies they regulate rather than by direct appropriations of Congress. The Federal Financial Statements Historically, department- or agency-wide financial statements were of minimal concern to legislators and the central agencies of the federal government. These parties gave primacy to appropriation accounting. While not ideal, and not full disclosure, the primary historical system of reporting is this: matters related to budgetary status must be reported to the OMB; cash must be reported to Treasury; and accounting for specific appropriations must be reported to Congress. With continuing GAO emphasis over the years and the more widespread introduction of computer technology, the organizational entity gained prominence as the reporting entity in the 1980s and 1990s. Since the passage of the CFO Act and later laws, annual financial statements are now compiled department- and agency-wide and are independently audited. Subsequent to the CFO Act, agencies have striven to ensure that these federal financial statements conform to the accounting and reporting standards recommended by the FASAB and promulgated by the OMB. Financial reporting for corporations, state and local governments, academic institutions, and nonprofit organizations is typically provided through a package of four financial statements—a Statement of Financial Position (i.e., the balance sheet), a Statement of Operations (i.e., the income and expense statement), a Statement of Retained Earnings, and a Statement of Cash Flows. The FASAB concluded that this level of reporting would not suffice for the federal government and cited a need for other types of financial statements. The OMB, in its circular on the form and content of federal financial statements, requires federal agencies to prepare and have audited five principal annual financial statements: 1. The Balance Sheet is needed to present resources, liabilities, and the financial status of the entity at a specific point in time, however measured (i.e., budgetary, cash, accrual, etc.), and to show total balances of appropriate assets, liabilities, and equities of a federal organization. 2. A Statement of Net Cost is needed to present the various components of the net cost of a reporting entity’s operations (i.e., total, gross, or full costs less any exchange revenues). 3. A Statement of Changes in Net Position reports the beginning net financial position, the items that caused changes in the net position, and the ending net position of a federal entity. 4. A Statement of Budgetary Resources provides information on the status of congressional spending authority by those entities whose financing derives, wholly or in part, from congressional budget and spending authority. 5. A Statement of Financing is an accrual-based reporting, in contrast to the budget-based reporting of the Statement of Budgetary Resources. The Statement of Financing reconciles the financial (or proprietary) net cost of operations with the obligational basis of budget authority.

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6. A Statement of Custodial Activity is used to record custodial revenue collected by a federal agency which is not considered revenue to the entity. Typically, these are collections on behalf of other funds (e.g., Treasury’s General Fund, trust funds, etc.). These are normally nonexchange revenues with (arguably) the best known example being collection of taxes by the Internal Revenue Service. This statement applies only to entities engaged in custodial activities and only if the custodial activity is a significant part of the agency’s mission. Incidental custodial collections do not require the separate statement. These are statements of a different character, in greater number, and with different content than those appearing in an annual financial report of private-sector organizations or other public-sector and nonprofit entities. Other reporting is dictated by legislation and compliance criteria imposed on a department by Treasury or the OMB. Further, there is no prohibition in the federal standards against a department or agency having statements unique to itself, designed to provide data on performance indicators or its operations. Parallel Accounting Bases Laws, regulations, terminology, financial practices, and the simple enormity of federal government operations have fostered specialties that hint at a somewhat fractured system (or sets of systems). Federal laws, regulations, rules, and promulgations often refer to various types of accounting—budgetary, financial (proprietary), cost, and even cash accounting. The next section is an overview of these terms, which are described, discussed, and illustrated in the chapters that follow. Budgetary accounting. This accounting applies to the processes, controls, monitoring, and reporting required to track the execution of the budget laws of Congress. Budgetary accounting in the federal government has given rise to a body of terminology, descriptive of both legal and economic events and accounting procedures, required of federal entities to monitor and manage the financial impact of these events. Some examples of these events and their relevant terminology include • Only Congress can authorize and appropriate funds or budget authority to permit the collection of revenues or expenditure of federal money. Authorization and appropriation legislation are separate legislative actions of Congress. • Permission to allocate a portion of an appropriation between agencies is an exclusive prerogative of Congress. Allocations must be specifically identified by Congress in its laws. • By law, the OMB has the responsibility to apportion the various funds appropriated or allocated by Congress to regulate the rate of fund use by agencies. Thus, the OMB must approve all apportionment requests before a federal department and agency can obligate the government or spend federal money. • The individual federal departments and agencies are responsible for allotting, obligation, expending or disbursing, and costing the funds of an appropriation or other budgetary authority as they execute and manage federal programs. The accounting and reporting of these activities must be by each congressional

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appropriation, and by the individual programs and activities of the federal entity, in total for the entire entity and ultimately government-wide. By a variety of laws, department and agency accounting and financial reporting procedures must be established and used to ensure compliance with governmentwide criteria and with a department’s or agency’s own policies and controls for proper management of funds, assets, and other federal resources. Understanding the budgetary accounting process is a prerequisite to understanding the uniqueness of federal accounting. It is the reporting for the legal, economic, and accounting events and actions alluded to earlier that distinguishes federal accounting from the accounting of private-sector and other public-sector organizations. Financial (proprietary) accounting. There is also an accounting for the assets, liabilities, investments, revenues, and expenditures related to an appropriation by federal entities that is somewhat similar to the accounting process used in the private sector. This basis of accounting is referred to as proprietary accounting. Overall, Congress and the OMB require that systems of accounting and internal controls exist to acquire, safeguard, account for, report on, and dispose of funds and properties and settle debts of the government. This financial accounting, however, varies for two types of governmental entities. The accounting for all cabinet departments and most federal agencies is premised on an appropriation-based as well as an accrual-based accountability for governmental activities. Funds are also established by Congress to finance certain business-type organizations, the accounting for which is generally conducted pursuant to the legal requirements for working capital funds, revolving funds, and more recently termed “franchised” operations. These operations, often supply and industrial funds, perform a variety of business services from wholesaling to manufacturing, and (in a sense) sell services or products to other units within their department or externally to other federal departments and agencies. For these business-type operations, business or private-sector accounting is generally applied; often cost accounting is an integral aspect of the financial management of such entities. As with the corporate sector, the accounts of a federal entity must provide a ready reporting of activities on both a cash basis and an accrual basis. Neither basis is best; both are required to manage, but for reasons that might differ somewhat from those of the corporate sector. Ideally, a federal entity should manage and monitor its operations on the accrual basis of accounting; but the Treasury requires daily information to support its cash-basis accounting. The OMB is in legal trouble if it does not require agencies to report on the basis of obligations, and Congress wants reporting by appropriations, a language it understands. Cash accounting. To meet the constitutional mandate to provide “a regular statement and account of receipts and expenditures of all public money,” the Treasury needs specific information. This necessitates that the Treasury maintain and operate a central cash accounting and financial reporting system for the federal government. As the “keeper of the government’s purse,” the Treasury must, pursuant to the Constitution and other laws, render regular statements of receipts and expenditures of the government. While this is an important accounting and significantly impacts

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individual departmental and agency accounting and reporting, the accounting needed by the Treasury is essentially a cash-in, cash-out system, fulfilling a single purpose, the federal cash-balance reporting, with minimal utility for overseeing and managing the programs and activities of federal entities. The central requirement of the Treasury automatically becomes a detailed accounting and reporting requirement of all federal entities. Information on entity programs and activities must be compiled and monitored on a cash or checks-issued basis, as well as on the other bases. Cost accounting. Knowledge of the costs of programs, activities, and outputs is necessary if Congress and federal executives are to make sound decisions about resource allocations, authorizing and managing programs, and evaluating performance. Industrial funds, working capital, and federal revolving funds have long been concerned with capturing and reporting costs—of activities, products, operations, and so on. Historically, though, cost accounting was not regarded as a high priority in federal accounting by managers of programs financed by annual appropriations. Considerable legal impetus was provided by several congresses with the passage of many laws impacting financial management (e.g., the Government Performance and Results Act, the Government Management Reform Act, and the Federal Financial Management Improvement Act). These initiatives caused departments and agencies increasingly to examine the financing, spending, and financial monitoring of programs and operations from a cost perspective. The full-cost view is in contrast to financial reporting made on the more historically popular cash, appropriation, obligation, and fund views, all of which provide less than a total financial accounting. Cost accounting is viewed as a more precise recording, accumulating, accounting, and reporting of the costs of a product, service, activity, or even a program, than is the case with typical appropriation-based accounting. While later discussed separately from budgetary and financial accounting, cost information must be from the same financial and nonfinancial and statistical databases as are used by the entity for its budgetary, accounting, and financial reporting purposes. DIFFERENT VIEWS ON FEDERAL FINANCIAL MANAGEMENT The public’s views about federal financial management and data needs seem limited only by the number of views solicited. In its 1997 statement of federal accounting concepts, the FASAB provided an illustrative comment on viewpoints, such as those of an economist, a financial analyst, a federal budget analyst and program manager, and a federal accountant and auditor: • The economist is seeking data on the national society as a whole most importantly, possibly for the National Income and Product Accounts, a system that emerged in the 1940s in the Department of Commerce and earlier in private organizations. • The Wall Street analyst is more likely to view federal financial reporting in terms of the “Daily Treasury Statement” or the “Monthly Treasury Statement of Receipts and Outlays” of the United States Government.

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• Budget formulators and analysts want data from the federal budgetary accounting system, which tracks spending authority, controls expenditures, assesses economic implications, and is used in planning for government. • Accountants, program managers, and auditors in the federal environment want accountings of assets, liabilities, levels of revenues and expenditures, and periodic status reports of budget execution (i.e., budget versus actual). Users of federal financial information—citizens (defined in the broadest term), Congress, federal executives, and operating managers—all require data that asserts the integrity of the federal budget and its execution; discloses the cost of federal program operations and federal securities; and provides an accounting on stewardship of federal assets, pensions, insurances, and programs. Only with such information can citizens be assured, as noted in the Constitution, that no money is being drawn from the Treasury except in compliance with a law by Congress, and that for such receipts and expenditures there is a regular statement and accounting.

PART 1 THE NATURE OF FINANCIAL MANAGEMENT IN THE FEDERAL GOVERNMENT

1

FINANCIAL MANAGEMENT LEGISLATION AND POLICY

Under the United States Constitution, the responsibility for federal financial policy rests exclusively with the U.S. Congress. Over the years, the level of congressional involvement in department and agency operations has varied from macromanagement to micromanagement. By various laws, Congress has directed that certain central agencies establish specific financial management policies and that these agencies issue specific accounting and reporting principles, standards, and administrative guidelines for compliance by other federal departments and agencies of the government. These central agencies include the Office of Management and Budget, the Government Accountability Office, the Department of the Treasury, the General Services Administration, and the Office of Personnel Management. These agencies have published regulations and rules giving operating departments and agencies further guidance in implementing legislation. A considerable body of policy has been legislated relating to overall federal financial management. Furthermore, Congress also gives broad discretion to individual departments and agencies in determining managerial, accounting, and control procedures and practices needed to manage their own operations, programs, and activities. OBJECTIVES OF FEDERAL ACCOUNTING The overall objectives of appropriation budgetary fund accounting are directed toward fiscal accountability and compliance with the expressed intent of Congress. These objectives include • Ensuring that federal monies are spent only for purposes, with only those constituents, in only those locations, for only the amounts, and only within the time period set forth by Congress in its authorization and appropriation laws • Preventing obligations, expenditures, or disbursements of federal monies in excess of the appropriations or budget authority legislated by Congress • Fixing personal responsibility with designated federal executives for any violations or instances of noncompliance with congressional limitations or restrictions • Assisting with or promoting increased effectiveness and economy in the application and rate of expending federal money Implicit features of a federal entity’s systems of accounting and controls are checks and balances to ensure that several criteria of a federal appropriation are considered by a federal executive prior to the obligation or expenditure of federal monies and that program performance is consistent with law. At a minimum, all appropriations and budget authorities have three specific compliance considerations:

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1. Timing—The commitment and, on occasion, the rate of expenditure of appropriated funds must be made only during the time period permitted by Congress in legislation. 2. Purpose—Appropriated funds may be obligated and expended only for those purposes intended or expressed by Congress in an agency’s authorization or appropriation legislation. 3. Amount—The total amount of obligations and expenditures may not exceed the appropriation or amount of budgetary authority legislated by Congress. IMPLEMENTING ACCOUNTING IN THE FEDERAL GOVERNMENT The implementation of overall federal financial policy through more detailed regulations, rules, and other publications is dispersed among the aforementioned central agencies as well as among other executive branch entities. The three agencies having the majority of specific government-wide financial management responsibility include the GAO, the Office of Management and Budget (OMB), and the Department of the Treasury (Treasury). The General Services Administration (GSA), the Office of Personnel and Management (OPM), and the Congressional Budget Office (CBO) have also been given either government-wide or more specific roles by Congress. Several individual operating departments and agencies are given further responsibility by law for designing, implementing, and maintaining their own systems of accounting and internal and administrative controls. Office of Management and Budget Broad changes were made in federal financial management with the passage of the Budget and Accounting Act of 1921. The most significant provisions of that Act included • Title II, which established for the first time a national budget system requiring the President to formally transmit the national budget proposal to Congress at the beginning of each session. This Act also created the Bureau of the Budget (BOB) within the Department of the Treasury. • Title III, which established the GAO, to be headed by a Comptroller General of the United States. The GAO is a legislative branch agency, independent of the executive branch, and responsible only to Congress. In 1939, the BOB was made a part of the Executive Office of the President, where it exercised the role of budget officer for the President. Later the BOB was reorganized and subsequently renamed the OMB, by Reorganization Plan No. 2 of 1970. By that plan, all functions of the former BOB were transferred to the director of the OMB. Since the 1980s, the OMB has operated in an increasingly broader and stronger role as the federal government’s office of financial management. Over the years, many laws have given the OMB extensive responsibilities for prescribing regulations and rules governing the federal government’s financial management systems of budgeting, accounting, reporting, and auditing. These tasks have been broadly mandated to include planning, programming, monitoring, performance

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evaluation, and computer technology application, among other functions. In the last decade, this broadened inclusion was best illustrated when Congress passed the Chief Financial Officers Act of 1990 (discussed in detail in Chapter 2). This legislation empowered the OMB to take a more definitive executive role in the government’s financial management. The principal medium through which the OMB publishes financial management policy to departments and agencies is a system of OMB Circulars and Bulletins. These consist of rules, regulations, and directives that detail how operating departments and agencies are to implement laws of Congress. OMB Circulars are issued when the nature of the subject is to be of continuing effect and is to remain in force until rescinded or superseded. Circulars are identified by the letter “A” and a number (e.g., OMB Circular A-11, Preparation, Submission, and Execution of the Budget). OMB Circular A-1 outlines the scope of the subsequent Circulars that apply to all departments, independent commissions, boards, bureaus, offices, agencies, government-owned or government-controlled corporations, and other establishments of the government, including regulatory commissions and boards. OMB Bulletins are issued when either the nature of the subject requires a single or ad hoc action by federal departments and agencies or the issue is of a transitory nature. The Bulletins are issued in annual series, numbered in chronological order. The last two numerals of the fiscal year of issuance are used to indicate the annual series (e.g., OMB Bulletins 06-01 and 06-02 would be the first and second Bulletins issued during the federal fiscal year 2006). Government Accountability Office The Government Accountability Office (GAO) is an independent agency in the legislative branch. It is headed by the Comptroller General, an officer appointed by the President with the advice and consent of Congress, for a 15-year term and who may not be reappointed. Congress created the GAO with the Budget and Accounting Act of 1921. Over the years, Congress has charged the GAO with many financial management, accounting, reporting, fiscal procedural, and auditing responsibilities. Congress has declared by law that the GAO shall investigate, government-wide, all matters related to the receipt, disbursement, and use of public money. These responsibilities also require that the GAO analyze expenditures of each federal executive agency, to make any investigations and audits, and to report to either House of Congress having jurisdiction over federal revenues, appropriations, or expenditures. The investigations and audits by the Comptroller General are not limited to financial examinations. Routinely, a GAO audit will assess and report on program performance related to a federal department’s goals and objectives, and may consider such issues as the efficiency, economy, and effectiveness of operations. The Comptroller General is specifically authorized to audit a wide array of agencies, including federal government revenue-raising agencies, the principal ones being the Internal Revenue Service; the Bureau of Alcohol, Tobacco, and Firearms, operating units within the Department of the Treasury; and the Customs Service, now part of the Department of Homeland Security.

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Other legally mandated responsibilities provide that the Comptroller General may audit certain independent financial institutions and other entities, such as the Federal Reserve Board, Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the accounts and operations of the District of Columbia. Congress also provided the GAO with broad discretion over the nature, frequency, and timing of its reviews. For example, the Comptroller General typically has been authorized, by various laws, to initiate audits, investigations, or evaluations when ordered by either house of Congress, when requested by any committee of either the House or Senate, when requested by the staff of such committee or joint committee, or upon the Comptroller General’s own initiative. Today, with the OMB and Treasury, the GAO shares broad, government-wide financial management responsibilities. For the GAO’s part, these responsibilities are met through the active involvement of its staff in multidepartmental committees, functional task forces, government symposia, and activities of professional organizations. Department of the Treasury The Department of the Treasury is headed by the Secretary of the Treasury (not the Treasurer of the United States, who is a subordinate executive within Treasury) and is the official fiscal agency of the federal government with some of its responsibilities fixed by the Constitution itself. Created in 1789, the Treasury has been given extensive fiscal and accounting responsibilities by Congress and is the primary organization responsible for accounting and reporting on the cash receipts and cash disbursements of the government and on borrowings and the debt of the United States. On occasion, the Treasury has issued joint regulations with GAO on fiscal, accounting, and certain broader financial management-related matters having government-wide significance. Like the OMB, the Treasury has its own systems for issuing regulations and rules to departments and agencies. The more permanent or continuing guidance is set forth in the Treasury Financial Manual, but the department also issues less permanent guidance in the form of bulletins, announcements, and supplements. For the most part, federal departments and agencies look to these central agencies for coordinated policy and at times even for procedural guidance. Individual Federal Departments and Agencies Typically (at least since 1921), Congress has placed overall joint or separate responsibility and authority for financial management policy with the GAO, the OMB, or the Treasury. However, in a somewhat complicated practice, Congress has also typically made the heads of each federal department and establishment responsible for establishing the operating policies and implementing practices to comply with financial management legislation. This approach by Congress spawned a diversity of federal financial management systems, as the many federal entities needed a variety of systems of internal controls, accounting, reporting, and financial information to comply with the laws affecting their operations.

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For example, under the Budget and Accounting Procedures Act of 1950, the GAO, after consultation with the OMB and the Treasury, was directed to prescribe the principles, standards, and related requirements for accounting to be observed by the several federal entities. In the same Act, however, Congress stated that the heads of each executive department and agency were to design and maintain their own systems of accounting and internal controls to provide full disclosure of the financial results of their entities. The result of this divided responsibility and authority was that, from the 1950s until the passage of the Chief Financial Officers Act of 1990 (CFO Act), nearly half of the federal establishments never complied with or adopted the financial management promulgations of the GAO. As described in more detail in Chapter 2, the CFO Act called for the appointment of both a chief financial officer and a deputy in each federal entity, and realigned the responsibilities and authorities for financial management in the federal government. Today, the OMB has the lead financial management role, setting policy and, in many instances, the detailed financial procedures. Its direction is often quite specific, prescribing what these financial officers shall do, how the prescribed practices are to be followed, and when reporting will be made on the actions taken by federal entities. SELECTED FINANCIAL LEGISLATION Several laws have been directed toward the way federal departments and agencies receive, account for, spend, and report on the status of federal appropriations and other budgetary authority. Some laws have been concerned with financial management, the basis of accounting used, and the reportings made by departments. Still other laws over the years have directed federal departments to better plan, manage, and monitor their operations in a more economical, efficient, and effective manner. Exhibit 1.1 gives examples of key financial management legislation of direct concern to all federal departments and agencies. Selected provisions of these laws are discussed in the sections that follow. Exhibit 1.1: Selected Laws on Federal Financial Management Year 1789

Legislation United States Constitution

1870

Anti-Deficiency Act

1921

Budget and Accounting Act

1945

Government Corporation Control Act

…the initial, most basic, legislation making reference to revenues and expenditures of the federal government …prohibited executive departments and agencies from making expenditures in excess of amounts appropriated by Congress …more significant provisions of this Act affect federal financial management policy, systems, controls, and practices to this day …passed to provide for closer Congressional scrutiny of government corporations and require that these organizations undergo independent audits by the Comptroller General

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8 Year 1950

Legislation Budget and Accounting Procedures Act

1955

Supplemental Appropriation Act

1956

Public Law 84-863

1974

Congressional Budget and Impoundment Act

1982

Federal Managers’ Financial Integrity Act

1990

Federal Credit Reform Act

1990

Chief Financial Officers Act

1993

Government Performance and Results Act

1994

Government Management Reform Act

1996

Federal Financial Management Improvement Act

2002

Accountability of Tax Dollars Act

…provided Congress with overriding accounting and reporting and more control over federal receipts, expenditures, funds, and property …established statutory criteria that defined what constitutes a valid obligation against a federal appropriation …permitted the President to submit annual budget information on a cost basis and to include information on program accomplishments …changed the federal budgeting and financial process to assert more Congressional control over the executive branch …reflected increased concern by Congress over the adequacy of internal accounting and administrative controls in federal executive agencies …required that the President’s budget reflect full cost of direct loan and loan guarantee programs, including new direct loan obligations or loan guarantee commitments …changed significantly the accounting and reporting of the federal government …required the OMB to submit to Congress a strategic plan of major functions and operations, outcome-related goals and objectives, and a description of skills, technology and resources required …required each federal department and agency to submit by March 1 of each year an audited financial statement for the preceding fiscal year showing the financial position and the results of operations …required each executive agency to implement and maintain systems that comply substantially with federal financial management system requirements, applicable federal accounting standards, and the Standard General Ledger at the transaction level …required all but the smallest of agencies to be audited annually

Constitutional Authority for Appropriations The initial, most basic legislation making reference to revenues and expenditures of the federal government appears in the United States Constitution. Portions of Article 1, Sections 8 and 9, outline the financial responsibility vested in Congress: • Section 8, clause 1. The Congress shall have the power to lay and collect taxes, duties, imposts, and excises, to pay the debt and provide for the common defense and general welfare of the United States…Section 8, clause 2. To borrow money on the credit of the United States…

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• Section 9, clause 7. No money shall be drawn from the Treasury, but in consequence of appropriations made by law; and a regular statement and account of receipts and expenditures of all public money shall be published from time to time.

This is the underlying authority—in other words, “the power of the purse”—by which Congress provides for the levy and collection of federal taxes and authorizes the expenditure of public funds and other forms of financial assistance. In practice, this constitutional authority has been consistently interpreted to mean that no federal expenditure can be legally made without an earlier legal action by Congress (i.e., enactment of an appropriation or passage of budgetary authority). Anti-Deficiency Act of 1870 From the beginning, Congress has battled the executive branch and, at times, even challenged the laws of previous congresses over fiscal excesses, waste, mismanagement, and failures to adhere to spending laws. The purpose of the AntiDeficiency Act, dating back to 1870, was to prevent executive departments and agencies from spending more than was appropriated by Congress. In later amendments, the Anti-Deficiency Act was expanded to include restrictions requiring prior formal apportionment by the OMB of all funds appropriated by Congress. Later statutes prohibited incurring expenditures and obligations in excess of appropriated funds and mandated specific sanctions related to federal executives, managers, and employees. Within federal fiscal management, probably the most quoted and most closely monitored of all financial legislation are the provisions of the Anti-Deficiency Act, more commonly cited by government accountants and auditors as “Section 3679” (of the Revised Statutes) provisions. Some salient provisions of Section 3679 related to apportionments, administrative controls, and prohibitions of federal funds include • The director of the BOB is required to apportion or reapportion appropriated funds, in writing, by months, calendar quarters, operating seasons, or other time periods; or by activities functions, projects, or objects; or by a combination thereof. • No apportionment is permitted that would necessitate a deficiency or supplemental estimate unless such an action is required because of (1) laws enacted after transmission to Congress of the estimates for an appropriation, which require expenditures beyond administrative control; or (2) emergencies involving the safety of human life, the protection of property, or the immediate welfare of individuals in cases in which an appropriation has been made requiring sums to be paid to such individuals. • An officer of the government with administrative control of an appropriation is required to prescribe, by regulation, a system of administrative controls designed to (1) restrict obligations or expenditures against each appropriation to the amount of the apportionment, and (2) enable such officer or agency head

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to fix responsibility for the creation of any obligations or the making of an ex1 penditure in excess of an apportionment or reapportionment. To conform to the Anti-Deficiency Act and its subsequent revisions and amendments, each federal department and agency is directed by law and federal regulations to have a system of accounts and controls that permits the subdivision of the apportioned appropriations among operating units, with the objective of monitoring the spending of funds at the highest practical level within the agency. The Anti-Deficiency Act, as amended, has generally resulted in a detailed system of signatory authorization and approval by designated department and agency officials, as well as adherence to detailed fiscal review and fund certification procedures. Budget and Accounting Act of 1921 Broad changes were made to federal financial management practices with the passage of the Budget and Accounting Act of 1921. The more significant provisions of this Act affecting federal financial management to this day include • Title II of the Act, which established a national budget system requiring the President to formally transmit the national budget to Congress at the beginning of each congressional session. This Act also created the BOB within the Treasury. By later legislation, the BOB was moved to the Executive Office of the President and in 1970 was renamed the OMB. • Title III of the Act, which established the GAO, headed by the Comptroller General of the United States, as an independent agency in the legislative branch, responsible only to the Congress. The Budget and Accounting Act of 1921 gave the Comptroller General the power to prescribe the forms and procedures for the administrative control and accounting of the funds appropriated by Congress to various federal entities. The GAO was also given responsibility for making administrative examinations of fiscal officers’ accounts and all claims against the government, and for investigating “…at the seat of government or elsewhere, …all matters relating to the receipt, disbursement, and application of public funds.” Later amendments gave the GAO the responsibility 2 for settling and adjusting all claims and demands by or against the government. Government Corporation Control Act of 1945 Early in the 1900s, there was a growing concern among the public and members of Congress about the number of federally chartered corporations and the need for closer scrutiny and independent audit of these entities. Historically, government corporations, by law, had not needed to rely on annual congressional appropriations or the passage of budgetary authority to sustain their operations. In 1927, pursuant to a Supreme Court decision, government corporations found themselves, in certain re1

2

In 1992 this language was revised, but without significant substantive change, in Title 31 of the U.S. Code. The Chief Financial Officers Act of 1990 transferred selected responsibilities and roles of the GAO, in the areas of accounting and financial reporting and auditing, to the OMB.

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spects, free from accountability to the Treasury and from the audit jurisdiction of the GAO. The Supreme Court also held that the corporations were generally free of congressional control over their expenditures for administration and operations. Following congressional investigations in the 1940s, however, legislation was passed that provided for closer congressional scrutiny of many government corporations. The legislation also required these organizations to undergo independent audits by the Comptroller General. The resulting legislation was referred to as the Government Corporation Control Act of 1945. These audits were to be made in accordance with procedures applicable to commercial corporate audits and under any regulations that might be prescribed by the Comptroller General. By the 1980s, congressionally chartered but privately owned and operated financial corporations were operating as intermediaries to facilitate the flow of investment funds to specific segments of the private sector. Examples include the Federal National Mortgage Association, the Farm Credit Banks, and the Federal Home Loan Banks. Like their predecessors, the financial activities of these federally chartered corporations are not included in the federal budget (i.e., their financial transactions are considered to be off-budget), and they are a part of neither governmentwide reporting nor the reporting of federal departments or agencies that have oversight over these corporations. A major activity of these corporations is guaranteeing loans and credit—a contingency risk to the federal government that the GAO has reported totals several trillions of dollars. While reference is repeatedly made in the media to these contingent guarantee liabilities, there is no statutory authority that defines the exact nature of federal financial support that might be enacted to support a chartered corporation that is experiencing severe financial difficulties. It is expected that the federal oversight entity would disclose the financial relationship of the federal government to a particular chartered corporation and the possibility of a contingent liability, but the specified liability of Congress remains purposefully vague. Budget and Accounting Procedures Act of 1950 The Budget and Accounting Procedures Act of 1950 established additional improvements in the areas of federal budgeting and accounting. It authorized the preparation of performance-based budgets, requiring that the financial information of departments and agencies be displayed in terms of functions and activities. Department and agency heads, in consultation with (what was then) the BOB, were directed by this Act to achieve • Consistency in accounting and budget classifications • Synchronization between accounting and budget classifications and organizational structure • Support of budget justifications by information on performance (e.g., workload data) and program costs (e.g., unit cost data) by organizational units Congress now requires that the President submit certain specific, performanceoriented data, to justify budget requests sent to Congress. Budget submissions are to include information on

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• Functions and activities of government and other desirable classification data • Reconciliations of executive branch expenditures with congressionally approved appropriations • Estimated expenditures and proposed appropriations for the ensuing year • Estimated receipts of the government during the ensuing year • Actual and estimated appropriations, expenditures, and receipts during the last completed fiscal year and the fiscal year in progress • All essential facts regarding the bonded and other indebtedness of the government • Balanced statements of financial conditions of the Treasury at the end of the last complete year, estimates for the end of the year in progress, and the estimated condition of the ensuing fiscal year if the financial proposals contained in the budget were to be adopted by Congress Several overriding accounting and reporting objectives were sought by Congress, including full disclosure of results of government financial operations; adequate financial information for operating and budgetary purposes; and more effective control over receipts, expenditures, funds, property, and other government assets. Additionally, executives of federal departments and agencies were directed by Congress, under this Act, to fully consider the needs and responsibilities of the executive and legislative branches in establishing systems of accounting, control, and reporting. The Act addressed, from a policy view, most of the federal government’s financial management deficiencies and areas that needed strengthening. Implementation by federal departments and agencies, however, was spotty. The GAO’s issuances were virtually ignored or implemented only in part by much of the government, and the OMB and the Treasury often disagreed with the GAO regarding the specific procedural changes required. In addition, Congress, when apprised of shortcomings and legal noncompliance, in some instances ignored the GAO’s reports or opted not to enforce compliance, and often did not provide money or personnel to improve existing systems or implement new ones. These and other issues formed the foundation for passage of the Chief Financial Officers Act of 1990, which required many of the same changes explicit or implicit that appeared in the 1950 Act. Supplemental Appropriation Act of 1955 The Supplemental Appropriation Act of 1955 once again was the result of frustrating congressional efforts to obtain accurate financial data from executives of federal departments and agencies about the obligation and expenditure of funds against congressional appropriations. This Act established statutory criteria that defined what type of transaction constitutes a legally binding obligation against a federal appropriation. If a claim fails to conform to the criteria in this Act, that claim is not a valid obligation of the United States Government and cannot be paid. According to Section 1311(a) of this Act, no amount shall be recorded as an obligation of the government unless it is supported by one of the eight prescribed forms of documentary evidence. Congress intended that these eight forms of documentary evidence (defined in more detail in Chapter 4) encompass the full range of

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types of obligations that may be legally incurred in the course of governmental activities. By this Act, Congress also required that every entity report, at year-end, its unliquidated obligations and its remaining unobligated appropriation balances. This report is certified by officials designated by the federal department or agency head as having overall responsibility for recording and monitoring obligations. This reporting also initiates a special federal-level year-end audit procedure, known government-wide as a “1311” or the year-end unliquidated obligation audit. Public Law 84-863, 1956 In 1956, Public Law 84-863 amended the Budget and Accounting Act of 1921 and the Budgeting and Accounting Procedures Act of 1950, permitting the President to submit annual budget information on a cost basis (as opposed to an obligation, cash, or hybrid basis) and to include information on program accomplishments. Once again, as in the 1950 Act, Congress directed federal department and agency heads, among other tasks, to take the necessary action to achieve: (1) consistency in accounting and budget classifications; (2) synchronization among accounting, budgeting, and organizational structure; and (3) support of budget justification by information on performance and program costs. Cost-based budgets. The congressional objective for cost-based budgets was to permit executive branch management and Congress to review the total resources on hand, on order, and being procured, rather than limiting the budget review only to money sought from Congress in the form of new obligational authority and appropriations. A cost-based budget was defined as one identifying the cost of a program in terms of goods and services consumed or used. The budget data would have to disclose the balances of goods and services on hand that were obtained through expenditures of prior year appropriations and the extent of any unconsumed goods and services that would be available to support the current or future year’s budgeted program. Thus, a cost-based budget would show the net or new or additional obligational authority necessary to support the current year activities. Particularly revealing is the legal requirement to identify carryover inventory, funds, and other resources from one year to another. Accrual accounting. Department and agency heads were also directed to maintain accounts on an accrual basis; to show the financial resources, liabilities, and costs of operations in a manner that facilitated the preparation of the required cost-based budgets; and to include adequate monetary property accounting records (in contrast to only physical counts of property) as an integral part of the accounting system. Under this legislation, accrued expenditures were defined as charges incurred for goods and services received and other assets acquired, regardless of whether payment has been made or whether invoices have been received. Again, as in earlier legislation, Congress addressed several issues and provided a legal basis for making much-needed, and in some instances innovative, improvements in federal financial management. Unfortunately, throughout the years, departments and agencies were permitted to ignore or implement only selected sections

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of the law. On many occasions, Congress even ignored or refused to provide the resources to implement its own laws. The ideas embedded in this legislation were again included in the CFO Act and later laws of the 1990s. Congressional Budget and Impoundment Act of 1974 The Congressional Budget and Impoundment Act of 1974 made considerable changes in the federal financial process and was a concerted attempt by Congress to assert more control over the financial activities of the executive branch. This Act accomplished a number of things: • It established a new budget process in an attempt by Congress to incorporate more discipline over its own activities in the congressional authorization and appropriation processes. It had been several years since Congress had met its own laws, and even the Constitution, with respect to approving appropriations prior to a new fiscal year and prior to any expenditures being made with such appropriations. (In the 1990s, Congress was still having difficulty meeting its own imposed deadlines.) • It established Committees on the Budget in each house of Congress to force the many committees of Congress to coordinate and agree, in advance, on revenue and expenditure levels. Previously, Congress had not imposed fiscal and operational controls over itself, and at times the several committees were not fully aware of the financial commitments and needs of others. These Committees on the Budget were ineffective for 20 years. It took the budget and deficit crises of the 1980s and 1990s to make it necessary that these Committees exercise their authority and be given meaningful roles in the money deliberations of Congress. • It established the CBO to provide Congress with counterweight in challenging and critiquing data provided to Congress by the OMB and the executive branch and to give Congress a source of independent financial professionals. Ever since, the CBO has provided that service to Congress and has generally been viewed as being an independent, honest broker with respect to calculations, forecasts, and other estimates related to financing federal programs. • It established procedures that provided or underscored congressional control over the impoundment of funds by the executive branch. Over the years, presidents had taken the liberty of impounding, or not spending, appropriated funds if they disagreed philosophically or otherwise with the purpose for which Congress had made monies available. • It mandated a new fiscal year of the federal government, changing it from July 1 of each year to October 1. For several of the years preceding the impoundment law, Congress had been hopelessly delinquent in its responsibility to provide the appropriation finances demanded by the Constitution by the first day of a new fiscal year. Year after year, many appropriations were not available to departments and agencies by June 30. By changing the fiscal year-end, Congress bought itself an extra three months. In later years, however, Congress failed with regularity to complete its work by October 1; annually much of the federal government still operates on a temporary financing basis, re-

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ferred to as a continuing resolution, for weeks and sometimes months into a new fiscal year. For a few years after the Congressional Budget and Impoundment Act, Congress had difficulty restructuring its legislative process, realigning committee jurisdictions, and generally adhering to the rules that it had imposed on itself. By the 1990s, the general effect of the Act had become more positive and Congress did conform, with the exception of the timely appropriation of funds. Even today, Congress has difficulty limiting hearings, reconciling differences, ceasing debates, and passing the appropriation laws needed to run the government by October 1. In some years, difficulty is encountered in passing even the face-saving continuing resolutions. This was particularly true in 1996; the federal government was twice shut down for lack of funds, and the same difficulties characterized the process at the end of fiscal year 1999 and the start of fiscal year 2000. Federal Managers’ Financial Integrity Act of 1982 The Federal Managers’ Financial Integrity Act of 1982 amended sections of the Accounting and Auditing Act of 1950, reflecting increasing concern by Congress over the inadequacy of internal accounting and administrative controls in federal executive agencies. By this Act, Congress directed agencies to establish accounting and administrative controls in accordance with the standards prescribed by the Comptroller General. The law required heads of departments and agencies to provide assurance to Congress that • Obligations and costs are in compliance with applicable law • Funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation • Revenues and expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and of reliable financial and statistical reports, and to maintain accountability over the assets The OMB, under this Act, would have to establish guidelines for evaluating agencies’ systems of internal accounting and administrative controls. Federal executive departments and agencies would have to prepare an annual statement to Congress and the President on the status of compliance with the prescribed standards, reporting on whether the agency was in compliance with the Act and on any material weaknesses in the control systems. This critical piece of legislation has grown in importance with the passage of time. Guidance to assist federal agencies in their implementation is contained in OMB Circular A-123, Management's Responsibility for Internal Control. Partly as a result of the enactment of the Sarbanes-Oxley Act, the guidance and the requirements of the Federal Managers’ Financial Integrity Act were significantly expanded in December 2004, effective beginning with fiscal year 2006, to more closely parallel internal control reporting requirements imposed on most corporations subject to Securities and Exchange Commission filing and reporting requirements.

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Federal Credit Reform Act of 1990 The Federal Credit Reform Act of 1990 was part (“Title V—Credit Reform”) of the Omnibus Budget Reconciliation Act of 1990. The Act applied to federal loans and loan guarantees; the stated purposes of this Act were to 1. Ensure a timely and accurate measure and presentation in the President’s budget of the costs of direct loan and loan guarantee programs 2. Place the cost of credit programs on a budgetary basis equivalent to other federal spending 3. Encourage the delivery of benefits in the form most appropriate to the needs of beneficiaries 4. Improve the allocation of resources among credit programs and between credit and other spending programs The Federal Credit Reform Act required that, beginning in 1992, the President’s budget request must reflect the cost of direct loan and loan guarantee programs, including the planned level of new direct loan obligations or loan guarantee commitments associated with each appropriation request. The specificity of the new language in relation to appropriations for loans and loan guarantees was unique for a federal law. Major provisions of the Act that were effective for fiscal year 1992 were • For each fiscal year in which the direct loans or the loan guarantees are to be obligated, committed, or disbursed, the President’s budget reflect the longterm costs to the government of the subsidies associated with the direct loans and loan guarantees. • Before direct loans are obligated or loan guarantees are committed, annual appropriations generally are enacted to cover these costs. • Borrowing authority be provided to the Treasury to cover the nonsubsidy portion of direct federal loans. This Act changed considerably the financing, accounting, and reporting for federal loans and loan guarantees for major segments of the population not adequately served by nonfederal financial institutions. These programs are among some of the more popular supported by Congress, including farmers’ home loans, small business loans, veterans’ mortgage loans, and student loans. This legislation closed a 200-year history of accounting for less than the full costs of direct loans and loan guarantees by Congress and many presidents. It required federal departments and agencies that managed programs of direct loans and loan guarantees to now recognize up front, at the time of legislative action, the true costs that such programs were likely to incur, and that the full congressional appropriations or budget authority be provided at that time. Under this law, the projected default costs and interest subsidy costs to be incurred must be recognized at the time of the loan and at the current market rate. Historically, Congress and departments and agencies regarded a federal loan as only a disbursement and had preferred to make no formal accounting for the future repayment of this loan. This lack of accounting eliminated the embarrassing need to

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make default entries later to formally account for the uncollected loans. Even worse, in the case of loan guarantees, no formal accounting entry was made until the loan defaulted or the federal government was required to make payment under a loan guarantee program. In many instances, these events happened years later, were not anticipated, and in the case of the failures of savings and loan associations and banks, resulted in billions of dollars of losses that a later generation of taxpayers had to finance. This Act addressed another cost of federal loan programs that historically had not been reflected by operating departments or agencies—with the acquiescence of Congress, of course. All federal loan programs provide for a rate of interest below the going market rate, in essence a break or subsidy to the borrower or the recipient of the guarantee. But to finance these loan programs, the Treasury issues notes, bonds, or other securities and pays market interest rates (e.g., 7%). These borrowed monies are then loaned to borrowers at the much lower interest rates set forth in the laws (e.g., 4%). This interest subsidy (e.g., in this case 3%)—the difference between the lower loan interest rate and the higher market interest rate—was another real cost incurred by the federal government, but one for which an accounting had never been made. Now the Federal Credit Reform Act requires the government to account, up front, for the full cost of federal loan and loan guarantee programs, which includes the estimated cost of anticipated default, plus the difference in interest rates between what the Treasury pays to borrow money and what Congress charges to borrowers of these federal monies. Chief Financial Officers Act of 1990 The Chief Financial Officers Act of 1990 (described in greater detail in Chapter 2) passed within minutes of the adjournment of the 101st Congress, significantly changing the accounting and reporting of the federal government. The responsibility for setting accounting and financial reporting standards for the executive branch shifted from the Government Accountability Office, a legislative branch agency reporting to Congress, to the OMB, an agency in the executive branch. The OMB was given additional financial management, accounting, and reporting responsibilities. Further, this Act required the designation of the first chief financial officer of the United States and, ultimately, the formal establishment of a chief financial officer in each major executive entity of the federal government. The Act also contained requirements for improving agency systems of accounting and financial management; increasing internal controls to ensure the issuance of reliable financial information; and publishing entity financial statements. For the first time, Congress required that federal executive departments and agencies have annual independent audits of agency-wide financial statements, and that these audit reports be made available not only to Congress, the President, and others in government, but also to the public.

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Government Performance and Results Act of 1993 The focus of the Government Performance and Results Act of 1993 was the fact that federal managers were seriously disadvantaged in their efforts to improve program efficiency and effectiveness because of insufficient articulation of program goals and inadequate information on program performance. Further, congressional policy making, spending decisions, and program oversight were seriously handicapped by insufficient attention to program performance and results. As a result, Congress required in this Act that the OMB submit to Congress a strategic plan for federal department and agency program activities. The plan must contain these elements: • Mission statement of major functions and operations of each agency • Outcome-related goals and objectives • Description of how the goals and objectives were to be achieved, citing the operational processes, skills, technology, capital, information, human and other resources, and other needs required to meet the stated goals and objectives The plans were to cover a five-year period and be updated at least every three years. Additionally, the affected agencies were to prepare an annual performance plan covering each program activity. Under this Act, such program performance reporting was to begin no later than March 31, 2000. The initiative was phased in through a pilot plan that commenced as early as fiscal year 1994. To achieve some consistency and comparability in the communication of the mandated information, Congress, in the 1993 Act, provided these definitions that were to be used in all information relating to the Act: • Outcome measure—An assessment of the results of a program activity compared to its intended purpose • Output measure—The tabulation, calculation, or recording of an activity or effort expressed in a quantitative or qualitative manner • Performance goal—A target level of performance expressed as a tangible, measurable objective, against which factual achievement shall be compared, including a goal expressed as a quantitative standard, value, or rate • Performance indicator—A particular value or characteristic used to measure output or outcome • Program activity—A specific activity related to the mission of an agency • Program evaluation—An assessment, through objective measurement and systematic analysis, of the manner in and extent to which an agency program achieves intended objectives Until this Act, the connotations of these terms were not consistent across the federal government. With these definitions, overseers of departments and agencies had some confidence that the discussion, costing, and reporting of accomplishment and productivity measures are uniform.

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Government Management Reform Act of 1994 The Government Management Reform Act of 1994 contained certain housekeeping and administrative provisions. Title I provided limitations on certain annual federal pay adjustments; Title H, leave accumulation restrictions relating to the federal government’s senior executive service; and Title III, streamlining of management control by eliminating or consolidating duplicate or obsolete reporting requirements made in the past to Congress or its committees. Beyond such housekeeping provisions of the Act, however, Title IV required the head of each federal entity to prepare and submit to the OMB, by March 1 of each year, an audited financial statement for the preceding fiscal year showing the financial position of the offices, bureaus, and activities, and the results of operations of these organizations. Additionally, beginning no later than March 31, 1998, the Secretary of the Treasury was to prepare and submit to the President and Congress an annual audited financial statement for the preceding year, covering all accounts and associated activities of the executive branch of the United States government and reflecting the overall financial position and results of operations of the executive branch. The Treasury was to prepare these financial statements according to the OMB’s form and content requirements. The audit of these financial statements was to be made by the Comptroller General of the United States (the head of the GAO). Thus, for the first time in the country’s history, a government-wide financial statement was to be prepared and audited. Federal Financial Management Improvement Act of 1996 The Federal Financial Management Improvement Act is another Act having as its intent the improvement of financial management in the federal government. It is particularly concerned with the areas of fiscal and accounting practices, such as full costing, reflecting the total liabilities (present and contingent) of congressional actions, and accurately reporting the financial conditions of the government. The authors of the Act believed that current federal accounting practices undermined the ability of the Government to provide credible and reliable financial data, that the practices encouraged waste, and that they did not assist in achieving a balanced budget. Though brief, this Act accomplished several needed changes, such as • Formally recognizing the work of the Federal Accounting Standards Advisory Board (FASAB), which had been organized to recommend federal accounting and reporting standards, not pursuant to any law, but only under an interagency agreement among Treasury, the OMB, and the GAO. This Act made official the FASAB’s standards, concepts, and reporting requirements. • Requiring federal departments and agencies to incorporate the FASAB’s accounting and reporting concepts and standards into federal financial management systems; to evaluate cost and performance information using these standards; and to increase the capability of federal entities to monitor execution of

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their budgets by requiring reports that compare spending of resources to results of activities. • Requiring federal departments and agencies to implement financial management systems that comply with federal requirements, applicable accounting standards, and the government’s Standard General Ledger. • Requiring that systems requirements, accounting standards, and the Standard General Ledger were to be implemented “…at the transaction-level.” Crosswalks, working paper adjustments, summarized reporting, or year-end workpaper adjustments from the cash basis to the accrual basis of reporting were not condoned. The accounting and reporting now must come from the official accounts and journal entries of the Standard General Ledger (the repository for federal agency transaction-level data). • Directing those conducting the annual audit of a federal organization’s financial statements and other reviewers to make specific assertions with respect to the compliance of financial management systems with provisions of this Act; departments and agencies not in compliance had to develop and implement a remediation plan to fix all noncompliance no later than three years after the reporting. • Providing that this Act would apply not only to the legislative and judiciary branches but to the executive branch as well. The Senate, the House, and the Chief Justice of the United States were to conduct studies and report to Congress on how they might achieve compliance with the Federal Financial Management Improvement Act. • Directing the GAO to make, by October 1, 1998, and annually thereafter, a report concerning whether the financial statements of the federal government have been prepared in accordance with applicable accounting standards and the adequacy of uniform accounting standards for the federal government. An inclusion in earlier drafts of the Act, but not in the enacted law, was that this remediation plan would be financed by the mandate that deficient departments and agencies set aside 2% of their annual operating appropriations to make priority improvements in their financial management systems. With respect to the system of internal controls, an initial draft of the law stated that if a financial officer or program manager knowingly and willfully commits, permits, or authorizes material deviation from the requirements of the Act, he or she may be subject to disciplinary actions, including suspension from duty or removal from office. Further, the agency involved would have significant reductions made in its annual appropriations for the period of noncompliance. These penalties were struck from the Act before it was passed. Nonetheless, during congressional hearings on this Act, these unique conditions highlighted the serious concerns of many members of Congress over the deteriorated state of federal financial management. The Accountability of Tax Dollars Act of 2002 The Accountability of Tax Dollars Act requires that all but the smallest of executive agencies (generally executive agencies with $25 million or less in budget authority) issue annual audited financial statements.

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THE CHIEF FINANCIAL OFFICERS ACT OF 1990

The federal government’s financial management deficiencies had been documented for decades, and while changes had been made in earlier years, in 1987 many in and out of the government expressed the view that serious improvements had to be made. Throughout that year, members of both houses of Congress attempted to halt further erosion of the existing financial structure, but as in past years, their efforts were not totally successful. On September 30, the year-end, the President, with the acquiescence of congressional leaders, published a budget deficit of $148 billion. Immediately, the news media and analysts outside of the government challenged the reported amount, charging that it was too low by tens of billions of dollars or even more. Private-sector financial analysts and the financial media accused Congress and the administration of “cooking the books” of government. The Comptroller General published a report documenting that Congress and the executive branch had resorted to such forms of “cooperative accounting,” as using nonfederal funds to cover up government debts and liabilities, and to delaying and rolling over 1987 costs to other fiscal years so as to misrepresent the fiscal problems of the country and understate the “troubling” financial condition of the federal government. The collective uproar was a loud indictment of the financial leadership of Congress as a body and of the Office of the President. In October of that year, less than a month after the publication of the understated deficit, the stock market suffered its second largest one-day decline in values ever, with securities worth 20% less at the close of business on October 27, 1987, than they had been six hours earlier. Serious problems were arising in connection with major federal loan and loan guarantee programs, housing and pension guarantee programs, and the many entitlement programs enacted by Congress in years past. Estimates of taxpayer bailouts of financial institutions alone were in the hundreds of billions of dollars. However, the crisis of 1987 did not appear from out of the blue; rather, its evolution can be traced to the Constitution, an article of which made the Department of the Treasury responsible for publishing “…a regular statement and account of receipts and expenditures of all public money….” It was hardly the Constitution’s fault that the Treasury, for many decades the designated financial manager of the federal government, did not seek out or perform this function government-wide with any real eagerness. So it was Congress that had to experiment over the years with other organizational structures and delegations of responsibility, passing various initiatives to try to impose better fiscal controls with more complete accounting and reporting practices on the government as a whole.

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More than once Congress’s efforts took the form of transferring financial management functions away from the Department of the Treasury, most often to the Comptroller General, who heads the Government Accountability Office, or to the Office of Management and Budget. 1 A significant study of federal financial history by the GAO describes legislation from the nineteenth century wherein Congress attempted to bring order to federal financial systems. The Dockery Act of 1894, for example, sought to eliminate excess offices, install centralized auditing, institute a preliminary examination of records, and simplify the federal account structure. Then, as noted in Chapter 1, the Budget and Accounting Act of 1921 established the GAO as an independent legislative agency, assigning to it many of the Treasury’s previous functions, organizing the Bureau of the Budget in the Treasury, and instituting a national executive budget system. In 1939, the Treasury was then relieved of this responsibility when the Bureau of the Budget was transferred to the Executive Office of the President. The Budget and Accounting Procedures Act of 1950 required more changes. This Act established the Joint Financial Management Improvement Program, recentralized the financial management structure that had sprawled after World War II, and made the head of each agency responsible for establishing and maintaining that agency’s own systems of accounting and internal controls. Later, the Legislative Reorganization Act of 1970 and the Congressional Budget and Impoundment Act of 1974 made further improvements to federal financial management practices. Others outside of Congress were concerned about the government’s financial habits. A comprehensive analysis by the Association of Government Accountants (AGA) documented that federal departments and agencies were accountable to too 2 many different agencies for financial management matters. Over the years, Congress and central agencies (GAO, OMB, Treasury, General Services Administration, and Office of Personnel Management) had all had government-wide financial management responsibilities and roles, though under somewhat conflicting and duplicative laws. Never had Congress designated a single agency as responsible for improving federal financial management, and no agency was given sole authority to make needed changes. None could set and require compliance with sound financial management policies and practices, and none could be held responsible when laws and policies were not implemented or when problems arose, as began to happen in the late 1980s. The AGA study described Congress as appearing to operate as the federal government’s board of directors—passing laws, setting overall policy, and authorizing taxes, spending, and debt levels. Its agent, the GAO, prescribed accounting principles and standards and tried to obtain compliance by reviewing the entities’ systems of accounting and controls. Congress was reluctant to require adherence to its own laws, and individual entities could (and did) ignore the recommendations and pleadings in GAO reports. The executive branch of the government lacked a clear 1

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U.S. General Accounting Office, Managing the Cost of Government (Washington, D.C.: GAO, March 1984). Association of Government Accountants, Strengthening Controllership in the Federal Government: A Proposal (Alexandria, VA: Association of Government Accountants, May 1985).

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line of authority for fixing these financial problems. These and other issues were of concern to many within and external to the federal government. Two years after the federal financial crisis of 1987, another study, this one by 3 the American Institute of Certified Public Accountants (AICPA), captured the ongoing status of federal financial management: • The 1950 Act [the Budget and Accounting Procedures Act] created a climate for confusion and noncompliance by giving the executive departments the responsibility for establishing and maintaining systems of accounts that conform to GAO standards and integrating those systems with the OMB’s budgetary accounting requirements and the Treasury’s reporting requirements. • Although the GAO, headed by the Comptroller General, had prescribed accounting principles and standards, the Treasury, the OMB, and individual departments and agencies have disagreed with GAO over the need for or applicability of a number of the GAO’s accounting principles and standards. Inadequate due process and irrelevance of some standards are also cited as reasons for noncompliance. • The parties affected by the standards felt that the process by which standards were established did not provide for the free and open debate that was necessary for consensus. • Some of the prescribed standards are perceived to be irrelevant to the unique objectives and environment[al] nature of the federal government. Noncompliance has resulted. The AICPA study contained four major conclusions and recommendations, which would form much of the basis of the Chief Financial Officers Act of 1990: 1. There is no single chief financial officer (CFO) charged with and held responsible for the fiscal and financial affairs of the country. Recommendation: A full-time CFO, for the federal government—and controllers for each department and agency—to organize and execute financial management responsibilities. 2. The current accounting and reporting practices and procedures may not be appropriate to the unique circumstances of the federal government and are not being applied consistently government-wide or within individual departments and agencies. Recommendation: Governmental adherence to consistent accounting and reporting criteria across its many departments and agencies. 3. The financial statements of federal departments and agencies are not uniform or comparable government-wide. Recommendation: Annual preparation and publication of complete, consistent, and reliable financial statements of the government’s financial position and results of operations. 4. The federal government does not require annual independent audits of its financial statements, although it has legislatively imposed this requirement on many state and local governments, publicly owned companies, and others. 3

AICPA, “Discussion Memorandum: Federal Financial Management—Issues & Solutions,” September 1989.

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Recommendation: Independent audits of the government’s financial statements every year. At about the same time, the Financial Executives Institute, the professional organization of the Fortune 500 chief financial officers, published a report that reached similar conclusions. Nearly everyone seemed to agree with Congress, which had concluded in the CFO Act that The federal government is in great need of fundamental reform in financial management requirements and practices as financial management systems are obsolete and inefficient, and do not provide complete, consistent, reliable, and timely information.

THE CHIEF FINANCIAL OFFICERS ACT OF 1990 Passed during the waning moments of the 101st Congress and signed into law by the President on November 15, 1990, the CFO Act reflected the frustrations of many members of Congress and a concern that much had to be done quickly to redirect the financial management practices of the federal government. Congress, in the preface to this Act, outlined the extent of the problems: • General management functions of the OMB needed to be significantly enhanced to improve the efficiency and effectiveness of the federal government. • Financial management functions of the OMB needed to be significantly enhanced to provide overall direction and leadership in the development of a modern federal financial management structure and associated systems. • Losses amounting to billions of dollars each year through fraud, waste, abuse, and mismanagement among the hundreds of programs in the federal government could be significantly decreased by improved management, including improved central coordination of internal controls and financial accounting. • The federal government needed fundamental reform in its financial management systems, which were obsolete and inefficient and did not provide complete, consistent, reliable, and timely information. • Current financial reporting practices of the federal government do not accurately disclose the current and probable future costs of operating and investment decisions, including the future need for cash and other resources; do not permit adequate comparison of actual costs among executive agencies; and do not provide the timely information required for efficient management of programs. Congress intended to create uniform department and agency systems for budgeting, accounting, reporting, internal controls, and personnel practices. The ultimate purpose of the legislation was to provide for complete, reliable, consistent (year to year), timely, and uniform (among departments) financial information, badly needed for financing, managing, and evaluating federal programs—and not least of all for citizens who wanted to know what happens with their tax monies. The CFO Act reaffirmed the intent of Congress. It required, for the first time, department controls, adherence to applicable accounting and reporting standards, annual financial statements by federal entities, and independent audits of those fi-

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nancial statements. To accomplish these goals, the CFO Act, among other things, centralized authority and responsibility for better accounting, controls, and financial management into one agency—the OMB. Financial Management—Responsibilities of the OMB With the CFO Act, Congress established two separate deputy directors at the OMB—one for budget and one for management. The Act also caused changes both within the OMB and between the OMB and the operating departments and agencies. A senior executive position, the Deputy Director of the OMB for Management, was established and the role of the “M” in OMB—federal financial management—was significantly expanded. Setting financial management policy. By Section 503 of the CFO Act, the “M” of the OMB was now responsible for establishing the general management policies for all executive branch entities and for performing all functions of the Director of the OMB and those functions delegated by the President. The OMB was given the continuing role of facilitating congressional and executive branch actions to improve management of government operations and remove impediments to effective administration. The OMB was required to perform rather specific financial management oversight and operational responsibilities, including • Settling differences arising among agencies regarding implementation of financial management policies • Issuing those policies and directives necessary to carry out the CFO Act • Providing for complete, reliable, and timely information to the President, Congress, and the public regarding management activities of the executive branch • Chairing the new CFO Council, established by Section 302 of the CFO Act The CFO Act created the Office of Federal Financial Management (OFFM) within the OMB. This office was made responsible for developing financial management policy and executing the financial management functions imposed by the Act. The OFFM consists of three main branches with specific financial management responsibilities: 1. Financial Standards and Grants—Responsible for developing reporting requirements, financial standards, and financial audit guidance to implement the requirements of the CFO Act. The branch’s mission also includes developing grants and Single Audit Act guidance. 2. Financial Integrity and Analysis—Responsible for promoting operating efficiency and the implementation/adoption of sound financial management practices. 3. Federal Financial Systems—Responsible for ensuring that federal financial systems support financial management requirements, including the accumulation and reporting of relevant/accurate financial data. Additionally, the OMB was to communicate directly with financial officers of states and local governments and foster the exchange of information concerning financial management standards, techniques, and processes. The congressional objec-

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tives of having the OMB work with state and local governments were to improve and strengthen intergovernmental relations and to provide assistance to these governments with respect to intergovernmental programs and cooperative agreements. Determining systems policy. Congress, to correct perceived and existing federal financial management deficiencies, made the OMB responsible for providing complete, reliable, and timely information to the President, Congress, and the public regarding the management activities of the executive branch. Among the specific responsibilities were that the OMB must • Establish, direct, and give leadership for financial management policies and requirements, and monitor the establishment and operation of federal government financial systems • Review agency requests for financial management systems and operations and advise on required resources for developing, effectively operating, maintaining, and correcting federal financial management systems • Establish the general management policies for executive agencies and perform several general management functions relating to • Managerial systems • Systematic measurement of performance • Procurement policy • Grants, cooperative agreement, and assistance management • Information and statistical policy • Property management • Human resource management • Regulatory affairs The OMB was also made responsible for conducting organizational studies, longrange planning, program evaluation, productivity improvement, and experimentation/demonstration programs. Tracking and costing budgets. For decades, the tracking of, accounting for, reporting on, and costing of congressional appropriations was not done to the satisfaction of Congress or others interested in what the federal government was doing and spending. Federal financial information was not uniform within units of the same department or with other departments or across the government, nor was it consistent from one fiscal year to another. Financial information was not timely for managing; nor was it complete or accurate. For these and other reasons, Congress, by the CFO Act, required that the OMB also • Oversee, periodically review, and recommend changes to entities with respect to their legislative proposals and budgets, their budget execution and performance reports, and their administrative structure governing financial management activities • Review and recommend changes to budgets and legislative proposals of agencies to ensure consistency with financial management plans of the OMB • Monitor execution of the federal budget in relation to actual expenditures, including timely performance reports

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Improving competence of financial managers. The CFO Act is unique among federal laws in requiring that the persons appointed to senior federal financial management positions (1) be competent, and (2) possess relevant experience—a matter that had been of concern to many during the 1980s and before. This Act gave the OMB further important responsibilities in this area to • Develop and maintain qualification standards for agency CFOs and deputy CFOs appointed under the Act, and advise departments and agencies with respect to the selection of their CFOs and deputy CFOs • Advise agencies on the qualifications, recruitment, performance, and retention of other financial management personnel • Assess the adequacy of professional qualifications and capabilities of financial management staffs throughout government, and recommend ways to correct problems impairing the efficiency of those staffs • Advise agencies on the qualification, recruitment, performance, and retention of managerial personnel Controllership Responsibilities: Another New Role Among other things, the CFO Act placed leadership responsibility and the authority to improve federal financial management with two newly appointed OMB executives: a Deputy Director of the OMB and a Controller of the federal government. These executives were to provide leadership, advice, review, oversight, and maintenance support to myriad financial management areas. Just a partial listing of the OMB’s new controllership roles and responsibilities, to be led by its two new executives, includes • Establish financial management policies and requirements related to monitoring, establishing, and operating federal government financial systems • Review financial budgets and requests for funding to more effectively operate and maintain or improve federal financial management systems • Monitor the financial execution of the federal budget in relation to actual expenditures, including timely reporting • Develop and maintain the qualification standards for all federal department and agency CFOs, and advise on the recruitment, performance monitoring, and retention of these executives • Arbitrate differences among agencies regarding the implementation of financial management policies • Prescribe the form and content of entity financial statements required under the CFO Act in accordance with applicable accounting principles, standards, and requirements As to the specific position of the OMB Controller, for 200 years Congress had seen no need to make a single office or individual responsible for the federal government’s accounting, reporting, and overall financial management. In 1983, however, organizations and individuals, both within and external to the federal government, called for the establishment of a Controller of the United States within the ex-

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ecutive branch. (In 1987, the OMB had administratively added the Controller title and some financial management responsibilities to an existing OMB position.) By the CFO Act of 1990, the Controller position was more than an administrative adjustment—it was law. Section 203 of the Act established within the OMB an office of federal financial management, to be headed by a Controller. This federal executive is to be appointed by the President and serves with the advice and consent of the Senate. Congress required that the Controller be qualified and that he or she possess relevant financial management experience. For example, the Act required that the Controller be appointed from among “…individuals who possess (1) demonstrated ability and practical experience in accounting, financial management, and financial systems; and (2) extensive practical experience in financial management in large governmental or business entities.” It is the OMB Controller who is directed by Congress to carry out the financial management functions and exercise those responsibilities under the direction of the OMB’s Deputy Director for Management. Department and Agency Chief Financial Officers The Chief Financial Officers Act required the appointment of a chief financial officer in operating departments and agencies and in some independent offices. By Section 205 of the CFO Act, each chief financial officer, for cabinet and large agencies, was to be appointed by the President and serve with the advice and consent of the Senate; or be designated by the President, in consultation with agency heads, from among officials of the agency who are required by law to be so appointed. For the smaller agencies and offices, the CFOs were to be appointed by the head of the agency, to be in federal career competitive service or the senior executive service, and to be career appointees. Congress mandated that these executives be experienced and possess a certain level of competence to serve in these positions. For example, the CFO Act stated that the CFOs for both large and small federal entities were to be appointed or designated “…from among individuals who possess demonstrated ability in general management of and knowledge of and extensive practical experience in financial management practices of large governmental or business entities.” The duties for department and agency CFOs were specific in several different management areas and included financial as well as nonfinancial roles, such as financial and nonfinancial systems, monitoring and accounting for budget execution, all aspects of all entity personnel having financial responsibilities, and certain department-wide reporting and budget-type responsibilities. The sections that follow provide a partial listing of those financial management responsibilities imposed on departmental and agency CFOs by the Chief Financial Officers Act of 1990. Centralized financial management responsibilities. Congress had found that the financial management functions of the OMB, departments, and agencies needed to be significantly enhanced to provide direction and leadership for the development of the modern federal financial management structure with associated supporting systems.

Chapter 2 / The Chief Financial Officers Act of 1990

29

Prior to the CFO Act, the financial management function was not organized in a uniform manner across the government. Additionally, responsibilities for financial management were dispersed among several senior executives. At larger departments and agencies, these responsibilities were dispersed among several executives at the assistant secretary level. In no federal entity did a single official have the full range of financial management functions. Further, the average tenure of these executives was about 18 months—a term of service that produced constant turnover and that was too short to permit these executives to preside over the entire design, development, and installation of a new accounting system for a federal entity, often a several-year undertaking. Furthermore, the program and operational managers and heads within departments and agencies often had their own financial personnel reporting to them. Financial managers had little or no responsibility for these program and operational financial staffs. After the CFO Act, however, these senior financial executives—now CFOs— were to report directly to the heads of their federal establishments on financial management matters, and would oversee all financial management activities relating to the programs and operations in their organizations. The responsibilities of the CFOs and deputy CFOs also extended to developing and maintaining integrated agency accounting and financial management systems, including reporting and internal controls to • Comply with applicable accounting principles, standards, and requirements, and internal control standards • Comply with policies and requirements prescribed by the OMB • Comply with other requirements applicable to systems • Provide for • Complete, reliable, consistent, and timely information, which is prepared on a uniform basis and which is responsive to the financial information needs of agency management • The development and reporting of cost information • The integration of accounting and budgeting information • The systematic measurement of performance • Develop and support agency financial management budgets • Approve and manage agency financial management systems design and enhancement projects • Implement agency asset management systems, including systems for cash management, credit management, debt collection, and property and inventory management and control Congress chose specifically to place financial and nonfinancial systems responsibilities with the department and agency CFOs. Previously, delegation of these responsibilities was determined by the head of individual federal establishments, and they were often dispersed among various support-function executives and program executives, many of whom lacked management, systems, or financial experience.

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Agency CFO systems responsibilities. The CFOs of the federal entities were directed to develop and maintain integrated agency accounting and financial management systems, including financial reporting and internal controls. These systems had to comply with • Applicable accounting principles, standards, and requirements • Internal control standards, policies, and requirements of the OMB • Other systems requirements The CFOs were also tasked with approving and managing agency-wide design or enhancement projects for financial management systems. Congress also expanded the CFOs’ systems responsibilities specifically to include implementing the agency’s asset management systems, including systems for cash management, credit management, debt collection, and property and inventory management control. Another major systems task cited in the Act was that CFOs were to provide complete, reliable, consistent, and timely information, prepared on a uniform basis, and responsive to the financial information needs of agency management. The CFOs’ role was much broader, in the end, than the mere production of financial information. Agency CFO performance and costing responsibilities. Congress noted in the CFO Act that the current financial reporting practices of the federal government were deficient, and did not • Accurately disclose the current and probable future costs of operating and investment decisions, including the future need for cash and other resources • Permit adequate comparison of actual costs among executive agencies • Provide the timely information required for the efficient management of programs To address these problems, CFOs were mandated to develop and maintain integrated agency accounting and financial management systems and internal controls, and to ensure that these systems provided cost information for the systematic measurement of performance. The CFOs were to review, biennially, the fees, royalties, rents, and other charges imposed by their respective agencies for services and things of value they provide, and to make recommendations on reviewing the charges to reflect costs incurred by the agencies. Agency CFO budget and reporting responsibilities. Until 1990 and passage of the CFO Act, the financial management function in federal entities was split between the budgetary responsibilities and the fiscal accounting and reporting responsibilities; accounting had almost no role with respect to budget preparation or execution. Once again, the legally imposed tasks for an entity’s CFO were expanded beyond those typically exercised by earlier federal financial managers. The Act states that the entity CFOs shall • Provide for the integration of accounting and budgeting information • Monitor the financial execution of the budget in relation to actual expenditures, and prepare and submit timely performance reports

Chapter 2 / The Chief Financial Officers Act of 1990

31

• Prepare and submit to the agency head and the OMB an annual report including a description and analysis of the status of financial management of the agency; annual agency financial statements; an annual audit report of the agency; and a summary of reports required under the Federal Managers’ Financial Integrity Act Agency chief financial officer personnel responsibilities. The retention and support of competent financial personnel was specifically noted by Congress in the CFO Act, which charged CFOs with making recommendations to the agency head regarding the selection of deputy CFOs. The CFOs were given agency-wide personnel responsibilities and were told to direct, manage, and provide policy guidance and oversight of all agency financial management, personnel, activities, and operations, including the preparation and annual revision of the required five-year agency and five-year financial management plan; the development of agency financial management budgets; and the recruitment, selection, and training of personnel to carry out the agency’s financial management functions. With this considerable expansion of authority for financial and nonfinanical systems, accounting, reporting, and personnel, Congress elevated the role of financial managers to senior executive status in federal entities. To properly perform this financial management role, now considerably enhanced and broadened from that of the past, the Act gave new authority and responsibilities to the CFOs. The CFO Act stated that agency CFOs were to have access to all records, reports, audits, reviews, documents, papers, recommendations, and other material that is the property of the agency or is available to the agency relating to programs and operations. Further, the federal entity CFO was entitled to request information of assistance as necessary for carrying out CFO duties and responsibilities. These senior financial executives could also enter into contracts and other arrangements with public agencies and private persons for preparing financial statements, studies, analyses, and other services, and make payments for these services. Deputy Chief Financial Officers Section 205 of the CFO Act required the appointment of department and agency deputy CFOs. This deputy CFO position is, by the Act, to be a career reserved position, with qualifying performance and experience requirements for appointment to the deputy position. The CFO Act requires that after consulting with the OMB and the agency CFO, the agency head shall appoint as the deputy chief financial officer “…an individual with (1) demonstrated ability and experience in accounting, budget execution, financial and management analysis, and systems development, and (2) not less than six years of practical experience in financial management at large governmental entities.” Department and Agency Financial Statements Section 303 of the CFO Act required the preparation and submission to the OMB of financial statements that reflected the overall financial position, result of operations, cash flows, and changes in financial position of each revolving fund or trust fund, and the accounts of each office, bureau, and activity of a federal entity

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performing substantial commercial functions during the preceding year. The CFO Act defined commercial functions to include • Buying and leasing real estate • Providing insurance • Making loans and loan guarantees and other credit programs • Any activity involving the provision of services or things of value for a fee, royalty, rent, or other charges Thus, while initially appearing to be limited in scope, the CFO Act affected a significant range of department and agency activities. In November 1994, Congress amended the CFO Act and extended its coverage to all departments and agencies, not just to those entities having commercial and trust fund type functions. The Director of the OMB was to prescribe the form and content of the financial statements to be produced by the executive departments and agencies. This guidance is published regularly by the OMB in a series of OMB Circulars and Bulletins. Annual Independent Audits The matter of annual independent audits is the fourth financial management area within the scope of the CFO Act (the other three areas include [1] the appointment of CFOs, [2] the requirement to comply with applicable accounting standards and principles, and [3] the publishing of financial statements by federal departments and agencies). The annual independent audit requirement in Section 304 of the CFO Act mandates that each financial statement must be prepared pursuant to the Act and shall be 4 audited in accordance with generally accepted government auditing standards. Where an agency has an inspector general, this inspector general must either perform the audit him- or herself, or select an independent auditor. Where there is no inspector general, the head of the federal entity will determine the independent auditor to perform the audit. Additionally, the Comptroller General is authorized to review these audits or may audit the financial statements, at his or her discretion or the discretion of a committee of Congress. The Director of the OMB annually publishes guidance on the scope and other details of these audits in a series of OMB Bulletins. ADDRESSING THE DEFICIENCIES OF THE CHIEF FINANCIAL OFFICERS ACT OF 1990 Though useful and far-reaching, the Chief Financial Officers Act of 1990 is not without flaws. For example, in various sections, the Act makes reference to “applicable” accounting principles and standards, as in

4

These are the Government Auditing Standards published by the Comptroller General of the United States, which incorporate the generally accepted auditing standards of the American Institute of Certified Public Accountants and impose additional auditing standards on federal departments and agencies.

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33

• Section 301, which requires that the five-year plans of the Director of the OMB, the Deputy Director of the OMB, and agency heads be consistent with “applicable accounting principles, standards, and requirements” • Section 303, which states that the Director of the OMB shall prescribe the form and content of agency financial statements, “consistent with applicable accounting principles, standards, and requirements” • Section 902, which requires that agency CFOs comply with “applicable accounting principles, standards, and requirements, and internal control standards” Nowhere in the CFO Act, however, does Congress detail either (1) what these applicable financial criteria should contain or require, or (2) which agency or federal executive is responsible for determining the applicable financial criteria. Chapter 1 has already described in greater detail other legislation, following the CFO Act, that reinforced the intent of Congress to improve and enhance federal financial practices. For example • The Government Performance and Results Act of 1993, which required annual performance plans and their subsequent reporting for federal entities • The Government Management Reform Act of 1994, which required, among other tasks, the preparation of annual entity financial statements and the submission of these audited statements to the OMB • The Federal Financial Management Improvement Act of 1996, which required compliance with government-wide accounting and financial reporting standards and the implementation of a Standard General Ledger by the federal government • The Accountability of Tax Dollars Act of 2002, which required all but the smallest of agencies to be audited annually We will now examine in closer detail an advisory body formed to address these specific questions: Which accounting principles, standards, and requirements are applicable? and Who is responsible for determining them? Federal Accounting Standards Advisory Board—Origins The origin of the Federal Accounting Standards Advisory Board (FASAB) is, to some degree, traceable to the Budget and Accounting Act of 1921. Parts of that Act, also discussed in Chapter 1, attempted to solve some of the same problems that the FASAB was later established to address. The same agencies are still involved today—the Government Accountability Office, the Department of the Treasury, and the Office of Management and Budget (established by the Budget and Accounting Act as the Bureau of the Budget). These same three agencies, through mandate of the Budget and Accounting Procedures Act of 1950, were to collaborate on the federal government’s accounting, financial reporting, and budgetary needs, and to prescribe the principles, standards, and related requirements to be used by all federal departments and agencies. In 1957, the GAO codified federal accounting and financial reporting standards in Title 2, “Accounting,” of its Policy and Procedures Manual for Guidance of Fed-

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Wiley Federal Accounting Handbook

eral Agencies. Title 2, however, was neither uniformly nor consistently applied by federal departments and agencies. Furthermore, the Treasury, the OMB, and Congress were not consistent or enthusiastic in supporting the GAO’s standards. During these almost 70 years, 1921 to 1990, no body of accounting principles or standards was ever considered to be generally accepted by or for all federal agencies. In 1989, the GAO published a Proposed Framework for Establishing Federal Government Accounting Standards, raising the concept of a board that would recommend federal 5 accounting and financial reporting standards. Federal Accounting Standards Advisory Board—Overview The FASAB was created by the Federal Advisory Committee Act for the express purpose of promulgating accounting concepts and standards for the federal government. The FASAB was initially established by a formal agreement (memorandum of understanding [MOU]) between the Comptroller General, the Secretary 6 of the Treasury, and the Director of the OMB. The initial memorandum of understanding was dated October 10, 1990. The memorandum has been amended periodically, and today, procedures to be followed in setting federal government accounting standards and the composition and operation of FASAB are governed by a MOU 7 dated May 7, 2003. The MOU addresses board composition and related protocol, board staffing, the standard-setting process, accounting concepts and standards, and certain administrative matters affecting member terms and termination of the agreement. Organization of the Federal Accounting Standards Advisory Board. The membership of FASAB, as set forth by the MOU, is comprised of ten members: one GAO member; one OMB member; one Treasury member; one Congressional Budget Office member; and six members from the general financial community, the accounting and auditing community, and academia. Members of the FASAB are to be selected on the basis of their individual broad professional background; current or prior federal government employment with relevant financial management experience; and expertise in government accounting, financial reporting, and financial management. The chairman of the FASAB is to be appointed from among the nonfederal board members. Members from the GAO, the OMB, the Treasury, and the CBO serve at the discretion of their agency heads. Nonfederal members serve initial terms of up to five years, with possible reappointment of up to an additional five years. The FASAB is supported by the Accounting and Audit Policy Committee (AAPC), which was created by the FASAB to improve financial reporting and issue 5

6

7

The Government Accountability Office’s report, A Proposed Framework for Establishing Federal Government Accounting Standards, was issued in May 1989 and designated GAO/AFMD 89-56. The FASAB’s Rules of Procedure Amended and Restated Through December 2003. This document is accessible through the FASAB’s Web site (www.fasab.gov). Memorandum of Understanding Among the General Accounting Office, the Department of Treasury, and the Office of Management and Budget on Federal Government Accounting Standards and a Federal Accounting Standards Advisory Board, Washington, D.C., May 7, 2003. This document is also accessible through the FASAB’s Web site.

Chapter 2 / The Chief Financial Officers Act of 1990

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technical releases (which are recognized as authoritative) within the guidance provided by the FASAB’s Rules of Procedure. The AAPC membership includes ten voting members: three CFOs, three Inspectors General, one representative from each of the three FASAB principals, and an at-large member. In addition, the AAPC also includes a nonvoting FASAB staffer. The wider membership of the AAPC allows the FASAB to reach a much larger cross section of federal managers and to develop a keen awareness of existing and developing issues in federal financial management. Federal Accounting Standards Advisory Board standards process. As highlighted earlier, the definition, prescription, and enforcement of federal accounting and financial reporting criteria within departments and agencies, both among these entities and government-wide, had been fraught with “turf” problems—for example, jurisdictional problems between the legislative and executive branches, or between federal entities and those required to implement the financial prescriptions. To avoid these and other problems of the past with respect to setting financial standards (and, more importantly, to establish and have government-wide acceptance of a single set of accounting and reporting standards), the mission statement of the FASAB required that it adhere to the following important protocol: • Determine the primary users of federal financial information and their needs. • Recommend accounting standards and principles that improve the usefulness of financial reports based on the needs of users and on the primary characteristics of understandability, relevance, and reliability. • Provide advice to central financial agencies on implementing the standards. • Improve the common understanding of information contained in financial reports. • Recommend standards and principles only when the expected benefits exceed the perceived costs. • Review the effects of current standards and recommend amendments or replace standards when appropriate. • Use a thoughtful, open, neutral, and fair deliberative process and consider the accountability and decision-making needs of users. • Develop rules of procedures designed to permit timely, thorough, and open study of financial accounting and reporting issues and to encourage broad public participation in all phases of the accounting standards-setting process. • Be objective and neutral to ensure, as much as possible, that the information resulting from proposed standards is a faithful representation of the effects of federal government activities. “Objective and neutral” means free of bias, and precluding the FASAB’s placing any particular interest above the interest of the many who rely on the information contained in financial reports. To ensure that this proposal was followed, the GAO, the Treasury, and the OMB outlined six steps that the FASAB must follow in considering federal accounting and reporting standards. The FASAB then proceeded to identify and apply a deliberative and consultative approach comprised of the following processes for each of the standards recommended by the FASAB to the GAO, the Treasury, and the OMB for their approval:

Wiley Federal Accounting Handbook

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1. 2. 3. 4. 5. 6.

Identify accounting issues and agenda decisions. Conduct preliminary deliberations. Prepare initial documents (e.g., issue papers, discussion memoranda). Release documents to the public, hold public hearings, consider comments. Hold further deliberations, publish exposure drafts, consider comments. Obtain general consensus (at least a majority vote) of the FASAB members and submit final documents to the Comptroller General, the Secretary of the Treasury, and the Director of the OMB. The protocol for acceptance of FASAB pronouncements, as set forth in the current MOU, is • Concepts and Standards—These pronouncements are submitted to the Comptroller General, the Director of the OMB, the Secretary of the Treasury, and the Director of CBO for their review. The Comptroller General and the Director of the OMB have 90 days to object to the proposed concept or standard. If no objections are forthcoming after 90 days, the pronouncement is formally issued and incorporated as a FASAB concept or standard. Concepts and standards are announced in The Federal Register. • Interpretation and Technical Releases—These pronouncements are submitted to the Comptroller General, the Director of the OMB, and the Secretary of the Treasury (“the three sponsors”). The FASAB members representing the sponsors have 45 days to object to the pronouncement. If no objections are forthcoming after 45 days, the pronouncement becomes final and is announced in The Federal Register. Generally Accepted Accounting Principles for the Federal Government Prior to the issuance of the Statement on Auditing Standards (SAS) No. 91, Federal GAAP Hierarchy, by the American Institute of Certified Public Account8 ants, the basis of accounting used by federal agencies was not recognized as generally accepted accounting principles (GAAP), but instead was considered an “other comprehensive basis of accounting” (OCBOA). The federal government’s OCBOA consisted of a hierarchy or set of accounting principles governing the accounting and financial reporting of all federal departments and agencies. These principles were published by the OMB in Bulletin 01-09, Form and Content of Agency Financial Statements (“form and content” bulletins were replaced by OMB Circular A-136, Financial Reporting Requirements). Exhibit 2.1 lists the federal accounting principles hierarchy originally established by OMB in its Bulletin 97-01.

8

The American Institute of Certified Public Accountants’ Statement on Auditing Standards (SAS) No. 91, Federal GAAP Hierarchy (AICPA: New York, October 1999).

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Exhibit 2.1: Pre-SAS 91 Sources of Generally Accepted Accounting Principles for the Federal Government Priority Sources for Federal GAAP 1.

Individual standards agreed to by the Director of the OMB, the Comptroller General, and the Secretary of Treasury, and published by the OMB and the GAO

2.

Interpretations related to the OMB statements of federal financial accounting standards, issued by the OMB in accordance with the procedures outlined in OMB Circular A-134, Financial Accounting Principles and Standards

3.

Requirements contained in the OMB’s Bulletin 01-09, Form and Content of Agency Financial Statements in effect for the period covered by the financial statements

4.

Accounting principles published by authoritative standard-setting bodies and other authoritative sources (a) In the absence of other guidance in the first three parts of this hierarchy, and (b) If the use of such accounting principles improves the meaningfulness of the financial statements.

SOURCE: Office of Management and Budget, Publication OMB Bulletin 01-09, Form and Content of Agency Financial Statements, Washington, D.C., September 25, 2001.

With the issuance of SAS No. 91 in April 2000, pronouncements by the FASAB became recognized as GAAP and the federal government’s financial accounting principles were no longer considered a comprehensive basis of accounting other than GAAP. Exhibit 2.2 sets up the new hierarchy of GAAP applicable to federal agencies.

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Exhibit 2.2: Hierarchy of Generally Accepted Accounting Principles Applicable to Federal Entities Category A

Category B

FASAB Statements and Interpretations

FASAB Technical Bulletins

AICPA and FASAB statements specifically made applicable to federal agencies by the FASAB

AICPA guides and SOP not objected to by the FASAB and applicable to federal entities

Category C

Category D

AICPA Practice Bulletins not objected to by the FASAB and applicable to federal entities

FASAB Implementation Guides Common practices widely followed by federal entities

Pronouncements by the AAPC

SOURCE: Office of Management and Budget, Publication OMB Circular A-136, Financial Reporting Requirements, revised August 23, 2005.

Federal Accounting Standards Advisory Board Pronouncements Exhibit 2.3 summarizes all pronouncements issued by the FASAB and the AAPC through March 2006. (The reader is advised to consult the FASAB Web site on a regular basis to stay abreast of developments.) Exhibit 2.3 Documents Issued by the FASAB and the AAPC Documents Resulting from the Federal Accounting Standards Advisory Board and the Accounting and Auditing Policy Committee Processes 1 F F F F

C C C C

Number SFFAC 1 SFFAC 2 SFFAC 3 SFFAC 4

F F F F F

S S S S S

SFFAS 1 SFFAS 2 SFFAS 3 SFFAS 4 SFFAS 5

2

Title Objectives of Federal Financial Reporting Entity and Display Management’s Discussion & Analysis Intended Target Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government Accounting for Selected Assets and Liabilities Accounting for Direct Loans and Loan Guarantees Accounting for Inventory and Related Property Managerial Cost Accounting Concepts & Standards Accounting for Liabilities of the Federal Government

Date Issued Sep. 93 Jun. 95 Apr. 99 Mar. 03

FY to implement N/A N/A N/A N/A

Mar. 93 Aug. 93 Oct. 93 Jul. 95 Dec. 95

1994 1994 1994 1998 1997

Chapter 2 / The Chief Financial Officers Act of 1990

1 F F F F F F F F F F F

2 S S S S S S S S S S S

Number SFFAS 6 SFFAS 7 SFFAS 8 SFFAS 9 SFFAS 10 SFFAS 11 SFFAS 12 SFFAS 13 SFFAS 14 SFFAS 15 SFFAS 16

F F

S S

SFFAS 17 SFFAS 18

F

S

SFFAS 19

F

S

SFFAS 20

F

S

SFFAS 21

F

S

SFFAS 22

F

S

SFFAS 23

F

S

SFFAS 24

F

S

SFFAS 25

F

S

SFFAS 26

F F

S S

SFFAS 27 SFFAS 28

F

S

SFFAS 29

F F F F

S ED ITC PV

SFFAS 30 N/A N/A N/A

F F F F

IFV I I I

F

I

F

I

F

I

F

TB

F

TB

Title Accounting for Property, Plant, & Equipment (PP&E) Accounting for Revenue and Other Financing Sources Supplementary Stewardship Reporting Deferral of Implementation Date for SFFAS 4 Accounting for Internal Use Software Amendments to Accounting for PP&E – Definitions Recognition of Contingent Liabilities from Litigation Deferral of Para 65.2 – Material Rev. – Related Transactions Amendments to Deferred Maintenance Reporting Management’s Discussion & Analysis Amendments to Accounting for PP&E – Multiuse Heritage Assets Accounting for Social Insurance Amendments to Accounting Standards for Direct & Guaranteed Loans Technical Amendments to Accounting Standards for Direct & Guaranteed Loans Elimination of Disclosures Related to Tax Revenue Transactions by the Internal Revenue Service, Customs, and Others Reporting Corrections of Errors and Changes in Accounting Prinicples Change in Certain Requirements for Reconciling Obligations and Net Cost of Operations (amends SFFAS 7) Eliminating the Category National Defense Property, Plant and Equipment Selected Standards for the Consolidated Report of the United States Government Reclassification of Stewardship Responsibilities and Eliminating the Current Services Assessment Presentation of Significant Assumptions for the Statement of Social Insurance: SFFAS 25 Identifying and Reporting Earmarked Funds Deferral of the Effective Date of Reclassification of the Statement of Social Insurance: Amending SFFAS 25 and 26 Heritage Assets and Stewardship Land

Inter-Entity Cost Implementation: Amending SFFAS 4 Accounting for Fiduciary Activities – Reexposure Invitation to Comment on Technical Agenda Options Preliminary Views on Eliminating the Category “Required Supplementary Stewardship Information” N/A Accounting for the Cost of Capital by Federal Entities I-1 Reporting on Trust Funds I-2 Accounting for Treasury Judgment Fund Transactions I-3 Measurement Date for Pension and Retirement Health Care Liabilities I-4 Accounting for Pension Payments in Excess of Pension Expense I-5 Recognition by Recipient Entities of Receivable Nonexchange Revenue I-6 Accounting for Imputed Intradepartmental Costs: An Interpretation of SFFAS 4 TB 2000.1 Purpose and Scope of FASAB Technical Bulletins and Procedures for Issuance TB 2002.1 Assigning to Component Entities Costs and Liabilities That Result from Legal Claims Against the Federal Government

39

Date Issued Nov. 95 May 96 Jun. 96 Oct. 97 Oct. 98 Dec. 98 Feb. 99 Feb. 99 Apr. 99 Apr. 99 Jul. 99

FY to implement 1998 1998 1998 1998 2001 1998 1998 1999 1999 2000 2000

Aug. 99 May 00

2000 2001

Mar. 01

2003

Sep. 01

2001

Oct. 01

2002

Oct. 01

2001

May 03

2003

Mar. 03

2002

Jul. 03

Amended 2006 Amended 2006 2006 2006

Nov. 04 Dec. 04 Jan. 05 Jul. 05

Aug. 05 Jun. 05 Jul. 05 Dec. 00 Jul. 96 Mar. 97 Mar. 97 Aug. 97

Phased – see SFFAS 29 for details 2009 N/A N/A

Dec. 97 Dec. 98 Apr. 03 Jun. 00 Jul. 02

FY 2005

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1 F F F F F A A A A A A

2 TB TB

Number Title TB 2002.2 Disclosures Required by Paragraph 79(g) of SFFAS 7 TB 2003.1 Certain Questions and Answers Related to the Homeland Security Act of 2002 R Report 1 Overview of Federal Financial Accounting Concepts and Standards R Research Accounting for the Natural Resources of the Federal Report Government Cod. Volume 1 FASAB Volume 1, Original Statements TR TR 1 Audit Legal Letter Guidance TR TR 2 Environmental Liabilities Guide TR TR 3 Auditing Estimates for Direct Loan and Loan Guarantee Subsidies under the Federal Credit Reform Act TR TR 4 Reporting on Nonvalued Seized and Forfeited Property TR TR 5 Implementation Guidance on SFFAS 10: Accounting for Internal Use Software TR TR 6 Preparing Estimates for Direct Loan and Loan Guarantee Subsidies under the Federal Reform Credit Act

Date Issued Sep. 02 Jun. 03

FY to implement

Dec. 96 Jun. 00 Mar. 98 Mar. 98 Jan. 04 Jul. 99 May 01 Jan. 04

Key: Column 1: F = FASAB; A = AAPC Column 2: C = Concept; S = Standard; ED = Exposure Draft; IFV = Invitation for Views; I = Interpretation; R = Report; Cod. = Codification; TR = Technical Release; PV = Preliminary Views * “In Printing Process”: Document signed and approved for implementation; available on the Web. Print version not yet available. “Under Hill Review”: Signed recommended capital accounting standard undergoing 45 day Hill review period. When released by Hill, will be available for implementation: Web version will be updated, list will be updated, and print version will be issued. “UR” and “SFFAS Under Review”: “UR” means “Under Review.” Document approved by the FASAB and sent to principals for 90 days. At the end of the 90-day period, the document will be posted to the Web, this list will be updated, and the print version will be issued. SOURCE: Federal Accounting Standards Advisory Board, Doc. #759364v3, August 15, 2005, www.fasab.gov/pdffiles/listingsof doc8152005.pdf, March 23, 2006.

Original pronouncements prior to July 2004 have been compiled in Volume I, Federal Financial Accounting Concepts and Standards. A companion, Volume II, titled A User’s Guide to Federal Financial Accounting Standards, is a codification of the accounting and reporting standards, alphabetized by topics, that integrates illustrative material from OMB and FASAB pronouncements, wherever possible.

3

THE FEDERAL BUDGET

It is through the budget process, from formulation to execution, that Congress raises and appropriates monies to finance the activities of the federal government. The budget, in the form of appropriations or other budget authority given by Congress, permits the annual spending of $1.5 trillion for federal programs. As the budget is executed throughout a fiscal year and afterward, the budget must be accounted for, controlled, managed, and reported on by departments and agencies. An understanding of the federal budget process is essential to comprehending how federal entities acquire funds to spend, spend those funds, manage and account for those funds, and later evaluate and audit those funds. THE FEDERAL BUDGET DEFINED The term “budget” requires some clarification, particularly when used in refer1 ence to the federal government. As the federal government is constitutionally structured, it can spend no money, it can initiate no federal programs—in short, nothing can happen in the federal government—unless Congress authorizes federal activities and appropriates monies. In other words, Congress must (1) give the federal government permission to do things, and (2) must provide the financing to pay for those things. Much attention is given by the news media to the President’s annual State of the Union address and the President’s budget, which is a key aspect of the message. Stated more accurately, this “budget”—the program, initiatives, and estimates of sources of revenues and program spending levels—is the President’s proposal or request to Congress. Unless both houses of Congress agree with the President’s proposal—and seldom is the President’s proposal accepted by Congress without change—there is no budget. When serious disagreements arise between presidential and congressional views over what the federal budget should be, the ramifications can be serious. If Congress refuses to vote on a budget, the government will shut down, as was the case with the government closures of 1996. The actual definition of the term “budget” is the legal mandate of Congress to the executive branch to tax, collect, borrow, obligate, and spend money in a prescribed manner, for specified purposes, and within designated time periods. The federal budget, after approval by both houses of Congress and the President, is at one and the same time

1

For considerably more information, see Office of Management and Budget publication, OMB Circular A-11, Preparation, Submission, and Execution of the Budget, revised 2005. It is a comprehensive explanation of federal budget policy, procedural preparation, and reporting guidance of the federal government’s budgeting and financial process, which currently exceeds 700 pages.

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• A listing of national priorities, as determined by the President and Congress for the next year and, in some cases, several years • Authority for departments and agencies to commence, continue, or cease operating specific government programs and activities • The legal authority for the government to collect revenues and incur and pay financial obligations • The financial plan for managing the government during the next fiscal year and, in some instances, for several ensuing years • The financial authority that dictates acceptable accounting and reporting policies and procedures Congress does not approve the President’s proposed or requested budget as a single amount. Instead, the amount proposed by the President ($2.7 trillion for fiscal year 2006) is broken down and analyzed by several committees and subcommittees of Congress, which eventually approve individual appropriations or provide other forms of budgetary or financing authority. By law, Congress should complete its process and have a total approved budget or financial plan for the entire federal government by October 1 of each year. In recent years, however, many appropriations have not been made final by Congress until well after the new fiscal year has begun. Once approved by Congress and accepted by the President, an appropriation or other budgetary authority is then formally recorded by the Department of the Treasury and closely managed, monitored, accounted for, and reported on by individual federal entities. The execution function of the budget is dispersed through many appropriations to many federal entities. Deviations from the budget constitute statutory violations and must be reported by the offending agency to the President and Congress. For violations considered to be of national import, Congress may even initiate committee hearings and make these budget issues into events of considerable public prominence. Fiscal Years Although referred to as a singular, finite event, budgeting in the federal government is not a once-a-year undertaking. Work on the federal budget never ceases. A department or agency is never clearly addressing only one single budget phase or single fiscal year. At the same time that a current year’s budget (e.g., fiscal year 2006) is being executed and accounted for, budget proposals for fiscal year 2007 are being vigorously defended before congressional committees. Those department and agency executives are simultaneously discussing proposed budgets for several ensuing fiscal years (the out years) with the Office of Management and Budget, while still other financial personnel are accounting and reporting on expired appropriations for the years 2003, 2004, and 2005. The focus of the news media, committees of Congress, the President, and the public is typically on a single fiscal year—the next one. Compiling federal budget estimates requires a multiyear perspective, as does the later accounting for federal appropriations. Each fiscal year runs from October 1 to September 30. Prior to the Congressional Budget and Impoundment Act of 1974, the fiscal year was from July 1 to

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June 30. Eight consecutive fiscal years—and possibly more—must be considered just in structuring the budget estimates for any fiscal period. Exhibit 3.1: Years That Must Be Considered in Estimating the Budget for Any One Fiscal Period Budget indicator CY (current year) BY (budget year) BY + 1 (budget year + 1) BY + 2 (budget year + 2) BY + 3 (budget year + 3) BY + 4 (budget year + 4) PY (past year) PY 1 (past year –1)

Period referred to Fiscal year immediately preceding the budget year Next fiscal year for which estimates are submitted to Congress Fiscal year following the budget year Second fiscal year following the budget year Third fiscal year following the budget year Fourth fiscal year following the budget year Fiscal year immediately preceding the current year (i.e., the last completed fiscal year) Fiscal year immediately preceding the past year

Within a department or agency, no formal accounting entry is made for budget years until Congress votes its approval of a current year appropriation or provides other budget authority for which an accounting can be made. A congressional appropriation is the defining event from an accounting viewpoint—formally recording the appropriation is the first entry of a fiscal year in departments and agencies. By law, the accounting for budget execution must cover the current fiscal year and the two fiscal years after the appropriation expires. Any remaining obligated balances of an appropriation are then transferred to the expired or merged (“M”) accounts in the Treasury, where such balances remain available for several years to meet claims that might be submitted against earlier valid obligations. Budget and accounting terms. Because accounting is integral to budgeting (and vice versa), certain terms are common to both disciplines and have a general applicability in federal financial management. Financial estimates submitted to the OMB by operating departments and agencies refer to subjects such as apportionments, budget authority, contract authority, borrowing authority, outlays, transfers of funds, obligated balances, unexpended balances, unobligated balances, collections, receipts, disbursements, and costs, to name a few. The terms and definitions that follow are among the more common that appear in the OMB’s pronouncements and in the federal accounting lexicon. Apportionment. This is a restriction or division, by the OMB, of congressionally enacted appropriations and other budget authority, into amounts for specific time periods, programs, activities, projects, objects, and any combination of these. Within departments and agencies, apportionments limit the obligations and expenditures that may be made and are further divided by the heads of federal entities into allotments and allowances. Budget authority. This is the formal, legal congressional permission for an executive branch department or agency to enter into obligations that bind the federal government and that will require immediate or future outlays of federal funds. Most budget authority exists in the form of congressional appropriations. In fact, in Congress and among federal financial personnel, the term “budget authority” is often used interchangeably with the term “appropriation.” The exception is when it is used

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in reference to two other forms of budget authority—contract and borrowing authority—which are not synonymous with appropriations. Not all federal organizations will have all types of fiscal authority, and none of these forms of authority is implicit. Congress must explicitly, by law, extend its fiscal budget authority to executive branch organizations. Contract authority. This provides a department or agency with the legal permission to execute contracts and enter into other obligations before Congress passes an appropriation to provide the funds to pay for these liabilities. In these instances, the congressional appropriation provides the cash to pay for these obligations after the liability is incurred. That is, Congress appropriates the funds necessary to settle the contract obligations after the fact, rather than before contract issuance. Borrowing authority. This authority also requires the specific approval of Congress. When permitted, departments and agencies are authorized to first incur obligations by borrowing and then later make payments for these authorized purposes out of the borrowed monies. Congress will also provide the authority to repay the borrowed funds and related interest. Note that few federal organizations have such authority. Outlays. These are the amounts of checks issued, interest accrued on the public debt, or other cash disbursements made, including advances to others, net refunds, and reimbursements (i.e., the net amount of advances made to others after the refunds from the others are subtracted). For budget purposes, the OMB considers the term “outlays” to be interchangeable with “expenditures” and “net disbursements.” Since some outlays are advances of federal monies, outlays are not necessarily considered to be costs of the federal government. Over the course of a fiscal year, federal organizations make numerous and detailed reportings of these outlays. Transfers. These are legal, required authorizations to move all or part of an appropriated fund balance to another budgetary account between federal organizations, different types of funds, and appropriations. Transfers cannot be made at the discretion of a federal agency. The accounting for a transfer of appropriation or other budget authority could be made by various methods. One method is to record an obligation and outlay on the book of the transferring agency and credit the receiving agency; the receiving agency would then reflect an expenditure transfer (and a cash reduction) to cover the service or other support provided. Or, pursuant to congressional appropriation legislation, an agency may be legally required to allocate a portion of its appropriation to another agency. An allocation moves all or part of an appropriation from the allocating agency to another agency; the receiving agency would generally be required to submit its appropriation status reports to the allocating agency, which would make consolidated reports to the OMB, Congress, the Treasury, and others. Every transfer must be formally approved by the OMB and have its origin ultimately in some law or permission of Congress. Obligated balances. These balances represent the unpaid liabilities and (possibly) contingent commitments of a federal entity for which services or goods were ordered but not yet received. Obligations must be supported by legally binding agreements entered into by departments and agencies that will ultimately result in federal outlays of cash. Officially, the unpaid liabilities and legal commitments must

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relate to an appropriation or other budget authority. For budget reporting purposes, obligated balances would include (1) total obligations incurred for which no outlays have been made, plus amounts received but not yet earned; (2) less collectible reimbursements/refunds receivable; (3) less unfilled orders within or external to the government. Unexpended balances. These amounts represent the total of still-outstanding obligations made under an appropriation, plus the balance of an appropriation (or other budgetary authority) not yet obligated, including investments in United States securities, if any. The OMB has determined that the unexpended balance of an appropriation or other budget authority will also include department or agency cash in the Treasury and investments in government securities. Unobligated balance. The unobligated balance of an appropriation is merely the total unexpended appropriation or other budgetary authority, less the total of amounts obligated. This is the same amount that would be determined by deducting the cumulative obligations of an appropriation or other budget authority from the total authority or amount available for obligation. Collection. This is simply money received by a government department or agency. Collections include the collection of income taxes by the Internal Revenue Service, duties by the Bureau of Customs, and miscellaneous receipts by other federal establishments. For most federal establishments, collections are minimal to nonexistent. Receipts. These are collections of cash by the federal government that result from the exercise of its sovereign power to tax, compel payment, or receive gifts of money. Receipts are compared to outlays in the Treasury’s calculation of the cash surplus or cash deficit of the federal government. Disbursements, outlays, or expenditures. These types of outlays are the amounts of checks issued, interest accrued on public debt, other payments made by an agency (including advances to others), and the net of any related refunds and reimbursements. Every disbursement or expenditure of funds results in a formal accounting entry that must be matched to its related appropriation. Cost. Cost, as defined by the OMB, is the price or cash value of resources used to support a program, project, or activity. Within the federal community, references to costs in relation to the federal credit programs must, by the Credit Reform Act, account for and report on the full costs of direct federal loans and loan guarantees. These would include the subsidized discounted interest rates, as well as losses sustained on defaulted loans and loan guarantees. More widely known to nonfederal entities that receive federal financial assistance through grants, contracts, or other forms of assistance is a “family” of OMB cost circulars, including • OMB Circular A-21—Cost principles applicable to educational institutions for determining allowable, unallowable, and indirect costs applicable to federal financial assistance • OMB Circular A-87—Cost principles applicable to state, local, and Indian tribal governments for determining allowable, unallowable, and indirect costs applicable to federal financial assistance

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• OMB Circular A-122—Cost principles applicable to other nonprofit organizations for determining allowable, unallowable, and indirect costs applicable to federal financial assistance The preceding terminology is consistently applied within a department or agency and its communications with both the OMB and government-wide in federal accounting and financial reporting. It is also used in the preparation of federal budget estimates, the phases of which are discussed in the next section. PHASES OF THE BUDGET CYCLE The federal budget cycle might be better viewed as a never-ending process, rather than as a discrete cycle, which implies an event with a beginning and an end. The federal budget process consists of several concurrent phases, not always clearly distinguishable, but always present: (1) the budget formulation phase; (2) the congressional action phase; (3) the budget execution phase; and (4) the review and audit phase. Phase 1: Budget Formulation For most agencies, the budget formulation phase begins 15 to 18 months (or more) before the start of the fiscal year to which the budget will apply. In addition to being the financial plan of the government, the proposed budget is, just as importantly, the culmination of the political process and financial planning. As this phase nears conclusion, the executive branch prepares to make its oral and written submission to Congress and the general citizenry. Historically, this phase has concluded with the President’s State of the Union message and the formal transmission of the proposed or requested budget to Congress shortly after Congress convenes in the January before the start of the next fiscal year. Confidentiality of information. Budget information compiled or considered by the executive branch has always been viewed as the privileged information of the executive branch of government. By the Budget and Accounting Act of 1921, the President is required to transmit an annual budget to Congress. This same law prohibits an agency’s submission to Congress in any other manner, unless at the formal request of either house. Executive branch communications that lead to the preparation of the executive branch request are not to be disclosed by departments and agencies or by those who prepared the budget request. Maintaining the confidential nature of agency submissions, requests, recommendations, supporting materials, and similar communication is important because these documents are an integral part of the decision-making process by which the President resolves budget issues and develops recommendations to Congress. Presidential budget planning and preparation is not final until the President transmits that budget request to Congress. Until released by the President, information relating to the proposed budget is considered to be executive-privileged. Office of Management and Budget and Congressional Budget Office roles. In the budget formulation phase, views are aired and information is exchanged among departments, agencies, and the OMB beginning with the submission of initial budget requests. After the initial passbacks of early OMB budget decisions, depart-

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ments and agencies provide revised budget data consistent with presidential guidelines. These budget data are captured in a computer system used to collect, process, and ultimately compile final budget requests that will then be transmitted by the President to Congress. The Congressional Budget Office, a legislative branch agency responsible to Congress, actually has no role in preparing the proposed budget and issues no regulations or guidance concerning the budget process to any executive branch organization. Pursuant to the Budget Enforcement Act of 1990, the CBO and the OMB must cooperatively calculate federal surplus and deficit estimates and measure compliance with congressional budget targets as the committees of Congress proceed through the budget deliberation process. These calculations must use the “scorekeeping” conventions of House and Senate Budget Committees. Specific rules exist for the “scoring” (i.e., markups) of direct spending programs, such as transfers of budget authority balances; delaying obligations; purchases; leases; lease-purchases; and write-offs of uncashed federal checks and unredeemed food stamps, to mention a few of the budget activities monitored in this phase. This CBO monitoring is necessary to assess compliance with the congressional budget targets under both the Budget Enforcement Act of 1990 and a budget summit agreement between the executive and legislative branches. It is the OMB in the Executive Office of the President, however, that has control and monitoring authority for preparing and executing federal budgets. Under Reorganization Plan No. 2 of 1970, the OMB was made responsible for providing budget guidance to all federal departments and agencies, compiling budget information, and assisting the President with the presentation and defense of proposed budget information before Congress. Exhibit 3.2 illustrates the budget submission and executive branch review process followed by federal entities. The OMB annually issues guidance relating to the preparation and submission of budget estimates to executive branch departments and agencies. Beginning in 1980, executive branch organizations implemented, at the OMB’s direction, multiyear budget planning systems that considerably expanded planning beyond just a single budget year. OMB guidance is both government-wide and specific to individual departments and agencies. Government-wide guidance relates to such details as formats, tables, schedules, contents, definitions, and codes that must be used in submitting the department and agency final budget estimates to the OMB. The guidance for individual departments and agencies generally relates to subjects such as ceilings and limitations (dollars, personnel, other resources, geographic operations, program levels, etc.), restrictions, new or revised policy direction, and so forth. The issuance of this guidance is followed by innumerable meetings between the OMB and the management of executive branch departments and agencies. On occasion, heads of federal organizations who disagree with the impositions of the OMB make direct appeals to the President. Since it is unlikely that the OMB’s guidance is at odds with presidential intent, few appeals are successful.

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Exhibit 3.2: Overview of the Budget Process Executive Review of the Budget

Budget Submission

Production of the Budget Documents

Budget Analysis and OMB Review Initial Submission OMB/GPO Automated Printing Process Budget System Database Computer Materials

Print Materials

Detailed Budget Estimates: Appropriations Language Narrative Statements Other Text

Budget Documents

Budget Appendix Data PhotoComposition and Data Generation

Budget Appendix

Review of Other Budget and Management Information Additional Information

SOURCE: Office of Management and Budget, Publication OMB Circular A-11, Preparation, Submission, and Execution of the Budget, revised November 2, 2005.

Specificity of budget estimates. Budget estimates and supporting data are compiled and submitted to the OMB by each federal entity for the specific appropriation and budget authority being requested from Congress. For example, departments and agencies must organize and compile these data by separate budget request submissions pursuant to the federal government’s fund groups: General and special fund appropriations authority. These budget requests seek congressional approval for funds to support the salaries, administrative expenses, program operations, and other costs of the individual departments and agencies. • General fund receipts are those not earmarked by law for a specific purpose (e.g., individual income tax receipts that can be used to meet general fund obligations and outlays). • Special fund receipts are earmarked collections to be spent only for specifically identified or permitted purposes.

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Revolving fund operations. These budget requests relate to federal business organizations that do business with other federal entities (e.g., the federal building fund, a businesslike operation mainly within the federal government) and the public (e.g., the Postal Service) on a reimbursable basis. Revolving funds permit the financing of a continual cycle of business-type activities. These activities provide services, then bill and collect for the cost of services rendered. Congress provides an initial capital fund corpus and then monitors closely any surplus or deficit from the fund’s operations. Trust funds. For the federal government, these typically are not fiduciary- or custodial-type accounts. Federal trust funds, for receipts and expenditures, are often merely accounts designated by Congress to record earmarked collections and specific expenditures. (Notable trust funds include Social Security, Medicare, and the Highway Trust Fund.) Management funds. These funds relate to monies advanced to or paid by two or more agencies to another agency to finance congressionally authorized intragovernmental services. The congressional authorization is often specific as to time availability, purpose, amount, and project accomplishment. Additionally, there are other congressionally authorized organizations that are not subject to the annual budget process managed by the OMB. These groups, which have been excluded from the budget process, have at times been collectively referred to as government-sponsored enterprises and government-chartered organizations. In earlier years, these organizations were also referred to as government corporations or wholly owned government corporations. Support for department and agency budget proposals. Department and agency budget requests are the output of a comprehensive financial system that integrates analysis, planning, evaluation, budgeting, accounting, and reporting. Budget estimates ultimately sent to Congress reflect not only the judgment of departmental heads and federal executive management, but also the OMB and presidential views on the scope, content, and quality of federal programs and activities. Every entity’s budget, however, must ultimately only reflect the policies of the President, but those policies must consider more than just the cost of direct federal operations. For example, the budget request of every entity must consider the entity’s roles and support responsibilities and its costs of federally assisted programs with state and local governments and even foreign governments. These budget requests may be met by a variety of funding formats. For example, Congress could provide financing for a federal activity through direct appropriation, contract authority, loans, loan guarantees, grants, contracts, formula entitlement-type financing, and so forth. Budget preparation requires that federal entities develop considerable demographic and economic data, which, depending on the nature of the program, could entail the collection of information for over 500 congressional districts; 50 states; 3,000 counties; 75,000 cities, municipalities, towns, townships, and other special units of government; and hundreds of thousands of nonprofit, academic, and corporate organizations. All of this information must be compiled in a manner that permits its examination and evaluation by the OMB and Congress in an expeditious manner—and this must be done for each fiscal year.

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Nature of department budget requests. The OMB’s budget preparation guidance requires that departments and agencies segregate budget requests by the nature of the estimate: regular, supplemental, and multiyear funding requests. The regular annual budget estimates must reflect all financial requirements anticipated at the time of budget submission, using several categories: • Continuing activities, including those for which additional authorizing legislation is required for the budget year • Currently authorized activities that will be proposed activities for the budget year • Other specific financial liabilities imposed by law No supplemental estimates or upward adjustments of the past year’s funding levels can be submitted by entities unless these adjustments are for circumstances that were unforeseen or were due to the subsequent action of Congress. If it appears likely that proposals for new legislation may require a further budget request or result in a change in revenues or outlays, a tentative forecast of the estimate must be set forth separately in the entity’s budget submission. These proposals must be consistent with items appearing in the entity’s legislative program. Where amounts for supplemental appropriations are required in the current year to meet unforeseen program contingencies, these requests for funds must be separately identified in the entity’s budget submission. Each of these supplemental requests must be forwarded to Congress. The departmental budget package must also include information for the ensuing years following the budget year (in OMB language, these are the out years, BY + 1 through BY + 9) to be consistent with presidential policy estimates and baseline estimates. These estimates permit the President and others to evaluate the long-term consequences of proposed program and tax initiatives. Baseline estimates provide a standard against which alternatives, including presidential policy estimates, can be assessed. Baseline estimates require consideration of changes in spending trends, economic assumptions, and other actions and events occurring in the economy. Prohibition of partial budgeting. Entities are prohibited, by law and by OMB regulations, from deliberately minimizing their budget requests by submitting budget estimates for partial or less-than-full funding of anticipated program initiatives. For example, requests for major procurement programs must provide, by the years involved, for the entire cost (with certain programs excepted, such as reclamation, rivers and harbors, and flood control projects). Another exception to this partial funding prohibition is that the OMB requires departmental and agency budget requests to include the effect of inflation. The budget estimates will not [OMB emphasis in its Circular No. A-11] necessarily include an allowance for the full rate of anticipated inflation. For discretionary programs, approved departmental totals may include an allowance for less than the full rate of anticipated inflation or even no allowance for inflation, as determined by the OMB. Often these deliberate underestimates for inflation are extensively and heatedly discussed in Congress and become the subject of much coverage by the financial news media.

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Approved agency totals may reflect the full inflation rate where such an allowance is required by law and where a decision is made by the OMB not to propose an inflation rate less than required. Phase 2: Congressional Action Congress can approve, change, disapprove, or ignore the President’s proposed budget. The congressional phase is marked by two sets of hearings: (1) hearings for authorization of a new or continuation of a federal program or activity; and (2) hearings for funding or approval of an appropriation for or financing of the program or activity. The congressional phase is often comprised of several types of activities involving many interested parties and, at times, representatives of foreign countries. For example • The President may (and the OMB and the heads of departments and agencies will) appear before committees of Congress to defend, explain, and justify the need for the proposed programs and the amount of money requested. • Congress holds hearings attended by citizens, state and local governments, companies, nonprofit organizations, and even foreign governments and the general public to support or oppose particular programs or levels of requested financing. • Special reviews and studies are made and submitted to Congress; Congress itself will authorize independent reviews to provide data that will be useful in reaching conclusions on various budget requests. The Congressional Budget Office is a valuable contributor to these efforts. • Executive sessions and private meetings are held among members and committees of Congress and persons and organizations involved or interested in particular programs. • Continual release of budget information is made to the media relating to suggested alternatives, program options, possible tax consequences, and the effect on projected debt ceilings of various programs, for the purpose of generating interest in support or opposition to competing positions on these programs. • Congress, through its committees, will ultimately develop a legislated financial plan for the federal government resulting from the many authorization and appropriation bills that it proposed, debated, changed, and then voted on. Once congressional consensus is reached, the various appropriation bills are submitted to the President for review and subsequent approval or veto. Note that submissions are not made to the President as a single package, but rather in the form of several appropriation laws. In other words, Congress forwards to the President a host of legislated financing actions that must be aggregated to reach the total spending program for the federal government. By enactment of the Congressional Budget and Impoundment Act of 1974, Congress formalized proposed activities that it would perform and a tentative timetable for completion of these activities for each year’s budget deliberations. While Congress has not always complied with its own plans, that congressional process is highlighted in Exhibit 3.3.

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Exhibit 3.3: Congressional Budget Phase/Timetable On or before

The following activities must take place

November 10 January—15 days after Congress meets March 15

The President must submit a current services budget. The President must submit a proposed budget for the next fiscal year, which begins October 1. Committees and joint committees must submit reports to the Committees on the Budget. The Congressional Budget Office (CBO) must submit report to Committees on the Budget. These budget committees must report on the first concurrent resolution on the budgets of their Houses. All committees report bills and resolutions authorizing new budget authority. Congress must complete action on the first concurrent resolution of the budget. Congress must complete action on bills and resolutions providing new budget labor authority and new spending authority. Congress must complete action on the second required concurrent resolution of the budget. Congress must complete action on a reconciliation bill or resolution, or both, implementing the second concurrent resolution. New fiscal year begins.

April 1 April 15 May 15 May 15 7th day after that September 15 September 25 October 1

The congressional approval of a program, with permission to obligate the federal government and spend federal monies, is referred to as an appropriation; that is, the legal or budget authority that makes funds available to individual departments and agencies for spending. The appropriation may be for a single year or several years. In some cases the congressional budget authority may be permanent, in which case funds become annually available to the department without further congressional action. On occasion, Congress will not complete action on all budget requests before the beginning of a fiscal year. In such circumstances, Congress may enact a continuing resolution, which provides temporary financing authority for a department to continue operations, usually—but not always—until an appropriation is approved. In unusual circumstances, the continuing resolution might be the entity’s financing basis for an entire fiscal year. While under a continuing resolution, the federal entity must conform to certain fiscal restraints, including • Generally, the federal entity may not undertake any new initiatives. • The federal entity must maintain its rate of expenditure at the same level as that of the preceding program year. • If one house of Congress has acted on the entity’s budget request, then the federal entity may not exceed the expenditure rate of that action or the expenditure rate of the last year’s appropriation, whichever is less. Phase 3: Budget Execution Once passed by Congress and approved by the President, the appropriations and other approved budget authority become the financial operating plan for the federal government for the next fiscal year and ensuing four fiscal years. Thus, the “ap-

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proved budget” initiates a number of events, necessitating a number of controls, affecting each federal department and agency. The role of the Office of Management and Budget. At the beginning of each fiscal year, the OMB provides specific spending guidance to each federal entity in the form of apportionments (i.e., restrictions) for each congressional appropriation or other budget authority that governs the rate, purpose or activity, amount, and time period of spending permitted by each federal entity. By October 1 of each fiscal year, what had been the budget year to that point is now transformed into the current year for purposes of execution, monitoring, and reporting. From the OMB’s calendar, the execution phase of the budget process entails • July—The OMB issues a revised, updated Circular A-11 to all federal entities, giving detailed instructions for department and agency submission of budget data and financial reportings. • October 1—The current fiscal year begins. The completed budget cycle was focused on this year. Departments and agencies, pursuant to OMB guidance, will commence committing, obligating, and spending the enacted appropriations and budget authority. • October through November—The OMB conducts its fall review, which entails reviews of department and agency budget proposals in light of existing and often changing presidential priorities, new budget restraints, and actual budget execution and program performance by operating departments and agencies. • November through December—The OMB compiles proposed budget priorities and policies, and provides “passbacks” of information and administration positions to each department and agency on their budget requests concerning the next fiscal year. Throughout this period, the OMB is concerned with monitoring the execution of departmental and agency funding provided by Congress, while concurrently calculating the need for new or additional appropriation and budget authority that will be incorporated into the President’s budget request and highlighted in the State of the Union address in late January. • Monthly, quarterly, and year-end—Often more frequently when the OMB has a concern, departments and agencies provide regular and special detailed financial reports to the OMB, the Treasury, and committees of Congress on apportionment status, rates of obligations, actual expenditures/disbursements, and available appropriation balances (to cite a few of the reported data) on departmental and agency progress in executing the promised financial plan and programs. Controlling and monitoring congressional appropriations. From the first Congress, control over appropriations has been a high priority. All early congresses were concerned that agencies not overspend appropriated budgets. The first general appropriation of the United States, in 1789, restricted obligation of the appropriation to the fiscal year for which the appropriation was made. This restriction, unless otherwise stipulated by Congress, has applied to all congressional appropriations since that time.

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However, for many years after the adoption of the Constitution, even though that restriction was in place, federal agencies ignored the spending limitations levied by Congress. Obligations to spend money were often incurred by agencies in excess— or in advance—of congressionally approved appropriations. Further, appropriated funds were commingled or used for purposes far different from those for which Congress had appropriated the money. Agencies would sometimes spend the entire appropriation in the first few months of a new fiscal year, then present Congress with a listing of “coercive deficiencies” that had to be paid. At these times, Congress had essentially lost control and individual federal entities were financing operations and obligating the federal government in what was technically an illegal manner (i.e., not approved in law by Congress). The OMB apportionments of an appropriation may be by specific time period (generally quarterly) or by activities, projects, objects, or a combination thereof. Reapportionments are made when earlier apportionments are no longer appropriate or because of a change in amounts available for obligation or the occurrence of unforeseen events. Amounts, although appropriated by Congress, may be deferred for expenditure through the apportionment process. If this is done, the deferred amounts are temporarily not available to the federal establishment for obligations until released by the OMB. Should an agency either obligate or expend funds in excess of the apportionment limit set by the OMB, it is in violation of the Anti-Deficiency Act of 1870, for which a special reporting must be made to Congress and the President naming the individual federal executives and circumstances involved in the violation. Budget and accounting reports. The OMB holds the reins that guide the distribution and use of appropriated funds, through a process called apportionment. An apportionment is a distribution (limitation, restriction, or ceiling) made by the OMB of the amounts available to a federal agency in a congressional appropriation or other budgetary authority, into specific amounts that are available for obligations by time period (i.e., generally quarters of the fiscal year) or specific activities, projects, object classes of expenditures, or some combination of these groupings. The objectives of the federal apportionment process are to (1) prevent obligations of an account (i.e., appropriation or other budget authority) in a manner that would require deficiency or supplemental appropriations, and (2) achieve the most effective and economical use of amounts made available by Congress. The OMB monitors entity performance, budget execution, and compliance with appropriation terms by requiring adherence to the apportionment process prior to the time an entity incurs obligations or makes expenditures. No department or agency may enter into any obligation or disburse congressionally appropriated funds until such funds have been previously and formally apportioned by the OMB. Within the entity. By August 21 of each fiscal year, or within ten calendar days after approval of an appropriation, whichever is later, departments and agencies must submit their apportionment requests to the OMB for each budget account. Once approved by the OMB, federal entities can incur obligations and make outlays to operate funded programs, projects, and activities. These financial transactions typically involve the issuance of contracts, grants, other forms of financial assis-

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tance, hiring or compensating personnel, making of capital expenditures, and so forth. Departments and agencies will obligate and disburse funds throughout the period of appropriation or budget authority availability. Within departments and agencies, several operational activities will occur, although not all are performed by every federal entity: • Taxes must be levied, duties imposed, and fees charged, and all must be collected to provide the funds necessary to support the approved expenditures budgets. • Obligations are incurred, expenditures made, and liabilities paid. • Receipts and expenditures are closely monitored by departments and agencies, the OMB, congressional committees, the CBO, and even parties external to the government, to ensure compliance with the appropriation budget legislation. Periodic reports are made to the President, Congress, and the public. • At each department and agency, a system of accounting and controls is followed for apportioning appropriated funds over the year to ensure that a deficiency does not result and to achieve legislated goals and objectives. • The specific appropriation or other budget authority approved by Congress becomes the budget (this may be in the form of one or more appropriations) in the aggregate and is the operating plan for federal entities. The activities financed by these appropriations are closely monitored, controlled, and tracked to ensure compliance with the intent of Congress. Accounting for the execution of a federal entity’s budget will then span several fiscal years. • The initial accounting entry to formally record the appropriation(s) is prepared by each responsible federal entity after the Treasury and the OMB establish an account number for that appropriation or other budget authority at the outset of the fiscal year. • A detailed accounting is maintained by all federal entities responsible for an appropriation throughout the active years of an appropriation or budget authority. • Finally, an accounting and reporting by departments and agencies is required for all appropriations for two fiscal years after the fiscal year in which the appropriation expired. One law in particular has a direct effect on the above activities: Section 3679 of the Revised Statutes, which mandates that the head of each agency, subject to approval by the OMB, prescribe a system for the administrative control of funds. The system of controls must be consistent with any budgeting requirements or prescribed accounting procedures and must be designed, first of all, to restrict obligations and expenditures against each appropriation or fund to the amount of OMB apportionments or reapportionments. Second, it must enable the agency head to fix responsibility for obligation or expenditure in excess of an OMB apportionment or reapportionment. However, an agency’s system would be deemed deficient if it merely performed these few accounting and control checks. Compliance with the OMB requirements is but one of many external (to an entity) fiscal and financial criteria that a federal system of accounting and controls must achieve.

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The “M” accounts. Another accounting and reporting phase follows those years in which the appropriation was active, or “unexpired.” In all instances where outstanding obligated amounts from expired appropriations remain, these amounts or balances must be transferred to the merged, or “M” accounts of the Treasury. In recent years, Congress has limited the spending viability of “M” accounts at the Treasury to five years, though historically, balances of expired appropriations that related to valid outstanding obligations at the time of expiration would remain available in the “M” accounts forever for payment of these obligations. Thus, the period from the initial call for a budget by the OMB to departments and agencies through the “M” accounts phase covers more than a decade. For example, planning, submission, and negotiations with Congress could encompass a twoto three-year period in advance of a fiscal year. Then the entity must maintain open accounts and make regular reports for the appropriations for a minimum of three years (the current year, plus two additional years after the appropriation expires). Finally, the “M” accounts phase will entail another half-decade. This span is illustrated in Exhibit 3.4. Exhibit 3.4: Illustration of Appropriation Account Closing for Fixed-Period Appropriations CURRENT PERIOD (1 year or multiple years) EXPIRED PERIOD (5 years) CLOSED PERIOD (Indefinitely)

Inception of appropriation account

Balances maintained on records of agencies for each appropriation account: 1. Total budget authority, 2. Unobligated balance, and 3. Obligated balance (unliquidated obligations).

End-of-period appriopriation accout available for new obligations

Agencies are to maintain records to account for the undisbursed balance for each appropriation account at the time of closing. This is represented by the 1. 2.

3.

Canceled unobligated amount Canceled amount of unliquidated obligations (undelivered orders) Amount of accounts payable when the account was closed

End-of-period appropriation account available for obligation adjustments or disbursements

Time periods in years

Apportionment/reapportionment requests. As described earlier, the apportionment process is an internal control over the rate or purpose for which appropriated funds are used. There is a government-wide standard form used by the OMB to formally apportion each budgetary authority in the federal government. Under this

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process, an apportionment request must be made by an agency before any appropriated funds are obligated or disbursed by a federal entity. This form provides for the apportionment of appropriations and budgetary authority by two categories: • Category A: By time period, such as quarters of the fiscal year • Category B: By specific activity or project The OMB requires the receipt of this apportionment and reapportionment schedule from each federal establishment prior to permitting or granting authority to obligate appropriation funds. Requests for apportionment and reapportionment are generally supported by a proposed obligation plan by time period, project, or activity. Budget Execution Report. After the apportionment/reapportionment request, departments and agencies must (1) make a historical reporting of how, in fact, the apportionments were used; (2) provide a periodic status report for each appropriation or other budgetary authority; and (3) show the relationship of obligations to outlays and expenditures. This historical accounting for the budget execution is made monthly, quarterly, and at year-end by all federal establishments in a report on budget execution by each appropriation or budget authority. In this context, “expenditures” used in reference to checks issued or cash disbursements. Phase 4: Review and Audit Federal departments and agencies (by many laws, presidential directives, and OMB and Treasury regulations) are required to establish systems of controls and accounting to ensure that all obligations and disbursements are consistent with the authorization and appropriation laws of Congress. These federal entities must also establish programs for reviews, evaluations, and audits. In all departments and agencies, and in several offices of the federal government, the conduct of audits and evaluations is the responsibility of the Offices of Inspectors General. Additionally, the Government Accountability Office and the OMB will regularly make reviews, evaluations, and studies of the manner in which executive branch organizations are complying with the intent of Congress. Federal agencies will also contract to professional consulting and certified public accounting firms for expert assistance during this phase. The Sarbanes-Oxley Act of 2002, which imposed specific responsibilities relative to internal controls on the management of publicly listed companies, has also impacted the federal government. By its Circular A-123, Management’s Responsibility for Internal Control, effective as of fiscal year 2006, the OMB imposed parallel control responsibilities on the management of federal departments and agencies with respect to entity internal controls. A CHANGED BUDGET PROCESS The Congressional Budget and Impoundment Control Act of 1974 significantly altered aspects of financial management in the federal government. Impoundment under the Act was directed at actions by the President to reduce the amounts provided by Congress for program operations by failing to spend at the levels autho-

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rized by Congress. Congress considered presidential impoundments to be improper and in conflict with its constitutional powers to raise and spend federal monies. Additionally, the Congressional Budget and Impoundment Control Act imposed a different timing for the congressional phase of the budget process and imposed several actions or procedural conditions on Congress itself. Congressional Budget Process The Congressional Budget and Impoundment Control Act introduced several new terms and definitions that subsequently became part of the governmental budget terminology, but are also indicative of some rather important legislative activity. These terms are discussed next. Current service budget. Under the 1974 Act, the current services budget to be submitted by the President on or before November 10 is a summary of estimated outlays and proposed budget authority that would be included in the budget to be submitted for the ensuing fiscal year if all programs and activities were to be carried into the ensuing year at the same level as the fiscal year in progress and without policy changes. The estimated outlays and requested budget authority submitted pursuant to the 1974 act must be shown by function and subfunction. Accompanying these estimates are economic and programmatic assumptions underlying the estimated outlays and proposed budget authority, such as the rate of inflation, the rate of real economic growth, the unemployment rate, program case loads, and pay and benefit increases. Concurrent resolution. A concurrent resolution of Congress on the budget, according to the 1974 Act, is a resolution setting forth the congressional budget for the government for the fiscal year or reaffirming or revising the congressional budget. Committees on the budget. Committees on the budget of each house of Congress were defined as committees having the duty to • Report the matters required to be reported under the Congressional Budget and Impoundment Control Act • Make continuing studies of the effect on budget outlays of relevant existing and proposed legislation, and report the results of such studies to the House or Senate, as appropriate • Request and evaluate continuing studies of tax expenditures • Devise methods of coordinating tax expenditures, policies, and programs with direct budget outlays • Report the results of such studies to the House and Senate, as appropriate • Review, on a continuing basis, the CBO’s conduct in its functions and duties Congressional Budget Office. By the 1974 Act, a Congressional Budget Office was established to assist committees on the budget of both houses in discharging matters within their jurisdiction, including development of information with respect to the budget, appropriation bills, and other bills authorizing or providing budget authority or tax expenditures; information with respect to revenues, receipts, esti-

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mated future revenues and receipts, and changing revenue conditions; and such related information as these and other committees may request. First concurrent resolution. The first concurrent resolution was to be completed by May 15 of each year for the fiscal year beginning on October 1, to include • The appropriate level of total budget outlay and total new budget authority • An estimate of budget outlays and an appropriate level of new budget authority for each major functional category, for contingencies, and for undistributed intragovernmental transactions based on allocation of the appropriate level of total budget outlays and of total new budget authority • The amount, if any, of surplus or deficit in the budget that is appropriate in light of economic conditions and all other relevant factors • The recommended level of federal revenues and the amount, if any, by which the aggregate level of federal revenues should be increased or decreased by bills and resolutions to be reported by the committees • The appropriate level of public debt and the amount, if any, by which the statutory limit on the public debt should be increased or decreased by bills and resolutions to be reported by the appropriate committees • Such other matters relating to the budget as may be appropriate to carry out the purposes of the 1974 Act Should it be necessary, the 1974 act provided for a second required concurrent resolution to be completed by Congress on or before September 15 that will • Specify the total amount by which the new budget authority for the new fiscal year, the budget authority provided for prior fiscal years, and new spending authority contained in bills and other resolutions within the jurisdiction of the committee is to be changed, and direct that committee to determine and recommend changes to accomplish a change in the total amount • Specify the total amount by which revenues are to be changed, and direct that the committees having jurisdiction determine and recommend changes in the revenue laws, bills, and resolutions to accomplish a change of the total amount • Specify the amount by which the statutory limit on the public debt is to be changed and direct the committees having jurisdiction to recommend such change These Committees on the Budget were intended to be the senior financial committees; however, in the early years, that did not always happen in practice. The more senior and powerful appropriation committees still find it difficult to relinquish control over department and agency funds. BUDGETING CONCEPTS Over the years, the federal government has utilized various concepts in attempts to achieve more precision in estimating required resources, in monitoring the expenditure rate of budgeted funds, and in determining the cumulative costs of agency programs. These efforts were dictated, in part, by concerns over the efficiency and effectiveness with which budgeted funds were being utilized. Equally as important,

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though, is the fact that the budget is also a statutory directive, violations of which must be reported to the President and Congress. To varying degrees, government entities have applied at least three budgeting or planning concepts to the management of appropriated funds. Still in use by agencies, but more popular in the 1960s, is the Planning, Programming, and Budgeting System (PPBS). At times, some federal organizations had claimed merit in attempting to apply zero-based budgeting (ZBB) and management by objectives (MBO) to federal activities; however, today, the systems of few agencies support ZBB or MBO. Departments and agencies were formally relieved of their responsibilities for compiling budget requests in the ZBB format in 1981 when the OMB rescinded Circular A-115, ending the use of ZBB in the federal government. Planning, Programming, and Budgeting System Implemented government-wide by presidential directive in the 1960s, PPBS was intended to be the integrated process by which federal organizations made decisions concerning the types, nature, and funding of agency programs and supporting activities. Where PPBS was successfully integrated into the decision-making process of a department or agency, the concept provided a sound basis for determining, monitoring, and accounting for federal programs and activities. Properly implemented information systems could provide uniform financial and nonfinancial reporting for the planning, programming, budgeting, and accounting phases of federal financial management. There were several phases to PPBS, including • Planning—Studying agency objectives, constructing alternative approaches to achieving objectives, and identifying and assessing contingencies • Programming—The structure of activities consistent with an agency’s objectives and expected outputs in relation to the cost of resources needed to attain the programmed objectives and outputs • Budgeting—Requesting funds of the President and Congress in support of the programmed activities; once approved, the budget becomes the operating plan for the agency • Execution—Recently, the Department of Defense formalized a fourth phase, Execution; thus, one will now encounter the term “PPBES.” The PPBES strategy included several processes or stages. Financial managers were concurrently involved in different phases for different fiscal years. For example, in the same fiscal period, an agency might be involved with planning objectives for three years into the future; programming activities might be under way for the upcoming budget year; and simultaneously, the operating plan for the current year is being executed. For any one fiscal year, however, a series of sequential activities is required. In addition to consisting of several processes, the PPBS concept required the participation and active involvement of several federal entities and parties—the individual departments and agencies, the President, the OMB, and Congress. All had a role in generating supporting data for the process, reviewing PPBS products, or ap-

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proving or revising outputs of the process. Exhibit 3.5 highlights the several concurrent activities and responsibilities of these organizations. In the 1980s, federal agencies were relieved of the responsibility to compile, defend, execute, account for, and report on their financial requests and activities under the PPBS concept. Some federal entities took advantage of this option, but others retained features of PPBS under different descriptions and titles. Forty years later, PPBS continues to be the principal financial management and control process of the Department of Defense, having been long ago accepted and integrated as the method by which major programs, some valued in the tens of billions of dollars, and spanning years of development and operation, are managed.

Report

• Ceilings • Targets • Funds • Timing

• Ceilings • Targets • Funds

• Priorities • Direction • Guidance • Funds

Report

Operating plans

PGM A

PGM C PGM B

Program budget

PGM A

PGM C PGM B

Agency budget

Obligate funds

Allocate funds

Apportion funds

Report

Report

Program alternatives

PGM A

PGM C PGM B

Review, refine

Program estimates

Governmentwide budget

Public laws

• Approve • Veto

EXECUTION PHASE

EVALUATION, INSPECTION, AND AUDIT

• Action schedules • Estimated funds • Staff resources

Revise, change

Hearings

• Authorization • Appropriation

BUDGETING PROCESS

Disburse, account, report

Review, comment, change

Plans

PGM A

PGM C PGM B

Goals and objectives

Budget call

PROGRAMMING PROCESS

ADMINISTRATIVE AND FINANCE FUNCTIONS

AGENCY PROGRAM DIRECTORS AND SUPPORT OFFICES HEADS

• Activity level • Cost • Time phasing

• Requirement • Time phasing

AGENCY HEAD

AGENCY PLANNING AND BUDGET OFFICE

• Targets • Ceilings • Guidance

OFFICE OF MANAGEMENT AND BUDGET

PRESIDENT

CONGRESS

PLANNING PROCESS

Exhibit 3.5: Responsibilities for Planning, Programming, Budgeting and Execution in Federal Government

BUDGETING CONCEPTS OF THE FEDERAL GOVERNMENT

4

ACCOUNTING EVENTS OF THE FEDERAL GOVERNMENT

Congressional concern with the appropriation and expenditure of federal monies to pay debts and provide for the common defense and general welfare of the country has its roots in the Constitution of the United States. Congress jealously guards its constitutional mandate that “no money shall be drawn from the Treasury, but in Consequence of Appropriations made by law.” Only Congress can appropriate money for spending. This same article of the Constitution goes on to describe a system of reporting that has remained intact to the present day—the requirement that “…a regular statement and account of receipts and expenditures of all public money shall be published from time to time.” This accounting has been a continuing responsibility of the Department of the Treasury since 1789. Abuses and liberties by executive branch agencies and presidents over the years have led Congress to reinforce its controls over the appropriation and expenditure of federal monies. At other times, though, Congress has neglected to enforce the laws it has passed to improve accounting and financial management in the federal government. Today, laws exist that describe and impose civil and criminal sanctions on any person violating limitations, ceilings, or other restrictions of an appropriation of Congress. Some prohibitions include spending funds for unauthorized purposes and committing or expending sums beyond amounts appropriated or approved by Congress. Other laws impose mandates for internal and external systems of accounts and controls on executive branch departments and agencies, and require the preparation of financial statements and the conduct of independent audits of those financial statements. One law even requires that the federal government’s Standard General Ledger be implemented “at the transaction level” of accounting. In federal accounting, the term “fund” refers to a congressional appropriation of money or other budget authority directing an agency to incur obligations and make expenditures on behalf of the federal government. Fund accounting or, more accurately, appropriation accounting is a principal basis of accounting within the federal government. Federal organizations must maintain an integrated system of accounts and controls that have been prescribed by Congress. This integrated system must provide for a complete reporting of an entity’s stewardship of all funds or appropriations for which it is responsible, both on an individual appropriation basis and in total for all appropriations. In some instances, an agency is responsible for a single appropriation, which simplifies the accounting considerably. More common is the circumstance in which an agency has received more than one appropriation. In other instances, an agency may not have its own budgetary authority from Congress, but is operating pursuant to an allocation of another agency’s appropriation or budgetary authority.

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The concept of fund accounting with respect to the federal government’s receipts and expenditures may have first been expressed by Alexander Hamilton, the first Secretary of the Treasury and a founder of the country, as ...that the purpose, the limit, and the fund of every expenditure should be ascertained 1 by a previous law. The public security is complete in this particular, if no money can be expended, but for an object, to an extent, and out of a fund, which laws have pre2 scribed.

In the 1920s, Congress collectively believed that the budget system was to provide, in financial terms, for planning, information, and control within federal agencies. At that time, in the Budget and Accounting Act of 1921, Congress gave the Government Accountability Office the power to prescribe the forms, systems, and procedures for the administrative appropriation and fund accounting in federal departments and establishments. Formal, extensive studies were made of federal budgeting and accounting in the 1940s and 1950s (the first and second Hoover Commissions, chaired by the former President Hoover). The first commission report noted, in part: There are serious weaknesses in the internal operations of the federal government in the fiscal field. These weaknesses penetrate into the heart of every governmental transaction....The president’s budget...does not indicate accurately what the cost of each activity will be over the coming year; and the government’s accounting system, outmoded and cumbersome, does not indicate what was accomplished with the money spent in the year past.

A key recommendation to improving the budgetary concept called for adoption of a budget based on functions, activities, and projects, which the commission designated as a performance budget. According to the commission, the all-important objectives of budgeting should address both work or service to be accomplished and what that work or service will cost. Budgeting and accounting go hand in hand, and sums budgeted in advance are subsequently accounted for as obligated and spent. The commission concluded that the contemporary budgeting and accounting system of the federal government did not supply answers to these questions, or supplied only “half-answers.” A good sys3 tem would supply the right answers. Over the next few decades, attempts to establish federal accounting principles appeared to suffer because much was borrowed from the corporate sector or adopted from state and local governments, with minimal recognition that the federal government’s needs might, in fact, be different from either of these. Today, Congress and those responsible for budgeting and planning seem to have concluded that the 1

2

3

Article 1, Section 9 of the Constitution, which states: “No money shall be drawn from the Treasury, but in consequence of appropriations made by law.” Brookings Institution, Control of Federal Expenditures—A Documentary History (Washington, D.C.: 1939); p.128. U.S. Senate, Committee on Government Operations, Financial Management in the Federal Government, Document No. 11, February 13, 1961.

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answer is not in federal entities having two systems of accounting, one budgetary (essentially a cash accounting system) and one proprietary (essentially an accrual, cost-based system). The need is for an integrated system supportive of cost-based budgets and accrual-based performance reports that meets the congressional mandates as well as managerially required financial reports. The integrated accounting described in this chapter, while much discussed before the 1970s, remained somewhat in the theoretical realm until the advent of computers. As a result, the 1970s were largely an introductory and experimental phase with respect to federal administrative and financial matters. Few had heard of computers, and the preferred descriptor was ADP (automated data processing equipment), involving punch cards, spindle cost accounting, magnetic tapes, and the like, and for entities manually maintained, green-covered ledgers were still common. Much modernization occurred in the 1980s and 1990s, and Congress enacted more laws directed to improving federal budgeting, accounting, performance, and administrative reporting than in any period in the country’s history. Today, federal agencies can, from an integrated accounting system, compile, organize, and report financial information on an appropriation fund basis, cash basis, and accrual basis by federal entity, internal functional organization, project, and activity. In addition, this integrated accounting system can track federal financial payments provided to 70,000 state and local governmental units, over 100,000 contractors and nonprofit organizations, and tens of millions of individuals. Federal Fund Accounting The accounting of federal, state, county, and city levels of government and of certain nonprofit organizations is termed “fund” accounting, but for each of these bodies, the accounting practices differ. For example, management of the federal government’s general fund is an all-encompassing concern at the federal level of Congress, the Department of the Treasury, and the Office of Management and Budget. But financial managers at the agency level are focused on complying with and reporting on the obligation and expenditure of the federal appropriations of their particular entity and not the general fund of the federal government. Within a federal department or agency, fund accounting is equated almost exclusively with accounting for the spending of appropriations. Very few agencies have been authorized by Congress to collect revenues and receipts. The financial integrity of all expenditure appropriations (i.e., laws passed by Congress) must be managed, controlled, monitored, costed, and reported on. Federal executives and program managers, while not averse to accruing accounting information per se, often have trouble using accrual accounting to resolve the many questions affecting obligations and expenditures at the operating levels; and these items are of continuing interest to Congress, the Treasury, and the OMB. The Treasury in particular must know the cash balance (and therefore cash receipts and cash expenditures) of the government daily. The Treasury also looks for early indications of progress or problems with the rate and trends of revenues, obligations, and expenditures incurred for the federal government as a whole.

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Fund accounting, of course, has no relevance to the private sector. The life cycle of a corporate accounting transaction is considerably shorter than one in the federal environment. Accounting for a transaction in a commercial entity is more abbreviated, generally needing only two entries— (1) the initial entry, which records the expense, and (2) a final entry, which records the disbursement of cash. As noted in Exhibit 4.1, there are 15 specific events in the life cycle of a federal transaction for which a separate accounting (i.e., an entry) must be made. Another difference is that the corporate books are open for entries for a year. Accounting for a federal appropriation requires that entries be recorded for a decade or more, during the entire life of an active or unexpired appropriation (possibly several years in duration), plus five additional years after the expiration of the appropriation, plus an indeterminate amount of time at the Treasury. Exhibit 4.1: Financing Federal Programs and Activities Accountable Events

ACCOUNTABLE EVENT

RESPONSIBLE BODY 1. 2. 3.

Congress Appropriation of $ Allocation of the $ Other budget authority

Treasury

OMB

Individual entities

4. Appropriation warrants 5.

Apportionments 6. 7. 8. 9. 10.

Allotments Allowances Commitments Obligations Accrued expenditures 11. Costs 12. Accruals 13. Disbursements 14. Expired accounts 15. Merged accounts

For the better part of 200 years, federal accounting was equated almost exclusively with budgetary accounting, which related to the monitoring of compliance with the legal requirements of congressionally appropriated funds. This monitoring was required of a federal entity by Congress, the Treasury, the OMB, and, in the past, the GAO. Unfortunately, this budgetary accounting basis did not provide accurate or timely reporting of program- and project-incurred costs, long-term investments, a reporting of capital versus operating expenses, or costs of outputs and outcomes. Full accounting requires that an agency’s financial system accumulate total costs, true costs, full costs, and accrued costs, whatever the source of money or number of appropriations assigned to an entity. In other words, proprietary accounting is needed as well as budgetary accounting. ACCOUNTABLE BUDGETARY EVENTS Budgetary Accounting Federal appropriation accounting—that is, budgetary accounting—although construed by some to be a separate accounting requirement or even a separate sys-

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tem, is more in the nature of a bookkeeping refinement of the accounting for funds, operations, and costs of a federal entity, with all data emanating from a single accounting and reporting system. In practice, concurrent accounting entries are also made to other accounts, at times referred to as proprietary accounts. The proprietary accounts are used by agency executives concerned with the financial tracking of the budgeted funds and actual costs of resources required to support a government program. Thus, the proprietary accounts cannot be separate, but must be part of the financial continuum for each congressional appropriation that will exist for years during the currency of the appropriation and long after the legal expiration of congressional spending authority. Budgetary and proprietary accounting are not two systems operating in parallel. By law, a federal department’s single integrated financial system must record all financial activity at the elemental transaction-level and provide both budgetary and proprietary data from this single integrated system. The term “appropriation or budgetary accounting” covers a breadth of accounting transactions, each with legal or economic implications. The accountable events listed in Exhibit 4.1, beginning with the congressional appropriation (entry 1) through the accruing of the expenditure (entry 10), are generally viewed as the scope of federal budgetary accounting. Nature of congressional authorizations. The funding of federal operations by Congress is a two-step process: 1. Congress must first vote on an authorization law to operate and financially support a program or activity. Authorizing legislation can be for the establishment or the demise of a federal department or agency or program. 2. Then generally, but not always, a subsequent appropriation law actually funds specific expenditures to pay for the authorized activity. Each of these steps requires a congressional hearing, one for the authorization and the other for the appropriation. Both steps are necessary. Mere authorization of a program by Congress generally does not grant permission to a federal entity to spend federal money. Congress has repeatedly authorized programs but never appropriated the necessary operating monies. Under these circumstances, no program could commence because no money could be spent. Exhibit 4.2 is an example of language used in a past authorization Act. As authorizing legislation, this Act of Congress provided no expenditure authority that the federal entity could spend. Note that the wording, although precise, may not be standard or uniform among all authorization acts, and is limited in specificity only by the imagination, ingenuity, and concerns of those members of Congress involved with the specific legislation. Note also that a federal entity does not make any accounting entry to reflect the passage of authorizing legislation.

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Wiley Federal Accounting Handbook Exhibit 4.2: A Typical Authorization Act TITLE VII—DEPARTMENT OF EDUCATION Higher Education Act—College Housing Part F—Housing and Other Educational Facilities Loans Federal Assistance in the Form of Loans Sec. 761.(a) Authority and Conditions for Loans—To assist undergraduate postsecondary educational institutions in the construction, reconstruction, or renovation of housing, undergraduate academic facilities, and other educational facilities for students and faculties, the Secretary may make loans of funds to such institutions for the construction, reconstruction, or renovation of such facilities. No such assistance shall be provided unless— (1) The educational institution involved is unable to secure the necessary funds for the construction or purchase from other sources upon terms and conditions equally as favorable as the terms and conditions applicable to loans under this title; and (2) The Secretary finds that any such construction will be undertaken in an economical manner, and that any such facilities are not or will not be of elaborate or extravagant design or materials. Sec 761.(b) Use of Loans for Previously Made Contracts—Any undergraduate postsecondary educational institution which, prior to the date of enactment of this section, has contracted for housing or other educational facilities may, in connection therewith, receive loans authorized under this title as the Secretary may determine. No such loan shall be made for any housing or other educational facilities, the construction of which was begun prior to the effective date of this section, or completed prior to the filing of an application under this title. Sec.761.(c) Amount and Conditions of Loans—A loan to an undergraduate postsecondary educational institution— (1) May be in an amount not exceeding the total development cost of the facility, as determined by the Secretary; (2) Shall be secured in such manner and be repaid within such period, not exceeding 50 years, as may be determined by the Secretary; and (3) Shall bear interest at a rate determined by the Secretary which shall be not more than the lower of (A) 5.5% per annum, or (B) the total of one-quarter of 1% per annum added to the rate of interest paid by the Secretary on funds obtained from the Secretary of the Treasury as provided in subsection.

Nature of congressional appropriations. Before obligations or expenditures can be incurred by a federal entity, an appropriation law must be passed by Congress. Availability of funds or financing means that: (1) an appropriation law must exist that grants permission to enter into obligations or make expenditures, and (2) the appropriation is current or active, or unexpired for the period for which the obligations and expenditures will occur. Funds are made available by Congress to executive branch departments and agencies for obligation and expenditure by means of appropriation acts or other legislation and the subsequent administrative actions of the OMB that actually release

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appropriated monies to entities for spending. The use or availability of appropriations, once enacted by Congress and apportioned by the OMB, is governed by • The terms of the appropriation Act itself • Legislation, if any, authorizing the activity or program • General statutory provisions, which allow or prohibit certain uses of appropriated funds • Regulations of the Treasury and the OMB that govern federal fiscal practices • General rules that have been developed through decisions of the Comptroller 4 General (who heads the GAO) and the courts These legislative, legal, and regulatory requirements, together with constitutional provisions, form the basis of appropriations law. Other laws give the Comptroller General the authority to render GAO decisions concerning the availability of appropriated funds to make certain types of expenditures. Government accountability office decisions. Federal executives (i.e., certifying officers, disbursing officers, and other accountable officers of the government) may request, and the Comptroller General must provide, an advance opinion on the legality of anticipated or incurred obligations and expenditures. GAO decisions are also rendered to disbursing and certifying officers who request review of settlements of their accounts. Individual claimants may also request review or reconsideration by the Comptroller General of earlier settlements disallowing their claims as a whole or in part. These GAO decisions are binding on the executive branch, but not on a private party who, if dissatisfied, retains the right to pursue the issue in the courts. Federal entities cannot thwart the intent of Congress by transferring part of the agency’s appropriation to another entity authorized by Congress for a different purpose. The GAO has maintained that appropriated funds cannot be made available to another agency by means of a transfer to a working fund or another appropriation for uses or purposes for which such funds are not available under the original appropriation from which the transfer was made. Also, working capital or funds of a revolving type cannot operate to divest appropriated funds of their identity or from the requirement that the funds be expended solely for the purpose for which the funds 5 were originally made available by Congress. In other words, the original terms and conditions of an appropriation cannot be “laundered” or another appropriation or fund used to “change the color” (i.e., the terms, conditions, limits, period of availability, or other prohibitions) of an appropriation or fund by accounting or bookkeeping tricks. The use of a specific appropriation to pay obligations under another appropriation during a temporary exhaustion of funds is also in contravention of 31 United States Code 628, even though repayment is contemplated after the supple6 mental appropriation is made. 4

5 6

U.S. Government Accountability Office, Principles of Federal Appropriation Law (Washington, D.C.: GAO, 1982), pp. 1–2. 26 Comp. Gen. 545, 548. See also 36 Comp. Gen. 386.

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In contrast to the language in authorization statutes, the wording of appropriation statutes, while often brief, is generally more precise. Exhibit 4.3 contains the appropriation Act that was related to the authorization Act in Exhibit 4.2. Exhibit 4.3: A Typical Appropriation Act PUBLIC LAW 102-170—NOV. XX, 2XXX College Housing and Academic Facilities Loans (Liquidating) Pursuant to title VII, part F of the Higher Education Act, amended, for necessary expenses of the college housing and academic facilities loans program, the Secretary shall make expenditures, contracts, and commitments without regard to fiscal year limitation. College Housing and Academic Facilities Loans Programs For the costs of direct loans, as authorized by title VII, part F, of the Higher Education Act, as amended, $2,500,000,000: Provided, that such costs, including costs of modifying such loans, shall be as defined in section 502 of the Congressional Budget Act of 1974 and that these funds are available to subsidize gross obligations for the principal amount of direct loans of not to exceed $30,000,000: Provided further, that obligated balances of these appropriations will remain available until then expended, notwithstanding the provisions of 31, USC. 1552(a) as amended by Public Law 101-510. In addition, for administrative expenses to carry out the direct loan program, $566,000.

Other sections of this appropriation Act might contain limitations on purposes for which funds may be expended, time periods for which funds are available for expenditure, and the total dollar amount of funds appropriated by Congress. Over the years, Congress has made use of many types of appropriations. Unfortunately, the titles or descriptors are neither uniform, nor mutually exclusive government-wide. Exhibit 4.4 lists, with brief descriptions, types of appropriations and budget authority. A formal accounting entry—a budgetary accounting entry— must be made in a federal entity’s system to record the passage of each appropriation Act. Availability of budget authority by time periods. Some appropriations could be available for obligation and expenditure by an agency for varying periods of time. Each of the listed appropriations expires at a different time, and the expiration might not always be related to the end of a fiscal year. • One-year appropriation account (or annual account) funds are available for obligation only during a specified fiscal year. • Multiple-year appropriation account funds are available for obligation for a definite period in excess of one fiscal year. • No-year appropriation account funds are available for obligation for an indefinite period, usually until the objective has been accomplished. • An unexpired appropriation account is an account for which the authority to obligate funds has not yet ceased to be available. • An expired appropriation account is an account for which the authority to newly obligate funds has ceased, but from which outlays can be made to pay for obligations previously incurred and adjustments can be made. An expired

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appropriation account includes the “successor” or merged (“M”) accounts that are maintained by the Treasury for all expired appropriation accounts of the federal government. Exhibit 4.4: Types of Appropriations and Other Federal Obligational Authority One-year appropriation—available for obligation during specific fiscal year

Definite appropriation— for specific sum of money

Multiple-year appropriation—available for obligation for definite period in excess of 1 year

No-year appropriation—available for obligation for indefinite period Unexpired or current appropriation—available for obligation

Indefinite appropriation— for unspecified sum, as part or all receipts of a source, determinable at some future time Proceeds from sale of securities—used to obligate and make payment

Expired or lapsed appropriation—no longer available for appropriation

Other obligational authority

Contract and other authority—to enter into obligations prior to appropriation of funds to pay such obligations

Continuing resolutions—resolutions of Congress for agency to continue operations during period between expiration of prior year appropriation and enactment of current year appropriation SOURCE: Standardized Fiscal Procedures, GAO Manual for Guidance of Federal Agencies, Title 7.

Types of budget authority. The OMB regulates the available congressionally approved appropriation or budget authority through the apportionment process. In any given year, the appropriation, budget, or other authority becomes the dollar ceiling provided by law for obligation and expenditure. The basic forms of authority that might be provided by Congress include • Appropriation—The most common form of budget authority that allows departments and agencies to incur obligations and make payments out of the Treasury for specified purposes. • Authority to spend debt receipts—Permits an agency to incur obligations and make payments for specified purposes out of borrowed money. • Authority to spend from offsetting collections—Permits obligations to be incurred and payments to be made by using offsetting collections credited to a budget account. Any portion of such spending authority that is not available for obligation is not recorded as budget authority. For budget accounts with

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• • • •

limitations on the use of offsetting collections, budget authority will include spending authority from balances of offsetting collections previously credited to the account to the extent that the amounts became available for obligations. In accounting for budget execution, offsetting collections credited to a budget account are deducted from the gross budget authority reported for that budget account. Public debt authority—Derived from the sale of public debt securities of the federal government. Agency debt authority—Derived from sale of department or agency debt securities (bonds, assumption of mortgages, participation certificates in pools of loans). Contract authority—Statutory authority under which contracts or other obligations may be entered into prior to an appropriation for payment of such obligations. Reappropriation—Authority to obligate and make payment amounting to all or part of the unobligated balances of an otherwise expired one-year or multiple-year appropriation, whether for the same or a different purpose.

Nature of budget authority. Within the federal government, other terms may be used to describe the nature of the appropriation or budget authority made available by Congress to federal organizations. It is important to note that these terms— definite or indefinite, permanent or current—and those mentioned in the preceding sections are not mutually exclusive. • Definite appropriation authority—A specific sum cited at the time that budget authority is granted by Congress, including authority stated as “not to exceed” a specific dollar amount. • Indefinite appropriation authority—A specific sum is not stated when the authority is granted by Congress but is determinable only at some future date, such as an appropriation being all or part of the receipts from a certain source. • Current authority—New appropriation or budget authority enacted by Congress in or immediately preceding the fiscal year involved. • Permanent authority—New budget authority available each year by virtue of onetime or standing legislation, not requiring further action by Congress. Such authority is considered “current” in the first year and “permanent” in succeeding years. Nature of congressional allocations. An allocation of an appropriation is a transfer, approved by Congress, of obligational authority from one federal entity to another to carry out the purpose of the parent appropriation. In one sense, “allocation” is used restrictively to mean the amount of obligational authority that is set aside in a transfer appropriation account (i.e., an allocation account) to carry out the purposes of the parent appropriation or fund. A transfer appropriation account is a separate account established to receive (and later obligate and expend) allocated appropriations from a parent appropriation under the control of another department or agency. Transfer appropriation accounts carry symbols identified with the original appropriation, and later transactions are usually reported with the transactions of the

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parent appropriation account. In this sense, an allocation would be a congressional action external to the federal entity receiving the allocation. Alternatively, “allocation” is used more broadly to include any subdivision of obligational authority below the suballotment level within a federal entity. In this latter sense, the allocation is viewed as a control check occurring within a federal entity. A formal budgetary accounting entry must be made in a federal entity’s system to record the passage of an appropriation Act and the congressional allocations. Nature of Office of Management and Budget apportionments. An apportionment is a formal distribution made by the OMB to federal entities of amounts available for obligation from an appropriation or budget authority. The OMB will apportion appropriated monies to entities by (1) amounts available for specified time periods (generally the fiscal quarters of the year, referred to as an “A” apportionment), or (2) amounts available for specific activities, projects, objects, and so on (referred to as a “B” apportionment). Apportionments are divisions of congressional appropriations by which the OMB restricts the amounts that may be obligated or expended by an agency. Through the apportionment process, the OMB controls the rate at which an entity can obligate or spend the congressional appropriation. The apportionment of funds is supported by a formal written notice from the OMB to the federal entity signifying the specifics of any subdivisions. Once funds are apportioned (most often by fiscal quarters), a formal accounting entry—a budgetary accounting entry—must be made in a federal entity’s system to record the OMB apportionments. Nature of federal entity allotments. For control purposes, heads of departments and agencies must limit, divide, or restrict the use of the apportioned appropriations or other budget authority or funds within their organizations. This action is referred to as “an allotment.” An allotment is a formal delegation of authority by the head of a federal entity to other entity employees to incur obligations within the amount allotted. Once the agency head has received the OMB-apportioned amounts, a formal delegation will often be made giving obligation and expenditure authority to subordinate agency program heads, heads of offices, and other agency executives. This delegation or transfer of obligational and expenditure authority is conducted by the issuance of a document referred to as an “advice of allotment.” The advice is formal notification to agency executives or allottees of their responsibility for funds allotted to them within the amounts apportioned to the entity. Once funds are allotted by the entity head, a budgetary accounting entry must be made in a federal entity’s system to record these allotments of apportioned appropriations. Nature of federal allowances. In some agencies, funds are further subdivided through issuance of “advices of allowances” to agency personnel. Unlike allotments, however, agencies may not record journal entries to formalize this subaccounting for agency funds. The detailed accounting and fund tracking occurs at the program or allottee levels in an agency, although there may be instances in which certain funds are recorded and accounted for above the allottee levels. The balances of allotments and allowances would comprise part of the agency’s unobligated apportionments

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and constitute the remaining obligational authority of the program official or allottee for which they are responsible. Allotment balances are closely monitored by the maintenance of manual or computerized allotment (or, if used, allowance) registers or summaries. Nature of federal obligations. From the view of law, an obligation is a legal event: two or more parties have rights, liabilities, and obligations. From an accounting view, the incurrence of an obligation is a financial event or happening that must be entered in the official records of the government. Thus, the term “obligation” has accounting and legal connotations. In the accounting sense, obligations are the amounts of orders placed, contracts awarded, services received, and similar transactions during a given period that will require payments during the same or a future fiscal period. An obligation could also include outlays for which a formal obligation had not been previously recorded and could reflect adjustments for differences between obligations previously recorded and the actual outlays required to later liquidate (i.e., pay) those obligations. Once an obligation is incurred with respect to a specific appropriation or budget authority, the same amount cannot be used for another obligation. The cumulative total of obligations and the remaining unobligated amounts of all appropriations are continuously controlled and regularly reported by federal entities to the OMB, the Treasury, and Congress. Legality and formality of federal obligations. From a legal view, an obligation must take a precise form to be acceptable as a valid commitment of government funds and be a recognized liability that the federal government may ultimately pay. The legal view takes precedence. Unless the obligation is legal, there is no concern with respect to any economic or accounting issues. As an example, the Supplemental Appropriation Act of 1955 (Section 1311 of the Revised Statutes) requires that an obligation of the federal government be supported by specific documentary evidence. There are only eight documentable forms for valid obligations: 1. A binding agreement in writing between the parties in a manner and form and for a purpose authorized by law, executed before the expiration of the appropriation period of availability for obligation of the appropriation or fund for specific goods to be delivered, real property to be purchased or leased, or work or services to be performed 2. A valid loan agreement showing the amount of the loan to be made and the terms of repayment 3. An order required by law to be placed with a government agency 4. An order issued pursuant to a law authorizing purchases without advertising when necessitated by public exigency or for perishable subsistence supplied or within specific monetary limitation 5. A grant or subsidy payable from appropriations made for payment of, or contributions toward, sums required to be paid in specific amounts fixed by law or in accordance with formulas prescribed by law; or payable pursuant to agreements authorized by or plans approved in accordance with an authorized law

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6. A liability that may result from pending litigation brought under authority of law 7. Employment or services of persons or expenses of travel in accordance with law, and services performed by public utilities 8. Any other legal liability of the government against an appropriation or funds legally available Each agency must ensure that all paid obligations meet one of these legal criteria and are supported by relevant documentation. If an obligation fails to meet one of these criteria, there is no authority for an agency to make payment since there is no legally binding obligation. Within all federal entities, specifically warranted executives are authorized to enter into legal and binding obligations for that entity. Commitments, promises, and offers by others within or external to the federal entity have no legal standing and do not constitute an obligation of the federal government. In dealings with the federal government, there is no implied or apparent legal authority with respect to federal obligations or liabilities. Conditions for legally obligating funds. In addition to meeting one of the eight legally required forms for an obligation, a financial obligation may be incurred by an agency only if there is a current or unexpired appropriation in existence for the period during which the obligation is incurred. Over the years, general rules have arisen and decisions have also been rendered by the Comptroller General that define conditions under which obligations may be incurred • The general rule regarding obligation of a fiscal year appropriation for payments to be made in a succeeding year is that the contract or other instrument imposing the obligation must be made within the fiscal year sought to be charged and the contract must be to meet a bona fide need of that fiscal year (33 Comp. Gen. 57, 61). • The bona fide need of the service of a particular year depends on the facts and circumstances of the specific case; no general rule for application to all situations exists (73 Comp. Gen. 155, 159). • The obligated balance of an appropriation available for a definite time period must be transferred at the end of the second (now the fifth) full fiscal year following the close of the period of availability of the appropriation. The transfer will be to the successor “M” or merged accounts of the Treasury (7 Comp. Gen. 19.6; PL 101-510). • Working capital or revolving-type funds cannot operate to divest appropriated funds of their identity or change the requirement that appropriated funds must be expended solely for the purpose for which the appropriation was made available (26 Comp. Gen. 545, 548). • The use of a specific appropriation to pay obligations under another appropriation, even during a temporary exhaustion of funds, is in contravention of 31 United States Code 628, even though the repayment is contemplated after a supplemental appropriation might be made (36 Comp. Gen. 368). In practice, confusion and discussions regularly arise over whether appropriated funds may be obligated in one fiscal year and liquidated in a succeeding fiscal year.

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The Comptroller General has stated that, unless prohibited by the terms of the authorizing or appropriating legislation, this practice is acceptable and legal. As indicated, unless specifically prohibited or precluded by law, it is not necessary for the obligation and its liquidation or settlement to occur in the same fiscal year. In fact, legally valid obligations remain available to meet expenditures for years after the fiscal year in which the appropriation expired. Generally, no new obligations may be entered into after an appropriation has expired, but funds from the expired appropriation may be used to pay legally incurred obligations of the appropriation that were incurred before expiration. It is also important to note that amounts from one appropriation or working capital or revolving fund cannot be used to incur obligations or make expenditures for a “customer” or other appropriation that would have been prohibited by the conditions of the first appropriation. In other words, one appropriation or fund may not be used to “change the color” (i.e., the terms, conditions, limits, period of availability, or other prohibitions) of another appropriation or fund. Recording legal obligations. Once funds are obligated by federal executives, a formal accounting entry—a budgetary accounting entry—must be made in the agency’s accounts to record the obligations of allotted funds. Federal accounting standards require that the entity match every obligation to its appropriation or other budgetary authority and then create an account payable or make a payment for previously obligated amounts when due. Adherence to budgetary accounting procedures makes it difficult for a federal executive to inadvertently overobligate or overexpend congressional budget authority. ACCOUNTABLE PROPRIETARY EVENTS Nature of Expenditures In one sense, an expenditure is a disbursement or outlay, or the amount of checks issued, interest accrued on public debt, or other payments made by a federal entity (including advances to others) net of any related refunds and reimbursements. An appropriation expenditure is also a reduction in an appropriation or other budget authority related to the receipt of goods and services ordered. The expending of an appropriation reverses, partially or in total, the earlier accounting entry made to record the formal obligation of appropriated funds. This expended appropriation status is not dependent on whether the related obligations have been paid or an invoice has been received. Each time an expenditure is incurred that reduces an earlier obligation, a budgetary accounting entry must be made in the entity’s system to record the reduction or liquidation of the obligation and record that portion of the now expended appropriation. A common error is to use the term “expended appropriation” when the term “expenditure of funds” is more appropriate. The descriptor “expended,” used in an accounting context, refers to the reduction or consumption of appropriation or budgetary authority; funds expended are no longer available for obligation for the pur-

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chase of goods or services, whereas, within the OMB and the Treasury, the “expenditure” of funds is synonymous with disbursements or outlays, or checks issued. 7 In 2005, the OMB attempted to clarify and standardize the use of these terms. While “expenditure” and “net disbursement” are frequently used interchangeably with the term “outlay,” the OMB has made some distinctions: • “Outlay” means a payment to liquidate an obligation (other than repayment of debt principal). • Outlays are generally equal to cash payments but are also recorded for cashequivalent transactions, such as federal employees’ salaries and debt instruments, where an agency’s appropriation is obligated for an employee’s gross wages on the accrual basis, but there may not be an actual disbursement external to the federal agency for a part of an employee’s gross wages until a later date. • Total outlays for the government, as required by law, must include both “onbudget” and “off-budget” amounts. • The government usually makes payment in the form of cash (currency, checks, or electronic fund transfers). • Normally, the recorded outlay equals the disbursement at the time of disbursement. Not every disbursement is an outlay because not every disbursement liquidates an obligation. For example, the OMB notes that an outlay is not recorded for these transactions: • Repayment of debt principal, because the federal government accounts for borrowings and repayment of debt principal as a means of financing. • Disbursements to the public by federal credit programs for direct loan obligations and loan guarantee commitments made in fiscal year 1992 or later, because the federal government treats cash flows to and from the government for credit programs as a means of financing. Outlays equal to the subsidy cost of direct loans and loan guarantees are recorded when the underlying direct loans and guaranteed loans are disbursed. • Disbursements from deposit funds, because these funds are on deposit with the government but are not owned by the government and are not federal outlays and are therefore excluded from the budget. • Refunds of receipts to nonfederal sources that result from overpayments are recorded as decreases in receipts rather than as increases in outlays. Obligations during a fiscal year may liquidate obligations incurred in the same year or in prior years. Obligations, in turn, may be incurred against budget authority provided in the same year or against unobligated balances of budget authority provided in prior years. Outlays flow partly from budget authority provided for the year in which the money is spent and partly from budget authority provided in prior years. The ratio of outlays resulting from budget authority enacted in any year to the 7

See OMB Circular A-11, Preparation, Submission, and Execution of the Budget (rev. 2005).

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amount of that budget authority is referred to by the OMB as the spendout rate for that year. Proprietary Accounting The term “proprietary accounting” refers to that accounting performed by federal entities for the nonbudgetary accounts. Generally, proprietary accounting is concerned with a federal entity’s assets, liabilities, net residual federal position or cumulative federal investment, any revenues or receipts, and expenses and costs. Differences between budgetary and proprietary accounting relate more to when an economic event transpires in the life cycle of a federal appropriation. For example, proprietary accounting would not include the earlier entries relating to the OMB apportionment and obligations or accrued expenditures by a federal entity. These are the details of budgetary accounting. The proprietary basis of accounting requires that costs incurred for goods and services benefiting more than one fiscal year be recorded as assets and be reported as costs when consumed or used. Also, where goods and services are consumed in a current fiscal year, but payment was made from one or more earlier or subsequent appropriations, the cost or expense is reported when consumed (i.e., in the fiscal year benefited). The accounting for expenditures and cost within the federal government, essentially accrual or proprietary accounting, is increasingly the basis for the recording and reporting of financial information by federal departments and agencies. For several decades, though, it is doubtful that any accounting concept has been the subject of more review, discussion, study, debate, and even misunderstanding and disagreement. The nature of federal proprietary accounting closely parallels that of a corporation complying with generally accepted accounting principles for the private sector. Exhibit 4.5 illustrates an example of the accrual basis in which a purchase order is issued in one fiscal period, the goods are received in another period, they are used or consumed in a third, and they are paid for in a fourth. The nature of this illustration requires that the accounting be performed in four fiscal periods. A budgetary entry is made in the first period to record the obligation incurred (a budgetary entry); in the second period, an entry is required for goods received (a proprietary entry), and a parallel entry is required for the reduction of the earlier outstanding obligation (a budgetary entry); in the third period, when the goods are consumed, an entry must be made to record this as a cost of the current period (a proprietary entry); and in the fourth period, when payment is made, an entry is required for the cash disbursed (a proprietary entry).

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Exhibit 4.5: Transaction Life Cycle for Purchase of Materials Economic event/activity Order placed for material Materials received Add to inventory

Order is placed As an obligation

Recorded in period in which Materials Materials are delivered are used

Liquidate earlier obligation Increase inventory account Increase payable account

Billed by vendor Used/consumed inventory Pay vendor Fiscal Period

Vendor is paid

As an applied cost or expense

1

2

3

As a cash disbursement 4

Accounting for assets. Assets have been defined as tangible or intangible items owned by the federal government that would have probable economic benefits that 8 can be obtained or controlled by the federal entity. The assets of a federal agency might include • Cash • Investments • Real and personal properties • Claims of the federal entity against nonfederal entities or parties (e.g., accounts receivable, interest receivable, and amounts due from federal advances and advances or prepayments to these nonfederal entities or parties). With some exceptions, assets are initially recorded by a proprietary accounting entry when received at purchased costs or donated values, regardless of when payment is made or the asset is used or consumed. Accounting for liabilities. The Federal Accounting Standards Advisory Board and the OMB define a federal liability as a “probable and measurable future outflow of resources arising from past transactions or events.” The liabilities grouping of an agency’s accounts includes an enormity of transactions and events including, but not limited to, accounts payable, end-of-period accrual liabilities, federal commitments and guarantees legally assumed or entered into; contingencies; and damages from litigious proceedings. Liabilities are recorded as proprietary entries in a federal entity’s accounts in the period incurred and removed from these accounts in the period paid or liquidated. Liabilities represent amounts owed and are not dependent on receipt of an invoice or request for payment. Also, liabilities must be reported irrespective of whether federal funds are available or authorized for their payment. 8

Federal Accounting Standards Advisory Board, FASAB Original Statements, Volume I, Consolidated Glossary, March 1997.

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Accounting for revenues or receipts. No agency may collect receipts or earn revenues unless specific authorization is provided by Congress. Additionally, an agency may have the authority to collect receipts, but such receipts may be unavailable for expenditure by that collecting agency. Inflows from revenue and other financing sources would be those resources that the government demands, earns, or receives by donation. From an accounting view, exchange-type revenues are to be recognized when goods or services are provided to the public or to another government entity at the actual price received or receivable under established pricing arrangements. The accounting for nonexchange revenues or inflows of resources is recognized (1) when a specifically identifiable, legally enforceable claim arises, (2) to the extent that collection is probable (more likely than not), and (3) when the amount is reasonably estimable. The accounting for exchange and nonexchange revenues is reflected in proprietary-type accounts. Accounting for expenses. Federal expenses are defined as outflows or other usings-up of assets or incurrence of liabilities (or both) from providing goods, rendering services, or carrying out other activities related to an entity’s programs and missions, the benefits from which do not extend beyond the present operating period. Expenses are charged to proprietary-type expense accounts. Accounting for costs. Costs, depending on the nature of the transaction, may be charged to operations immediately and recognized as a proprietary expense of the period. Alternatively, costs might also be charged initially to an asset account (i.e., capitalized) and then transferred to an expense account in a subsequent period, when used and depreciated. (Most often, in federal entity accounting, costs are synonymous with expense.) Formal, proprietary-type accounting entries must be made for each cost incurred regardless of when payments are made or whether invoices have 9 been received. Accounting for disbursements. Disbursements in the federal government are payments of cash that take a variety of forms, including checks issued, payments made in cash, letters-of-credit drawdowns, and electronic fund transfers. In recent years, the OMB has adopted a definition of disbursements that includes expenditures and outlays. Expenditures and outlays are proprietary-type accounting transactions that are recorded for the amounts of checks issued, interest accrued on public debt, and other payments, such as advances and federal loans.

9

These definitions are set forth by the GAO in its Accounting Guide (GAO/AFMD-PPM-2.1).

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BUDGETARY AND PROPRIETARY ACCOUNTING PRACTICES

Through the 1950s, budgetary accounting (i.e., fiscal accounting or appropriation accounting), performed manually throughout the federal government, was the government’s exclusive accounting basis. Although accounting on an accrual or cost basis (as the term is defined in the corporate world) was much discussed in the 1940s, 1950s, and 1960s, proprietary accounting was not the reality for most federal entities until the widespread advent of computers and the development of more sophisticated software in the 1970s and 1980s. The differences between budgetary and proprietary accounting may appear subtle, but they are significant in practice from an accountability and managerial perspective. Budgetary accounting is concerned primarily with monitoring the status of budgetary authority appropriated (or other legislation) by Congress and apportioned by the Office of Management and Budget. Budgetary accounting reports on an agency’s stewardship of each of the appropriations for which the entity is responsible, and must be made on an individual appropriation basis and in total for that entity. Agencies must perform proprietary accounting for the nonbudgetary accounts. Proprietary accounting is concerned with other agency accounts such as an entity’s assets, liabilities, net position or cumulative results of operations and unexpended appropriations, revenues or receipts, and expenses and costs. The federal government’s Standard General Ledger provides the necessary account structure and the required standard accounting or ledger transactions; it also identifies the support documentation required for both budgetary and proprietary accounting. These documents are the standard fiscal and accounting forms widely used by federal entities and are typically designed to identify, specifically or through the use of pseudocodes, the correct accounting transactions and account codes. Since the systems of federal entities are now computer-based, the accounting by standard journal entries and designated general ledger account codes is often transparent (i.e., the standard entries and codes are an invisible framework for the computer system) to users of the systems. Though users, in practice, often make reference to two accounting systems—the budgetary accounting and the proprietary accounting systems—federal entities typically have only one accounting system, with a seamless transition of financial activity from the budgetary to the proprietary accounts. Many reports of a federal entity contain both budgetary and proprietary data that Congressional overseers, the OMB, the Treasury, and managers of every department and agency need in order to effectively manage the affairs of government.

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DEFINITIONS OF TERMS Appropriations. Congress, exercising the authority granted by the Constitution, passes appropriation legislation used to fund the activities of the federal government. The OMB, through delegated authority from the President, authorizes or makes available the budgetary authority granted in the appropriation to executive branch agencies to incur obligations by issuing apportionments. Apportionments. The OMB apportions funds to most executive branch agencies using authority delegated by the President. These federal entities cannot incur obligations or expend funds until the OMB apportions the budgetary authority as required by the Anti-Deficiency Act. Allotments. The head of a federal entity has authority to allot portions or the full OMB apportionment to subordinate agency executives. The allotment is the budget or expenditure authority to permit procurement of goods, services, or other support required by subordinate federal officials to perform the mission established by Congress in the authorization and appropriation legislation. Allottees are, typically, the senior program directors and heads of offices within the entity. Obligations. An obligation is a formal order legally committing the federal entity to ultimately pay a future liability. Obligations could take the form of payrolls, contracts, grants, award of loans, and subsidy payments. Obligations are initially recorded as undelivered orders, since the services, goods, or other support will generally not be received until a future date. But there will be instances when the obligation and payment by a federal entity occur almost simultaneously. Within entities, references are made to “commitments,” which do not legally encumber an appropriation as do obligations. Commitments are not legal reservations or obligations of appropriated funds. In fact, a commitment is not one of the eight forms that an obligation must take to be legally binding on the federal government. Expended appropriations. Expended appropriations represent charges against an appropriation or other budget authority for the cost of completed obligations. Once obligated or expended, that portion of the appropriation balance is no longer available to acquire additional goods or services. Expended appropriations, however, are not the same as expenditures. The term “expenditure” is more commonly used today to refer to cash disbursements and cash outlays. FEDERAL BUDGETARY ACCOUNTING PRACTICES Government-wide uniform accounting and reporting standards, developed by the Federal Accounting Standards Advisory Board, were jointly agreed to by the Secretary of Treasury, the director of the OMB, and the Comptroller General of the United States during the 1990s. These standards were incorporated by the Treasury into the federal government’s Standard General Ledger. The Federal Financial Management Improvement Act of 1996 (PL 104-208) states that financial management systems of federal entities shall comply substantially with “...applicable federal accounting standards, and the United States Government Standard General Ledger at the transaction level.”

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Until this Act, federal entities had not adopted or used a uniform general ledger or standard journal entries for recording the elemental administrative transactions of the federal government. From the 1950s to the 1990s, many departments and agencies had implemented the accounting standards, account structure, and standard transactions suggested by the Government Accountability Office, but some 40% of 1 federal departments and agencies never did conform to the GAO’s proposals. As departments and agencies revise, refine, improve, or replace their older systems, the 1996 Act requires that they comply with FASAB standards and the accounting policies implicit in the federal Standard General Ledger. Such procedures and practices will be examined in the remainder of this chapter. Accounting for Appropriations The initial budgetary accounting entry for an appropriation is prepared after a congressional appropriation has been made available to the federal entity by the Treasury. This process is formalized by the issuance of a Treasury warrant notifying the entity of the available congressional appropriation, along with identifying central account codes. This notification is recognized by a journal entry in the entity’s accounts that establishes a “cash balance” or the “unapportioned appropriation authority” with the Treasury, against which the entity can incur obligations and make payments. The detailed accounting and reporting for appropriations and other forms of budget authority is done by the individual federal departments and agencies. These entities are also responsible for maintaining the detailed supporting documentation for obligations and expenditures by each of the various types of appropriations. As indicated in GAO-07-261SP Appropriations Law—Vol. 1, appropriations are classified in different ways for different purposes. The classifications and 2 types of appropriations include • Classification based on duration • One-year appropriation—An appropriation that is available for obligation only during a specific fiscal year. This is the most common type of appropriation. It is also known as a “fiscal year” or “annual” appropriation. • Multiple-year appropriation—An appropriation that is available for obligation for a definite period of time in excess of one fiscal year. • No-year appropriation—An appropriation that is available for obligation for an indefinite period. A no-year appropriation is usually identified by appropriation language such as “to remain available until expended.” • Classification based on presence or absence of monetary limit • Definite appropriation—An appropriation of a specific amount of money. • Indefinite appropriation—An appropriation of an unspecified amount of money. An indefinite appropriation may appropriate all or part of the receipts from certain sources, the specific amount of which is determinable 1

2

U.S. Senate, Committee on Government Operations, a study titled Financial Management in the Federal Government, December 13, 1971, Washington, D.C. Government Accountability Office publication, GAO-07-261SP, Appropriations Law—Vol. 1.

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only at some future date, or it may appropriate “such sums as may be necessary” for a given purpose. • Classification based on permanency • Current appropriation—An appropriation made by Congress in, or immediately prior to, the fiscal year or years during which it is available for obligation. • Permanent appropriation—A “standing” appropriation which, once made, is always available for specified purposes and does not require repeated action by Congress to authorize its use. Legislation authorizing an agency to retain and use offsetting receipts tends to be permanent; if so, it is a form of permanent appropriation. • Classification based on availability for new obligations • Current or unexpired appropriation—An appropriation that is available for incurring new obligations. • Expired appropriation—An appropriation that is no longer available to incur new obligations, although it may still be available for the recording and/or payment (liquidation) of obligations properly incurred before the period of availability expired. • Canceled appropriation—An appropriation whose account is closed, and is no longer available for obligation or expenditure for any purpose. No formal entry is made at the time of enactment of an appropriation or budget authority by Congress. The initiating accounting entry for every appropriation be3 gins after the Treasury issues an appropriation warrant. No cash actually flows from the Treasury to the individual departments and agencies; instead, the Treasury records the appropriation or drawdown account. A single, uniform format for a Treasury Appropriation Warrant is not mandated, but warrants generally contain the information shown in Exhibit 5.1. Exhibit 5.1: Information Contained in a Typical Treasury Appropriation Warrant DEPARTMENT OF THE TREASURY APPROPRIATION WARRANT Warrant No.: __________________ Accounting Date:_______________ The Congress having, by the Acts hereon stated, made the appropriations hereunder specified, the amounts thereof are directed to be established in the general and detailed appropriation accounts, total in all $2,500,000,000 and for so doing in this shall be the warrant. 3

Because Treasury offers publicly available detailed information on federal accounting entries and to simplify the illustrations and reduce the number (there are 16 different accounts for types of unapportioned authority), the account descriptions used are general but otherwise consistent with the U.S. Government Standard General Ledger, Treasury Financial Manual, which is available at fms.treas.gov/ussgl/index.html. In addition, this site offers Treasury-approved scenarios and other federal accounting guidance for the numerous federal accounting transaction scenarios.

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The Secretary of the Treasury

Comptroller General of the United States

By _____________________________

By _________________________________

________________________________ Date Signed

____________________________________ Date Signed

The Department of Education—Housing and Academic Facilities Appropriation Symbol

Title

Amount

JOINT RESOLUTION Making further continuing appropriations for the fiscal year 20XX and for other purposes: By Public Law 102-170, XXth Congress

Approved November XX, 20XX

91x0242

Title VII, Part F Housing and Academic Facilities

$2,450,000,000

91x0241

Payment to Retirement Fund

$

50,000,000

Appropriation recordation. In overview form, the accounting made by a federal agency to record its new appropriation requires the following two entries: For Budgetary Accounting Purposes DEBIT: Appropriation realized CREDIT: Unapportioned authority

2,500,000,000 2,500,000,000

For Proprietary Accounting Purposes DEBIT: Fund Balance with Treasury CREDIT: Unexpended appropriations

2,500,000,000 2,500,000,000

The appropriation realized represents the amount of the enacted appropriation. The unapportioned authority represents appropriated funds not yet apportioned by the OMB; the account will be reduced when or if an OMB apportionment is established. The Fund Balance with Treasury is an asset account for the funds made available to an entity by appropriation, reappropriation, and amounts available under continuing resolutions. The unexpended appropriations is an equity account for the net amount or equity of the appropriation or budget authority enacted by Congress for which goods and services, funded by the appropriation or budget authority of Congress, have not yet been ordered or received. Unexpended appropriations is one of three equity or net position accounts of a federal entity, which is comprised of at least three amounts: 1. Unexpended appropriations, which represents appropriated funds provided by Congress that are available for obligation and expenditure 2. Invested capital, which represents the expended appropriations invested in purchased goods, property, or receivables for loaned or advanced federal monies

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3. Cumulative results of operations, which represents the cumulative results of a federal entity’s financing sources, revenues and gains offset by incurred expenses and losses The formal appropriation warrant becomes authority for federal agencies to enter into obligations and the basis for requests to the Treasury to make payments in accordance with the appropriation statute and other applicable laws and regulations. The warrant becomes the supporting record for entry of the appropriation into the central accounts of the Treasury as well as in the reciprocal accounts of department and agencies. A federal entity’s Fund Balance with Treasury is the aggregate amount of funds in a federal entity’s account with the Treasury from which the entity is authorized to make expenditures and pay liabilities. The Fund Balance with Treasury is an asset, representing the entity’s claim to congressionally approved federal resources, much like a cash account balance. However, from the perspective of the federal government as a whole, the Fund Balance with Treasury account is not an asset. Although the recorded balance is viewed by an agency as a commitment by Congress and the Treasury to make resources available to a federal agency, this balance is not a liability of Congress or the Treasury. Accounting for Apportionments Until an appropriation has been apportioned by the OMB, a federal entity has no authority to obligate or expend its appropriated funds. Under the apportionment process, a federal entity must formally request that its appropriation be apportioned. Apportionments are not typically made for periods longer than a fiscal year, even when the appropriation is a no-year or multiple-year appropriation. Apportionment and reapportionment schedule. A government-wide standard form (SF) 132, the Apportionment and Reapportionment Schedule, is the authorizing or supporting document for the apportionment entry. This schedule is prepared and sent by federal entities to the OMB, which concurs and transmits its concurrence back to the entity. Apportionment actions by the OMB divide the congressional appropriation by three possible categories: Category A apportionments would apportion funds by specific time periods (generally quarterly); Category B apportionments would apportion funds by activities, projects, objects, or a combination thereof other than fiscal quarters; and Category C apportionments would apportion funds into future fiscal years. Reapportionments are made when earlier apportionments are no longer appropriate or when there is a change in the amounts available for obligation. Report on budget execution. A companion schedule, SF 133, the Report on Budget Execution, is prepared and submitted by all federal entities to provide current data to the OMB concerning the status of each appropriation, whether an apportionment has been made or not. When an apportionment has been made, this report will have the same elements reported as were identified in the Apportionment and Reapportionment Schedule. Any expired appropriations are included on the same report as the unexpired appropriated amounts of the same title.

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By the apportionment process, the OMB not only controls the total amount that an agency may obligate, but monitors spending for the purpose established by Congress and determines the rate of and specific quarter of the fiscal year when obligations and expenditures can be incurred. The OMB will almost never make a single apportionment the entire amount of the enacted appropriation. Apportionment accounting entries. The accounting entries for the OMB’s apportionment of part of the enacted appropriation would be For Budgetary Accounting Purposes DEBIT: Unapportioned authority CREDIT: Apportionments

1,000,000,000 1,000,000,000

For Proprietary Accounting Purposes No proprietary accounting is performed at this stage in the transaction cycle.

Apportionments represents the appropriation amount apportioned by the OMB and now available for allotment within a federal entity to its congressionally authorized programs and activities. If the apportioned funds are not available until realized (e.g., offsetting collections), then the apportionment credit is posted to apportionments—anticipated resources. These anticipated resources are not available for obligation until realized. Once the resources are realized, apportionments—anticipated resources is debited and apportionments is credited, thereby increasing the amount of apportionments available for obligation. The remaining credit balance in the “unapportioned authority” account cannot be used by the entity until this amount has also been apportioned by the OMB. The amount moved to the “apportionments” account is the amount that the entity is permitted to allot to its program directorates and other offices and functions. Should Congress require that one agency allocate a portion of its appropriation to another agency, the OMB must first apportion the allocated funds before the transferring or the receiving agency can spend them. Accounting for Allocations An allocation is a transfer of obligational authority from one federal entity to another to carry out the purpose of the parent appropriation. As mentioned in Chapter 4, the term “allocation” is used in two different ways by the OMB and federal financial managers. The more restrictive meaning is the amount of formal obligational authority transferred by Congress from one federal entity to another and is set aside in a transfer appropriation account (i.e., an allocation account) to carry out the purpose of the parent appropriation. The broader meaning of allocation is any subdivision of obligational authority below the suballotment level, such as a subdivision made by an entity in its operating plans or other restrictions internal to the entity. The overobligation or overexpenditure of an internal agency allocation does not necessarily result in a violation of the Anti-Deficiency Act unless either (1) the allocation is separately apportioned by the OMB, or (2) the entity fund control regulations specify that an overobligation of the allocation automatically results in a violation of the Anti-Deficiency Act.

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The formal allocation of funds is not permissible at the convenience of a federal entity. Congressional approval and OMB concurrence is necessary to permit the allocation of appropriated funds. The accounting entries for allotments would be For Budgetary Accounting Purposes DEBIT: Apportionments CREDIT: Allocation transfers

50,000,000 50,000,000

Allocation transfers refers to funds formally allocated (or transferred to other entities) for work or projects in accordance with the parent appropriation or budget authority. For Proprietary Accounting Purposes DEBIT: Unexpended appropriations—Transfer out CREDIT: Fund balance with Treasury

50,000,000 50,000,000

Accounting for Allotments An allotment is authority granted by the head of a federal entity to entity employees to incur obligations and spend monies within the specific allotted amount, and consistent with OMB apportionments. The process of allotting portions of appropriated funds is a fiscal event internal to a federal entity. The controls governing the subdivision and reservation of apportioned appropriation balances are an integral part of a federal entity’s system of administrative internal controls. Allotments of funds to an entity allottee or program director and other entity organizations are documented by an advice of allotment issued by the head of the federal entity or person with delegated authority. The advice of allotment is the formal notice of the dollar amount, purpose, time period, and other limitations affecting the funds to be expended by the allottee. Some entities have attempted to assign prohibitions to allotments that are similar to those contained in the Anti-Deficiency Act relative to overobligating and overexpending an appropriation. Exceeding an allotment level, though, is a violation only of entity-imposed administrative requirements unless the sum of all allotment violations exceeds the total overall applicable OMB apportionment or congressionally enacted appropriated amount. For years, the GAO has recommended that the allotment subdivisions be established at the highest practical management level in the entity consistent with assignments of operational responsibilities and effective control. This guidance is to avoid excessive bookkeeping for relatively insignificant dollar amounts. The form and content for an advice of allotment, while not standard among federal entities, might be similar to that illustrated in Exhibit 5.2.

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Exhibit 5.2: Information Contained in a Typical Advice of Allotment DEPARTMENT OF EDUCATION Advice of Allotment Appropriation Title Title VII Housing and Academic Facilities

Date Sept. 23, 20XX

Appropriation Symbol 91x20242 Allotment Symbol 37

PERIOD COVERED 10/01/XX thru 09/30/XX

ALLOTTEE Assistant Secretary for PostSecondary Education

FISCAL AUTHORITY You are authorized to obligate funds within the limitation established in order to carry out the responsibilities assigned to you during the noted periods. ALLOTMENT OF APPROPRIATED FUNDS $500,000,000 LIMITATIONS OR ADMINISTRATIVE RESTRICTIONS Allotment reflects the remaining apportioned, but previously unallotted balance. All obligation and expenditure documents must bear proper approvals and indicate the foregoing appropriations and allotment symbols. It is illegal to incur obligations or expenditures in excess of amounts appropriated by Congress or apportioned by OMB. As a primary allottee under statutes providing for administrative control of funds, you are responsible for restricting obligations and expenditures to the amounts allocated. Approved: ________________________________________________________ Director, Division of Planning and Budget Office of the Chief Financial Officer

As noted, these advices of allotments are delegations of obligational and expenditure authority from the head of a federal entity to program and office heads in that entity. The accounting entries for these delegations or allotments would be For Budgetary Accounting Purposes DEBIT: Apportionments CREDIT: Allotments—Realized resources

500,000,000 500,000,000

Allotments—realized resources represents the amounts of OMB apportionments that are now available for commitment or obligation by allottees. The debit entry to apportionments reduces the available OMB apportionment balance provided to the federal entity. For Proprietary Accounting Purposes No proprietary accounting is performed at this stage in the transaction cycle.

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Accounting for Obligations Obligations incurred will include amounts for orders placed, contracts awarded, services received, and similar transactions that will require payment during the same or future period. With respect to appropriation entitlements, during the budget execution phase, the general rule is that the federal government is not liable to pay obligations until an appropriation is enacted, and no obligation should be recorded until that time. Throughout a fiscal year, allottees will incur obligations against their allotments. These obligations may be related to a variety of object classes of expenses (e.g., personnel compensation and benefits, contracts, grants, salaries, travel, etc.). To be a valid obligation and claim against the federal government, each obligation must be recorded and supporting documentation must take one of the eight formats set forth in the Supplementary Appropriation Act of 1955. Incurring obligations. Obligations by an entity reduces the balance of allotments available for future obligation and establishes unliquidated obligations, which are essentially undelivered orders or unperformed services, and represent a possible future claim on the funds of the federal entity. The accounting entries that are made for obligations incurred would be For Budgetary Accounting Purposes DEBIT: Allotments—Realized resources CREDIT: Undelivered orders—Obligations, unpaid/prepaid/advanced

25,000,000 25,000,000

Outstanding obligations for undelivered orders—obligations, unpaid/prepaid/ advanced are goods and services for which an obligation has been recorded, but which have not yet been received. This account would also include orders for which advance payments have been made, but delivery or performance has not yet occurred. Allotments—realized resources reduces the allottee’s balance that is available for future obligations. For Proprietary Accounting Purposes No proprietary accounting is performed at this stage in the transaction cycle if the undelivered order is unpaid. If an advance or prepayment is made, the following entry would be recorded: DEBIT: Advance/prepayments CREDIT: Fund Balance with Treasury

25,000,000 25,000,000

Liquidating Obligations/Appropriation Expenditures An obligation will be liquidated (i.e., realized or accrued) as a result of one or a combination of actions, including: (1) complete or partial cancellation of the obligation; (2) receipt of goods or services in full or partial satisfaction of the obligation; or (3) the accrual of an expenditure for which a prior obligation had not been established. At this juncture in the life cycle of a federal transaction, two concurrent entries (a budgetary as well as a proprietary) must be made (1) to record the reduction

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or liquidation of the earlier obligated amount, and (2) to record the accrual of the appropriation expenditure, liability, or debt owed by the federal entity. The entries to reduce an outstanding obligation and, in this illustration, the partial liquidation of the obligation and the liability for the goods or services received are For Budgetary Accounting Purposes DEBIT: Undelivered orders—Obligations, unpaid/prepaid/advanced CREDIT: Delivered orders— Obligations, unpaid/paid

15,000,000 15,000,000

Delivered orders—obligations, unpaid/paid refers to the amount of both paid and unpaid matured or accrued expenditures for (1) services performed by employees, contractors, vendors, carriers, grantees, lessors, and possibly other levels of governments; (2) goods and tangible property received; and (3) amounts becoming owed by the government under programs for which no current service or performance is required (e.g., annuities, insurance claims, other benefits, catastrophe, and emergency relief). The balance of the delivered orders—obligations account would concurrently be the value of the appropriation used or the exhausted budget authority. For Proprietary Accounting Purposes The related proprietary accounting at this stage in the transaction cycle, depending on the goods or services acquired, might be DEBIT: Operating expenses/program costs CREDIT: Advances/prepayments CREDIT: Accounts payable

15,000,000 10,000,000 5,000,000

This proprietary entry is needed to offset the earlier advance of federal funds against the total amount incurred for program operations and to record the net amount for the accounts payable that is due to the nonfederal party after deducting the funds advanced earlier. Entries for allotments, commitments, obligations, and the expended appropriation affect only the budgetary accounts if no advances or prepayments are made. Once performance is completed or goods and services are received, parallel entries must be made in the proprietary accounts that continue with the accounting of transaction as the goods and services are later used or consumed. It is the latter accounting, for the proprietary transactions, that is most similar to corporate accounting and financial reporting. FEDERAL PROPRIETARY ACCOUNTING PRACTICES Proprietary accounting is supportive of reporting on an accrual or cost basis. Proprietary accounting practices are concerned with accounting for assets, liabilities, capital or investment, revenues, and expense transactions. The federal government’s Standard General Ledger provides the necessary accounts structure and the required standard accounting or ledger transactions, and identifies the required support documentation for both budgetary and proprietary accounting.

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Before proceeding to the proprietary accounting practices themselves, there are a few terms relative to proprietary accounting that should be examined. Accounting for Assets Assets have been defined as tangible or intangible items owned by the federal government that would have probable economic benefits that can be obtained or 4 controlled by the federal entity. These assets include cash, investments, real and personal properties, and claims of the federal entity against nonfederal entities or parties (e.g., accounts receivable, interest receivable, and amounts due from federal advances and advances or prepayments to these nonfederal entities or parties). With some exceptions, assets are initially recorded by a proprietary accounting entry when received at purchased costs or donated values, regardless of when payment is made or the asset is used or consumed. Liabilities The FASAB has defined liabilities as probable outflows or other sacrifices of resources as a result of past transactions or events. Amounts owed for goods and services received from federal entities are intragovernmental transactions and should be reported separately from amounts owed to the public. Federal accounting standards require that when an entity accepts title for goods, whether the goods are delivered or in transit, the entity should recognize a liability for the unpaid amount of the goods. A form of federal liability would be accounts payable, including amounts owed by a federal entity for goods and services received, progress in grants or contracts performance, and rents due to other entities. Other current liabilities include accrued and unpaid expenses that are expected to be paid within the next fiscal year. Examples of other current liabilities are accrued employees’ wages, bonuses, or salaries for service in one fiscal year for which checks will be issued in the next; accrued entitlement benefits payable (e.g., old age survivors’ insurance, veterans’ compensation and pension); and annuities for the current year administered by federal trusts, plus pension and insurance programs that will be paid in the next fiscal year. Advance payments and prepayments from other entities for goods or services yet to be delivered by a federal entity must be recorded as other current liabilities by the benefiting agency. Expenses and Costs Operating/program expenses and costs is another important term. The operating/program expenses part refers to the consumption of goods and services and the costs related to the use of entity assets. The FASAB defines expenses as the outflow or other expenditure of assets or incurrence of liabilities (or combination thereof) during a period, due to providing goods, rendering services, or carrying out other activities related to an entity’s programs and missions, the benefits of which do not 4

Federal Accounting Standards Advisory Board, FASAB Original Statements, Volume I, Consolidated Glossary, March 1997.

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extend beyond the present operating period. The Standard General Ledger requires that expenses be accounted for by the nature of the expense, necessitating a subsidiary ledger structure. The costs part is generally defined by the FASAB as the monetary value of resources consumed, used, or sacrificed, or liabilities incurred to achieve an objective, such as to acquire or produce a good or to perform an activity or service. Depending on the nature of the transactions, costs may be charged to operations immediately (i.e., recognized as an expense of the period) or to an asset account (i.e., capitalized) for subsequent recognition as an expense benefiting future periods. In most contexts, cost is synonymous with expense. The OMB has defined costs as including all direct and indirect costs to any part of the federal government for providing goods, resources, or services. The FASAB defines the full costs of an output produced by a responsibility segment as the sum of (1) the costs of resources consumed by the responsibility segment that directly or indirectly contributes to the output; and (2) the costs of identifiable supporting services provided by other responsibility (e.g., organizational) segments both within the reporting entity and by other reporting entities. With the definitions of these terms and concepts in mind, we can proceed with a look at which activities of the federal government are best served by proprietarytype accounting, and why. Accounting for Advance Receivables Amounts may be due to the federal government for a variety of purposes, including provision of cash advances to beneficiaries designated in congressional legislation, furnishing of assets (e.g., cash, real property, buildings, equipment, materials) to federal contractors and grantees, cash to borrowers under federal loan programs, and even amounts advanced to federal employees to finance anticipated travel and transportation. With respect to receivables related to advanced funds, the federal entity should account for cash advances on the accrual basis and not on the cash disbursement basis. Under the accrual basis, for example, cash advanced to contractors, grantees, or employees would result in a proprietary-type entry, for example For Proprietary Accounting Purposes DEBIT: Advances receivable—Due from CREDIT: Fund Balance with Treasury

1,000,000 1,000,000

For Budgetary Accounting Purposes DEBIT: Undelivered orders—Obligations, unpaid CREDIT: Undelivered orders—Obligations, prepaid/advanced

1,000,000 1,000,000

Note that at the time funds are disbursed, the advance is not considered to be part of the expended appropriation. Recipients of the advances must make periodic reportings on fund status, at which time the federal entity will reduce the outstanding advance by amounts used. Based on these reports, an expenditure will be formally charged against the appropriation balance. In a somewhat similar fashion, funds dis-

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bursed to eligible loan constituents are recorded as loans receivable or as an advance, which is intended to be collected in compliance with the authorizing congressional legislation. Accounting for Advances By letter of credit, electronic funds transfer, or direct issuance of a check, federal entities might provide advance funding to a nonfederal entity. Depending on the conditions of the advance, the advance may have to be reduced before a check can be written for the accounts payable balance. For example, assume that the advance discussed earlier was made to a nonfederal entity to finance initial operations of a congressionally authorized project. Later, the nonfederal entity reports that $1,500,000 was spent for allowable program expenses. Budgetary and proprietary entries must be made in this way: For Budgetary Accounting Purposes DEBIT: Undelivered orders—Obligations, prepaid/advanced CREDIT: Delivered orders—Obligations, paid

1,500,000 1,500,000

This budgetary entry is required because the earlier advance of funds did not reduce the amount that had been committed or obligated, nor was the expended appropriation recognized at the time of the advance. At the time funds were disbursed, the advance was not considered part of the expended appropriation. Recipients of the advances had to make a periodic reporting on fund status. This report is the documentation to reduce the outstanding advance by amounts used in program operations. Based on the same documents used to support the above budgetary entry, a proprietary entry must be made for operating expenses. The advances due could be reduced and a liability established for any residual amount due to the party receiving the earlier advance. For Proprietary Accounting Purposes DEBIT: Operating expenses/program costs CREDIT: Advances to others

1,500,000 1,500,000

This proprietary entry is needed to offset the earlier advance of federal funds against the total amount incurred for program operations. Accounting for Assets and Related Liabilities Accounts payable, or unpaid liabilities, arise for a variety of reasons, including amounts due to contractors, vendors, grantees, and employees for property or goods received or services rendered. While these transactions are proprietary in nature, federal accounting requires that they generally be preceded by budgetary entries, for appropriation control purposes. Thus, as property, goods, or services are received, two concurrent entries (a budgetary as well as a proprietary) must be made to (1) record the reduction or liquidation of the earlier obligated amount; and (2) record the accrual of the appropriation expenditure and liability or debt owed by the federal entity.

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For Budgetary Accounting Purposes DEBIT: Unperformed orders—Obligations, unpaid CREDIT: Delivered orders—Obligations, unpaid

15,000,000 15,000,000

Delivered orders represents the amount of both paid and unpaid matured or accrued expenditures for (1) services performed by employees, contractors, vendors, carriers, grantees, lessors, and possibly other levels of governments; (2) goods and tangible property received; and (3) amounts becoming owed by the government under programs for which no current service or performance is required (e.g., annuities, insurance claims, other benefits, catastrophe and emergency relief). The amount of the entry to the delivered orders account would be the dollars of the appropriation used or the budget authority by this event. For Proprietary Accounting Purposes

Note that these proprietary entries would generally have been preceded by budgetary entries for the allotment, commitment, and obligation of the entity’s appropriated funds. DEBIT: Property, plant, and equipment DEBIT: Inventory CREDIT: Accounts payable

10,000,000 5,000,000 15,000,000

Property, plant, and equipment represents the cost or value of real property acquired and recorded in accordance with the federal government’s asset capitalization criteria. Inventory represents assets acquired for future sale (within or outside the federal government), but which have not yet been used in operations of the federal entity. Accounts payable represents amounts owed by the federal department or agency to another federal or nonfederal entity for goods or other property ordered and received and for services rendered by other than employees of the department or agency. Accounting for Program/Operating Expenses Operating expenses/program costs refers to the amount of operational and program expenses incurred, which are comprised of one or more of these categories: (1) the total outlay in cash or its equivalent in carrying out a specific program or function; (2) the total cost of goods sold plus all selling, administrative, and general expenses applicable thereto; and (3) the total cost assignable against operating income or profit. As operating expenses are incurred, concurrent entries (budgetary as well as proprietary) must be made to reduce or liquidate the earlier obligated amount and to record the accrual of the appropriation expenditure and liability or accounts payable now owed by the federal entity. For Budgetary Accounting Purposes DEBIT: Undelivered orders—Obligations, unpaid CREDIT: Delivered orders—Obligations, unpaid

2,000,000 2,000,000

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For Proprietary Accounting Purposes DEBIT: Operating expenses/program costs CREDIT: Accounts payable

2,000,000 2,000,000

Accounting for Costs The amounts in earlier asset entries related to property, plant, and equipment, and inventory, while generally referred to as delivered orders, are not considered, under the federal accounting practices, to be expenses or costs of operations at the time of receipt and initial recording. Pro rata amounts of property, plant, and equipment and of inventory are charged to operations as used or consumed and at that time are recorded as entity expenses or costs. The used or consumed costs of property, plant, and equipment are charged to operations through depreciation allocations; the consumption of the asset inventory costs is charged to operations when used or consumed. For Budgetary Accounting Purposes No budgetary entries are required at the time operations are charged with a pro rata share of earlier capitalized asset or inventory costs. Recall that the budgetary entries for these items were reflected when the agency entered into the commitment obligations. For Proprietary Accounting Purposes DEBIT: Depreciation, amortization, and depletion CREDIT: Accumulated depreciation/ amortization or allowance for depletion DEBIT: Operating expenses/program costs CREDIT: Inventory

1,000,000 1,000,000 500,000 500,000

The preceding entry is an example of applied cost, an accrual concept. Applied costs represent the value of resources consumed or used in the operation of agency programs. Applied costs will also include the value of material received or produced in procurement or manufacturing programs and the value of work put in place for public works programs. The accounting for costs and expenses should reflect the application, consumption, or use of these resources in the accounting period in which the program benefits from them or in which the event takes place. In this illustration, fixed assets and inventory were purchased and received but had not been consumed or used for operations. Once these resources are used, the above entries are needed to adjust the asset accounts and record costs of the period.

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APPENDIX FEDERAL CREDIT REFORM Accounting for federal loan and loan guarantee programs is a unique and complex characteristic of federal budgetary and financial accounting and applies to all federal loan and loan guarantee programs. This appendix briefly describes certain features of credit reform accounting. The Federal Credit Reform Act of 1990 radically changed the way in which federal credit programs were funded and imposed significant and complex requirements on both budgetary and financial accounting. As previously discussed, the Act required agencies to estimate costs and request appropriations to cover the subsidy cost of programs expressed in terms of present values. The Act placed these programs on the same basis as other federal programs and significantly increased the information requirements related to loan programs. Pre-Credit Reform Federal Accounting and Reporting of Loans and Loan Guarantee Programs Historically, Congress and departments and agencies regarded a federal loan as only a disbursement and preferred to make no formal accounting for the future repayment of this loan. This lack of accounting eliminated the embarrassing need to make default entries later to formally account for the uncollected loans. Even worse, in the case of loan guarantees, no formal accounting entry was made until the loan defaulted or the federal government was required to make payment under a loan guarantee program. In many instances, these events happened years later, were not anticipated, and in the case of the failures of savings and loan associations and banks, resulted in billions of dollars of losses that a later generation of taxpayers had to finance. As a result, this legislation closed a 200-year history of accounting for less than the full costs of direct loans and loan guarantees by Congress and many presidents. It required federal departments and agencies that managed programs of direct loans and loan guarantees to now recognize up front, at the time of legislative action, the true costs that such programs were likely to incur, and required that the full congressional appropriations or budget authority be provided at that time. Under this law, the projected default costs and interest subsidy costs to be incurred are required to be recognized at the time of the loan and at the current market rate. In addition to eliminating what was in essence a “pay-as-you-go-approach” to loan defaults and related subsidies, this Act addressed the costs associated with lending at below market interest rates. This is another cost of federal loan programs that historically had not been reflected by operating departments or agencies—with the acquiescence of Congress, of course. Federal loan programs typically provide for a rate of interest below the going market rate, in essence a break or subsidy to the borrower or the recipient of the guarantee. But to finance these loan programs, the Treasury issues notes, bonds, or other securities and pays market interest rates. For example, say that Treasury borrows at 7% and monies are loaned to borrowers at a lower rate of 4%. This interest

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subsidy (e.g., in this case 3%)—the difference between the lower loan interest rate and the higher market interest rate—was another real cost incurred by the federal government, but one for which an accounting had never been made. Now the Federal Credit Reform Act requires the government to account, up front, for the full cost of federal loan and loan guarantee programs, which includes the estimated cost of anticipated default, plus the difference in interest rates between what the Treasury pays to borrow money and what Congress charges to borrowers of these federal monies. The new practice ensures that the “true cost” of credit programs is reflected in the budget when the obligations are incurred and the cost of programs recognized in the accounting records when the expenses are incurred (e.g., in accordance with generally accepted accounting principles and accrual accounting). Objectives of Credit Reform The primary intent of the Federal Credit Reform Act was to ensure that the subsidy cost of direct loans and loan guarantees was taken into account in making budgetary decisions. To achieve this, the Act defined the following specific objectives: • Ensure a timely and accurate measure and presentation in the President’s budget of the cost of direct loan and loan guarantee programs. • Place the cost of credit programs on a budgetary basis equivalent to other federal programs. • Encourage the delivery of benefits in the form most appropriate to the needs of the beneficiaries. • Improve the allocation of resources among credit programs and between credit and other spending programs. The major provisions of the Federal Credit Reform Act, which were effective for fiscal year 1992 and thereafter, include • A requirement that, for each fiscal year in which the direct loans or the loan guarantees are to be obligated, committed, or dispersed, the President’s budget reflect the long-term cost to the government of the subsidies associated with the direct loans and loan guarantees. The subsidy cost estimate for the present budget is to be based on the present value of specified cash flows discounted at the average rate of marketable Treasury securities or similar maturity. • A requirement that, before direct loans are obligated or loan guarantees are committed, annual appropriations generally be enacted to cover these costs; however, mandatory programs have permanent indefinite appropriations. • Provision for borrowing authority from Treasury to cover the nonsubsidy portion of direct loans. • Establishment of budgetary and financing control for each product group program through the use of three types of accounts: (1) a program account (budgetary); (2) a financing account (nonbudgetary); and (3) a liquidating account (budgetary).

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FASAB Accounting and Reporting Standards The Federal Accounting Standards Advisory Board issued Statement of Federal Financial Accounting Standards (SFFAS) No. 2, Accounting for Direct Loans and Loan Guarantees, to effectively bring the intent of the Federal Credit Reform Act into the hierarchy of federal government generally accepted accounting principles. The standard applies to post-1991 loans and loan guarantees (although adoption of the standard for pre-1991 loans/guarantees is allowed). In general, the standard requires that • Direct loans disbursed and outstanding are recognized as assets at the present value of their estimated net cash inflows. The difference between the outstanding principal of the loans and the present value of their net cash inflows is recognized as the subsidy cost allowance. • For guaranteed loans outstanding, the present value of estimated net cash outflows of the loan guarantees is recognized as a liability. Disclosure is made of the face value of guaranteed loans outstanding and the amount guaranteed. • For direct or guaranteed loans disbursed during a fiscal year, a subsidy expense needs to be recognized. The amount of the subsidy expense equals the present value of the estimated cash outflows over the life of the loans minus the present value of estimated cash inflows. • The subsidy cost allowance for direct loans and the liability for loan guarantees are reestimated each year, taking into account all factors that may have affected the estimated cash flows. Any adjustments resulting from the reestimate are recognized as a subsidy expense (or a reduction in subsidy expense). • When direct loans or loan guarantees are modified, the cost of the modification is recognized at an amount equal to the decrease in the present value of the direct loans or the increase in the present value of the loan guarantee liabilities measured at the time of modification. • Upon foreclosure of direct or guaranteed loans, the property is recognized as an asset at the present value of its estimated future net cash inflows. Post-SFFAS No. 2 Activity Once the general framework for credit reform accounting was established by SFFAS No. 2, federal government accountants set about the difficult task of developing specific entries in accounts necessary to comply with both the provisions of the Act, and the requirements of the standard. Credit reform entries, unlike much of accounting, are not intuitive entries. In fact, to comply with credit reform accounting, two separate budgetary accounts are required in the program and financing accounts. • The program account is used to receive both the initial subsidy appropriation and the follow-on appropriations as each program year’s operations are recosted to account for variances between the original subsidy calculation and the current expectation based upon the results of the subsidy reestimate. Structurally in the budget, the outlays from the program account are scored (or costed) against the budget deficit calculations.

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• The financing account was created so that loan outlays and collections would not be scored against the deficit. The budget system does not include outlays from the financing account. The financing account receives its funds from the program account (subsidy), loans from the Treasury, and loan collections. It disburses loans from this pool of funds and repays loans from the Treasury to the program. If all accounting is performed properly, the financing account will have a $0 cash balance at the end of the program. Due to the novelty and complexity of the pronouncement, SFFAS No. 2 raised many questions that had to be addressed by the FASAB, as well as the Treasury and the OMB. To cope with the numerous issues raised by federal agencies subject to SFFAS No. 2, several pronouncements have been issued by the FASAB. A summary of these pronouncements follows. In general, these pronouncements, along with the original SFFAS No. 2, impose certain estimation procedures and disclosure requirements that are discussed later in this appendix. SFFAS No. 18: Amendments to Accounting Standards for Direct Loans and Loan Guarantees in SFFAS No. 2 SFFAS No. 18 imposed various requirements, including • Requiring that, in measuring and disclosing reestimates, the agency consider separately two kinds of reestimates: • Interest Rate Reestimate—This reestimate arises when the interest rate assumed for purposes of calculating subsidy expense for budget preparation purposes differs from the interest rate in effect when the loan or loan guarantee is actually disbursed or issued. • Technical/Default Reestimate—This reestimate arises when there is a change in projected cash flows from outstanding loans or loan guarantees (e.g., as a result of deviations in assumed delinquencies, projected collections, etc.). This reestimate should be computed (as needed) each year as of the financial statement date. • Requiring that a financial statement footnote disclosure be provided showing a reconciliation between the prior year’s closing subsidy cost allowance, and the current year’s ending balance. This reconciliation should disclose subsidy expense and subsidy reestimates affecting the current year’s change. • Requiring that a financial statement footnote disclosure be provided describing selected program characteristics. SFFAS No. 19: Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in SFFAS No. 2 SFFAS No. 19 clarifies/further defines and adds language to a number of technical terms and matters addressed by SFFAS No. 2: • Explicitly states that SFFAS No. 2 adopts the accounting standard cash flow discount method, which is consistent with a July 1997 amendment to the Federal Credit Reform Act of 1990. In doing so, it formally adopts the following

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language included in the amendment: “in estimating net present values, the discount rate shall be the average interest rate on marketable Treasury securities of similar maturity to the cash flows of the direct loan or loan guarantee for which the estimate is being made.” • Clarifies that the effective interest rate of a cohort of direct loans or loan guarantees “is the interest rate adjusted for the interest rate reestimate as defined in paragraph 9(A), SFFAS No. 18.” • Refines the definition of default costs: • States specifically that the default cost of direct loans “…is measured at the present value of projected payment deviations due to defaults minus projected net recoveries.” • States specifically that the “…default cost of loan guarantees is measured at the present value of projected payments to lenders required by the guarantee, plus uncollected fees, minus interest supplements not paid…and minus projected net recoveries…” Federal Financial Accounting and Auditing Technical Release No. 3 (Revised) Federal Financial Accounting and Auditing Technical Release (TR) No. 3 has caused a certain amount of confusion because the current official TR No. 3 is, in effect, an amendment of a prior TR No. 3 dated July 1999. The original TR No. 3 addressed both auditing and accounting guidance, while the current TR No. 3 addresses only auditing issues with accounting guidance provided in TR No. 6 (discussed below). The release is unusual in that audit guidance in the federal government had traditionally been the sole responsibility of the Government Accountability Office and the Office of Management and Budget. This is also a departure from generally accepted practice in the private sector, where the main source of accounting standards, the Financial Accounting Standards Board (FASB) does not issue audit guidance. For audit guidance in the private sector, the responsibility falls on the American Institute of Certified Public Accountants or the Public Company Accounting Oversight Board (for Securities and Exchange Commission registrants). In any event, this pronouncement does not affect accounting, but addresses a number of audit issues including planning, testing, documentation, and reporting, among other matters. Federal Financial Accounting and Auditing Technical Release No. 6 The purpose of TR No. 6 is to separate auditing guidance from accounting guidance by reissuing TR No. 3 as an audit guidance pronouncement, as noted above, and moving the accounting guidance to TR No. 6. The purpose of the pronouncement is to provide more specific guidance on procedures to be followed by federal agencies in the development of subsidy estimates. In general, the pronouncement addresses

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• Accounting guidance with the purpose of promoting consistency between accounting and budgeting estimates restating that accounting estimates for credit must be consistent with the requirements of credit reform • Description of the OMB’s role in connection with the subsidy estimation/ reestimation process • Guidance supporting the preparation of estimates • Additional reporting requirements guidance A further discussion of subsidy reestimates and financial statement disclosure requirements follows next. Selected Accounting and Reporting Requirements Credit reform has resulted in new recordkeeping, estimation, and reporting requirements, which are briefly discussed below. Recordkeeping. In summary, existing accounting guidance revolves around the following key features of credit reform: • Providing the ability to score the total cost of a loan program against the federal budget in the year that the direct loan is issued (or that the loan guarantee is established) • Annual reestimation of subsidies based on key economic factors to promote more accurate program performance reporting • Accounting for credit programs through two separate budgetary funds to provide information as follows: • Accounts for the activity scored in the federal budget in the program fund accounts • Accounts for the day-to-day activity of the program in the finance fund accounts To achieve the above objectives, recordkeeping rules and standard accounting entries have been developed by the Treasury. These recordkeeping procedures and accounting entries required by credit reform and SFFAS No. 2 (as amended) are extremely complex and well beyond the scope of this book. A good introduction to the complexity of the required accounting can be found at the Department of the Treasury’s Web site, where the Treasury’s U.S. Standard General Ledger Division created, and has subsequently updated over the years, case studies that illustrate the specific entries and transactions required to comply with federal credit reform accounting. This Web site contains a complete listing of bookkeeping entries with sample dollar transactions and closing entries. Subsidy reestimates. Subsidy reestimates are at the heart of credit reform accounting. For each federal credit program, subsidy reestimates are reported in the budget as increases or decreases in outlays at the time of the reestimate. Upward reestimates raise the cost of credit subsidies and thus lower the budget surplus (or increase the deficit). Downward reestimates reduce credit subsidies and thus increase the budget surplus (or lower the deficit) when the reestimates are made. Agencies calculate reestimates annually for all of the loans or guarantees that a program

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obligates in a given fiscal year (referred to in credit reform guidance as a “credit cohort”). All credit reestimates have at least two components: (1) revisions for initial assumptions in interest rates, and (2) reestimates for changes in default rates or other technical assumptions. Interest rate reestimates correct the projected subsidy for the difference between the discount rate that was assumed in the initial estimate and the actual rate prevailing when the credit is disbursed. The OMB requires agencies to use this forecast of interest rates in formulating initial subsidy estimates. Thus, agencies have no control over the initial interest rate assumption or the errors that may result from it. Technical or default reestimates correct the actual performance of the loan program. Technical reestimates adjust the subsidy estimate for unanticipated changes in delinquencies, default rates, recoveries, prepayments, and receipts from fees, and so forth. Subsidy reestimates are prepared annually. Upon completion of the reestimate, the agency will forward it to the OMB for review and approval. Audit and accounting guidance regarding preparation and documentation of this process is provided in TRs No. 3 and No. 6, discussed earlier. Financial Statement Disclosure In addition to including the results of credit programs in the budget and audited financial statements, credit agencies are further required by SFFAS Nos. 2, 18, and 19 to provide additional information on the credit program. The required form and content of these disclosures is defined in OMB Circular No. A-136, Financial Reporting Requirements. A series of tables illustrating the status of loan programs, including a reconciliation of the allowance for subsidy (or loan guarantee liability for a guaranteed loan program), are required. In addition, the tables must be supplemented by narratives and discussions on the following topics: • Description of the characteristics of the loan programs • Events that have had a significant and measurable effect on the subsidy rates, subsidy expense, and subsidy reestimates • Nature of modifications • Number of and restrictions on foreclosed property The information that must be disclosed for each loan program (including guarantees) includes • Direct loans obligated prior to fiscal year (FY) 1992 (pre–credit reform) • Direct loans obligated after FY 1991 • Total amount of direct loans disbursed (for the current and prior reporting year for each program) • Subsidy expense for direct loans by program and component • Subsidy expense for new direct loans disbursed • Direct loan modifications and reestimates • Total direct loan subsidy expense

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• • • • • • •

Subsidy rates for direct loans by program and component Schedule reconciling beginning to ending subsidy cost allowance balances Defaulted guaranteed loans from pre-1992 guarantees Defaulted guaranteed loans for post-1991 guarantees Guaranteed loans outstanding Liability for loan guarantees Subsidy expense for loan guarantees by program and component • Subsidy expense for new guarantees • Loan guarantee modifications and reestimates • Total loan guarantee subsidy expense • Subsidy rates for loan guarantees by program and component • Schedule for reconciling loan guarantee liability balances for post-1991 loan guarantees • Administrative expenses

6

THE DEPARTMENT OF THE TREASURY

The Department of the Treasury, as part of the executive branch, promulgates detailed fiscal guidance to federal operating entities, maintains a central accounting system, makes disbursements on behalf of the federal government, and meets the constitutional mandate of publishing “a regular statement and account of receipts and expenditures.” Congress controls the federal purse strings, but Treasury is the “keeper of the purse,” ensuring that the desired cash flow actually occurs and is monitored, maintained, and reported on. Throughout this book, references are made to the Secretary of Treasury and the Department of the Treasury, respectively. A word of caution: there is a federal executive within Treasury with the title Treasurer of the United States. This executive, whose signature appears on savings bonds and all legal currency, is a subordinate official within Treasury with no substantive role for the budgeting, accounting, or reporting in the federal government. LEGAL BASIS FOR TREASURY ACTIVITIES The need for central accounting and the responsibility for the function appears in the Constitution of the United States. Article 1, Section 9 states No money shall be drawn from the Treasury, but in consequence of appropriations made by law; and a regular statement and account of receipts and expenditures of all public money shall be made from time to time.

The basis for and operating definition of a congressional appropriation has been consistent and unchallenged since the Constitution was created. The first Secretary of the Treasury, Alexander Hamilton, expressed the view of congressional appropriations that prevails to this day. The design of the Constitution in this provision was, as I conceive, to secure these important ends—that the purpose, the limit, and the fund over every expenditure should be ascertained by a previous law. The public security is complete in this particular, if no money can be expended, but for an object, to an extent, and out of a 1 fund, which the laws have prescribed.

The Treasury, founded in 1789, is among the oldest of federal agencies and is the principal fiscal agent of the government. It is charged by law with the responsibility for maintaining the central accounts of the government. In practice, the central accounts actually include only those accounts relating to the collection, accounting, 1

F. W. Powell, “Control of Federal Expenditures—A Documentary History” (Washington, D.C.: Brookings Institution, 1939), p. 133, as quoted by the Committee on Government Operations, U.S. Senate, in Financial Management in the Federal Government (Washington, D.C.: 1971).

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and disbursing of cash, which together prescribe a uniform system of fiscal reporting for all federal entities. In 1994, the Government Management Reform Act required that Treasury, for the first time in the country’s history, prepare and submit to Congress an annual audited financial statement reflecting the overall financial position of the United States government. The Treasury has numerous other functions, some of which include managing the federal public debt (i.e., borrowing, managing the federal cash flow, repaying federal principal and interest); serving as the government’s banker for a system of commercial depository banks and the Federal Reserve Banks; and printing currency and minting coinage. The Treasury’s responsibilities for central accounts and reporting are distinct from its responsibilities related to accounting and reporting for its appropriations and for the fiscal management of its operations. As a federal entity, the Treasury is still responsible for managing and costing its own performance in the same manner and subject to the same federal laws and regulations for congressional appropriations and stewardship as all other federal entities. Many laws since the Constitution have defined the Treasury’s fiscal responsibilities. Some of the older and more notable (and a few of the more recent) include • House of Representatives Order—The U.S. House of Representatives has long required, by standing order, an annual report on receipts and outlays of the federal government. On the first day of each regular session of Congress, the Secretary [of the Treasury] shall submit to Congress a report for the prior fiscal year on the total amount of public receipts and public expenditures listing receipts and public expenditures, when practicable, by ports, districts, and states and the expenditures by each appropriation. [31 USC 331 (c)] The Secretary of the Treasury shall prepare reports that will inform the President, Congress, and the public on the financial operations of the United States Govern2 ment. [31 USC 351 (a)]

• Dockery Act of 1894—This Act was more specific with respect to the Treasury’s reporting. It stated that it was now the duty of ...the Secretary of Treasury annually to lay before Congress, on the first day of the regular session thereof, an accurate combined statement of the receipts and expenditures during the last preceding fiscal year of all public moneys....

• Budget and Accounting Procedures Act of 1950—The Treasury’s responsibilities continued to be refined into the late twentieth century. For example, the Budget and Accounting Procedures Act of 1950 provided that ...the Secretary of the Treasury shall prepare such reports for the information of the President, the Congress, and the public as will present the results of the financial operations of the Government.... 2

H.R. standing order, dated December 31, 1791, later superseded by 31 USC 331(c) and 351(a), U.S. Department of the Treasury, Annual Report of United States Government (Washington, D.C., December 23, 1994).

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• Government Management Reform Act of 1994—A more recent refinement of the Treasury’s accounting responsibility appears in the Government Management Reform Act. In the 200-year existence of the country, neither congresses nor presidents encouraged the development of an annual financial statement for the federal government as a whole. This 1994 Act [section 3515(c)] now requires that ...the Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget, shall annually prepare and submit to the President and the Congress an audited financial statement for the preceding fiscal year.... The financial statement shall reflect the overall financial position, including assets, liabilities, and results of operations...of the United States Government...in accordance with the form and content requirements set forth by the Director of the Office of Management and Budget.

THE CENTRAL ACCOUNTS SYSTEM The central system of accounts is a consolidated record on the fiscal position of the government for which a legal reporting must be made by the Treasury to Congress, the President, and the public. The central accounts are not the government’s overall general ledger for all assets, liabilities, receipts, and expenditures, nor the operating, subsidiary, and support data accounts for federal programs. Further, the central accounts are of minimal or no utility to department and agency heads and their financial and program managers. The central accounts reflect only the cash, receivables, liquid assets, and liabilities of the United States, publicly reported by the Treasury on a daily, monthly, and yearly basis. The information in the Treasury’s central accounts does not originate from and cannot be documented at the Treasury. This information is submitted by federal agency disbursing and collecting officers monthly or more frequently to the Treasury, which posts the information into the central accounts. Accounting Activities in the Central Accounts System Supporting the central accounts is a receipts and expenditures fund coding system of government-wide fund symbols, published annually. This coding structure must be used by all federal establishments when reporting cash receipts and disbursements to Congress, the Office of Management and Budget, the Government Accountability Office, and the Treasury. Though the term “appropriation” is most often used in reference to federal obligation and expenditure transactions, the term applies equally to federal receipts. Receipt and expenditure symbols assigned by the Treasury identify several key facts about congressional appropriations and other budget authorities: (1) the department or agency; (2) the fiscal year; (3) years of fund availability; and (4) the appropriation number. This account symbol structure is similar for both receipts and expenditure appropriations. Accounting for receipts. Statements are submitted monthly to the Treasury by many federal disbursing officers and collection officers showing both funds disbursed and funds collected and deposited on behalf of the government. Collections

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arise from several sources and are classified accordingly. When they are classed by the nature of the receipt, one of the titles that follow would generally be used. Note that these titles are not mutually exclusive, but rather serve different reporting objectives. • Governmental receipts—Collections resulting from the sovereign right to levy and collect taxes (e.g., income taxes and duties) • Proprietary receipts—Collections resulting from business-type operations of various agencies (e.g., licenses, sales of publications, fees) • Intrabudgetary receipts—Collections resulting from activities between various federal accounts that do not increase the net funds of the federal government Other classifications are used to identify receipts by the type of fund into which they will be added. This classification would define receipts in this manner: • General fund receipts—All receipts not earmarked by law for specific purposes (e.g., income tax revenue, custom duties, and several types of miscellaneous receipts) • Special fund receipts—Receipts from specific sources that are earmarked by law to finance specific programs of the government It is the general fund receipts that comprise the appropriations used to finance the discretionary programs set forth in the President’s budget request, pursuant to review and approval of Congress. Receipts might also be referred to by their source. In this instance, examples of sources would be income tax receipts, alcohol and tobacco taxes, and custom receipts collected by agencies within the Treasury. As mentioned, none of these classification groupings or terms is mutually exclusive and, in practice, some confusion exists. Once the receipts are classified by their nature, their source, or the type of fund, the vast majority of receipts or collections are recorded in two general fund accounts: 0100—Taxes or 0300—Customs Duties. Exhibit 6.1 illustrates some of the principal receipt appropriation fund symbols established by the Treasury. Historically, the symbol used by the federal collection agency has consisted of a six-digit code. The first two digits identify the collecting department or agency; the next four digits identify the fund type or type of receipt. Exhibit 6.1: Account Symbols and Titles for Major Classes of Receipts by Fund Type of fund General Fund Governmental Receipts Taxes Custom duties Receipts from monetary power Fees for regulatory and judicial services Fines, penalties, and forfeitures War reparations and recoveries under military occupations Gifts and contributions Clearing accounts

Account symbol

0100 0300 0600 0800 1000 1100 1200 3800

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Type of fund Proprietary Receipts Interest Dividends and other earnings Rent Royalties Sale of products Fees and other charges for services and special benefits Sale of governmental property Realization upon loans and investments Recoveries and refunds Special Fund Trust Fund Departments and agencies District of Columbia

109

Account symbol 1400 1600 1800 2000 2200 2400 2600 2800-2900 3000 5000 7000-8999 9000-9999

SOURCE: Adapted from United States Department of the Treasury, Financial Management Service, Treasury Financial Manual, (Washington, D.C.).

Over the years, the Treasury has identified over 1,000 separate appropriation receipt accounts; however, only a few are applicable to any single department or agency. In fact, the GAO once noted that nearly 80% of the federal government’s resources are related to less than 5% of the budget accounts. Conversely, 85% of all 3 budget accounts contain about 6% of the federal total budgetary resources. Accounting for disbursements/outlays. A congressional appropriation is required to provide an agency with the authority to obligate and expend funds. These appropriations could be related to general, special, or trust fund appropriations and other budget authority, all of which can be conferred only by Congress. Once funding is appropriated, the Treasury must inform the responsible agency of the amounts available for obligation and expenditure by way of a Treasury warrant. Treasury account symbols for expenditure appropriations may contain varying numbers of digits, possibly up to ten. As with the receipt appropriations, there is an agency identifier—the same code as used for receipts. For expenditure account symbols, however, four more digits have been assigned to designate the type of fund from which the expenditure is to be made. Additionally, the expenditure symbol describes the duration for which obligational authority exists, by identifying the date the authority expires. • A one-year appropriation is available for obligation for a period of one fiscal year and is designated by the last digit in the fiscal year (i.e., years ending on September 30, 1999 and 2000 would be shown as “9” and “0”). • A multiple-year appropriation is available for obligation for more than one fiscal year and is designated by showing the first and last years for which obligational authority exists (i.e., a three-year appropriation beginning in fiscal year 1999 and ending in 2002 would be shown as “9/2”). 3

U.S. Government Accountability Office, Budget Account Structure—A Descriptive Overview, report GAO/AIMD-95-179 (Washington, D.C., 1995), p. 369.

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• An expired appropriation is no longer available for obligation, the authority to obligate these funds having expired at least five fiscal years earlier. Any obligated balances still unliquidated five years after the expiration date of an appropriation are transferred to the Treasury. At the Treasury, these unliquidated obligation balances are merged into the central accounts. Particular Treasury accounts are designated by the letter “M” in lieu of a fiscal year digit to signify merged accounts. Exhibit 6.2 illustrates the coding that might be used for a multiple-year appropriation. Exhibit 6.3 lists the nature of major expenditure fund appropriation account symbols used by the Treasury in its central accounts for past years. Exhibit 6.2: Illustration of Treasury Receipt and Expenditure Appropriation Account Symbols RECEIPT APPROPRIATION ACCOUNT SYMBOL 3

6

4

2

2

0

Agency identifier (in this case, the Veterans Administration) Summary fund group in which receipt is recorded (in this case, fees for services) Subsidiary account (of the Veterans Administration)

EXPENDITURE APPROPRIATION ACCOUNT SYMBOL 2

0

0-

1

1

8

0

1

Agency identifier (in this case, the Treasury) Period available for obligation (in this case, multiple fiscal years of 2000 and 2001) Fund purpose of the appropriation (in this case, the specific accounts for Salaries and Expenses, Bureau of Governmental Financial Operations)

SOURCE: Adapted from the United States Department of the Treasury, Treasury Fiscal Requirements Manuals, Receipts, Appropriations, and Other Fund Account Symbols and Titles (Washington, D.C.).

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Exhibit 6.3: Appropriation and Other Expenditure Account Symbols by Fund Type of fund General fund Management, including consolidated working fund Revolving fund Public enterprises Intragovernmental Special fund Deposit fund Trust fund Departments and agencies (exclusive of the District of Columbia) District of Columbia

Account symbol 0000–3899 3900–3999 4000–4499 4500–4999 5000–5999 6000–6999 7000–8999 9000–9999

SOURCE: Adapted from the United States Department of the Treasury, Treasury Financial Manual (Washington, D.C.).

Accounting for expired receipt and expenditure appropriations. Concerned about abuses and certain unintended practices by some subcommittees and executive branch agencies, Congress passed and the President approved Public Law (PL) 101510. This law changed the historical practices with respect to the use of and accounting for expired appropriations. Public Law 101-510 states that all federal entities may expend their remaining budget authority for five years after the expiration of a definite (as to the time availability, purpose, or amount) appropriation to pay unliquidated obligations and liabilities still on the books. At the end of that five-year period, all authority to spend, both obligated and unobligated, is canceled. The unused budget authority is withdrawn from federal entities and transferred to the Treasury, and any receivables and 4 payables on the books are canceled for the expired appropriation. Treasury guidance provides that at the time of cancellation, an account receivable is established in a miscellaneous receipt account of the Treasury for future collection efforts. Upon collection, the funds are deposited in the miscellaneous receipt account of the Treasury. With respect to obligations and payables, if these claims prove valid, the Treasury will pay the claim, provided that two tests are met: 1. The first test is applied to the old appropriation—in other words, the nowexpired appropriation. There must be unused, canceled appropriation or budgetary authority sufficient to have funded the payments if such payments had been made from the old appropriation. Failure to meet this test will most likely result in a violation of the Anti-Deficiency Act, prohibiting obligations and expenditures in excess of an apportionment approval of the OMB or an appropriation of Congress. 2. The second test is applied to the new appropriation of the department or agency. The total payments from the new appropriation for obligations and 4

Financial Management Service, Department of the Treasury, Accounting for Expired Appropriation Authority Under Requirements of P.L. 101-510 (Washington, D.C., 1991).

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payables of the old appropriation cannot exceed 1% of the new appropriation. This 1% amount will be separately apportioned. Unused amounts from the 1% may be transferred back to the remaining 99% and used to fund new transactions. If such payments to be made exceed the 1% limitation, additional budgetary authority must be sought from Congress. Under OMB guidance, the liabilities may not be recorded on the books of a subsequent appropriation until (1) valid bills are received for payment, and (2) it is certain that payment will be made from that subsequent appropriation. With respect to an appropriation that is available for obligation or expenditure for an indefinite period, the obligational or expenditure authority will be canceled only if the head of the department or agency concerned or the President determines that the purpose for which the appropriation was made has been carried out and no disbursements have been made for two consecutive fiscal years. If an indefinite appropriation is canceled, all status accounts for that appropriation are closed. Note that with respect to both indefinite and expired definite appropriations, the emphasis is on existing unliquidated obligations and existing liabilities. A federal establishment is not permitted to enter into new obligations or incur new liabilities once an appropriation has expired. Reporting for Central Accounts Reporting to the Treasury by federal entities. Within federal departments and agencies, the reporting to the Treasury is viewed as an external reporting function that has minimal utility to most executives of individual federal entities. Most departmental program managers are oblivious to their entity’s reporting for central accounts purposes, and even if they were interested, they would not be able to use the reported data for any operational or management purpose. In these Treasury reports, expenditures are shown on a checks-issued basis and include both cash payments and withdrawals or advances made under federal letters-of-credit. Receipts are shown on the basis of cash collected as reported by the many federal disbursing and collecting officers. The receipts and expenditures for the United States government and related budget surplus or deficits are published monthly by the Treasury based on the information submitted to it by federal disbursing and collecting officers. A monthly Treasury statement reconciles the central accounts and the accounts of various reporting agencies. This central reporting is fairly streamlined, involving minimal forms and documents, and will vary for each federal entity depending on whether receipt and expenditure transactions for these entities are handled directly by the Treasury or whether the entity is an exempted entity that makes its own collections and directly disburses funds. Entities such as the Department of Defense, some other offices, and certain government corporations are exempted. For such an entity, the reporting of collections and disbursements is done directly through its disbursing officer without separate reporting by that entity to the Treasury. Those entities that are not exempted, however, must subscribe to the reporting forms and procedures that follow.

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Statements of transactions and accountability. Reporting by most federal entities includes the monthly submission of a statement of transactions showing total receipts and disbursements for the month. This reporting (done for years on government-wide Standard Forms) must be accompanied with details showing lists of confirmed deposits and debit vouchers shortly after the end of the month (historically, no more than three days). Receipts and disbursements must be reported by related appropriation, fund type, and symbol. Each of the three types of disbursements requires its own specific statements: (1) disbursements from foreign service accounts, (2) disbursements made by agencies on their own behalf, and (3) disbursements made by federal Treasury disbursing officers at the request of individual departments and agencies. Statement of obligations. Reports of obligations are submitted by most federal entities to the Treasury after the close of each month. Such a reporting is made for each general fund, management fund (as well as consolidated working funds), revolving fund, special fund, and trust fund when it is anticipated that the reportable obligations of the fund will exceed $1 million in a fiscal year. Amounts on these reports must agree with the related obligational data also submitted to the OMB. Statement of unexpended appropriation balances. A year-end closing statement on the unexpended balances of appropriations shown on department and agency records must reconcile to those shown in the central accounts of the Treasury. This reconciliation takes into consideration several events that might have previously been unknown to the Treasury, such as transfers of amounts or balances to the “M” accounts; withdrawals of appropriated amounts; reimbursements; and receivables, outstanding undelivered orders and contracts, payables, and other liabilities. This statement is used to monitor compliance with the provisions of the AntiDeficiency Act relating to the validity of reported obligations and the possible need for supplemental appropriations. Financial condition and income, and retained earnings reporting. A statement of financial condition (i.e., a balance sheet) and a related statement of income and retained earnings is submitted by fiscal quarters, semiannually and annually, to the Treasury by any revolving fund or business-type activity operating within the federal general fund or special funds. Reporting by the Treasury. The central accounts of the Treasury have as their principal purpose the support of several financial reportings that the Treasury must make to Congress, the President, and the general public. These financial reports are an accounting, essentially on a cash basis, for the operations of the federal government as a whole, and include • The daily statement of the United States Treasury • The monthly statement of receipts and outlays of the United States government • Combined statement of receipts, expenditures, and balances of the United States government

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Daily Treasury Statement. Each day, the Treasury releases a report of transactions affecting its central accounts. The Daily Statement of the United States Treasury includes information on the fiscal position of the government, such as • Statement of assets and liabilities concerning only the central accounts of the Treasury • Summary of changes in the balance of the central accounts, for the month, year-to-date, and the corresponding periods of the prior year • Summary of cash deposits and withdrawals for the month, year-to-date, and the corresponding periods for the prior year • Summary of certain transactions reflecting increased value of outstanding public debt securities sold at a discount during the period At month-end, certain additional information is published to supplement the Daily Treasury Statement. The additional content issued on the last day of each month relates to • A detailed statement of public debt receipts and expenditures for the month, year-to-date, and the corresponding periods for the prior year • A summary of public debt and guaranteed debt outstanding for the current date and the corresponding date for the prior year • A detailed statement of outstanding public debt, showing the amount of each obligation issued, both retired and outstanding • A statement of guaranteed debt of the government, at the end of the month • A summary of direct and guaranteed debt outstanding at certain dates • A summary of the amount of savings bond issued and retired for the month, year-to-date, and the corresponding periods for the prior year • A statement of securities of government corporations and other agencies held by the Treasury at month-end Monthly Treasury Statement of Receipts and Outlays of the United States. The Treasury’s Monthly Statement of Receipts and Outlays reflects the budget surplus or deficit on a cash receipts and disbursement basis, not on a full accrual basis of accounting. Receipts are reported as collected, and outlays are reported on the basis of checks issued and cash payments made. The exception is the public debt, which is reported on an accrual basis. This monthly statement is comprised of several tables containing such information as • Budget receipts, outlays, and related surplus or deficit for the prior year, current year-to-date, and estimates for the full current year, as well as the means of financing the budget • Budget receipts for the current year-to-date classified by major sources and budget outlays and by departments, agencies, and other organizations, and compared to budget estimates for the year • Budget receipts and outlays for the current month, year-to-date, and the corresponding period for the prior year by divisions in the budget document to permit comparison to budget estimates

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• Means of financing the budget classified by assets and liabilities directly related to the budget, showing net transactions for the month and for current and prior fiscal years to date, as well as account balances at the beginning of the current year and month and the balances at the close of the month • Budget receipts and outlays for each month of the current year, cumulative totals year-to-date, and a comparison to the prior year-to-date • Summary of trust fund receipts and outlays for the current month, current year-to-date, and securities held as investments at the beginning of the current year and month and at the end of the month • Summary of net receipts by source and outlays by function for the month, current year-to-date, and the corresponding period of the prior year This monthly report is published on a preliminary basis shortly after the close of the year. At this time, not all receipts and disbursements have been included in the accounts. However, it is the balance of this preliminary statement that is used to announce the federal government’s budget surplus or deficit for the year. A final statement, issued months later, will contain the official financial position for the fiscal year, and will vary slightly from the earlier preliminary statement. Combined Statement of Receipts, Expenditures, and Balances of the United States Government. Annually, the Treasury issues the Combined Statement of Receipts, Expenditures, and Balances of the United States Government in book form. This statement contains extensive tabulations of financial data, and is segregated into several parts: • Three financial statements for the federal government: the balance sheet, a statement of receipts and outlays, and a financing statement that shows when and what type of financing was provided and applied to the operations of the federal government • One part concerning income tax revenues, customs, and miscellaneous receipts for the fiscal year. This information is shown by source, category, and organizational entity. Data are also provided on individual income tax collections for social insurance programs, capital transfers, customs collections by district and ports, and income tax receipts by states and districts • A detailed statement of appropriations, outlays, and balances, for the fiscal year by (1) budget expenditure accounts; (2) deposit fund accounts; and (3) a summary of budget authority, appropriations, outlays, and balances • Informational tables containing data on appropriations and authorizations, public debt, and status of special and trust fund receipts • Information relating to each foreign current account for currencies acquired by the government without payment of dollars or other means Some of this information (e.g., the financial statements, details on receipts and appropriations, and outlays and balances) is compiled from the central accounts maintained by the Treasury. Other information in this annual statement is reported as received by the Treasury from individual departments and agencies. Consolidated financial statements of the United States government. Since 1975, the Treasury has issued prototype consolidated financial statements for the

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federal government in an attempt to provide a comprehensive financial reporting on the full range of federal government activities, structured in a manner similar to annual commercial or corporate financial statements. A recent refinement of the Treasury’s accountability report was the Government Management Reform Act of 1994. The Act now requires ...the Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget, shall annually prepare and submit to the President and the Congress an audited financial statement for the preceding fiscal year….The financial statement shall reflect the overall financial position, including assets and liabilities, and results of operations of the executive branch of the United States Government and shall be prepared in accordance with the form and content requirements set forth by the Director of the Office of Management and Budget.

Types of Accounts in the Central Accounts System The central accounts maintained by the Treasury (with the exception of the accounts that the Treasury must maintain to keep track of its own appropriations and budget authority) are essentially a cash-basis, government-wide reporting system. The Treasury’s central accounts consist of financial information reported by other federal departments and agencies. Within this central system, the Treasury has established receipt and outlay accounts that are further identified by budget accounts and other accounts. Budget accounts. Essential to the Treasury’s central accounts is an elaborate appropriation and fund accounting coding system. The federal budget accounts are numerous and include both receipt and expenditure accounts. General fund receipts accounts. These accounts are credited with all receipts not earmarked by law for a specific purpose. General fund receipts primarily include Internal Revenue Service collections—income, excise, estate, gift, and employment taxes. Also included in this category are collections of duties through the Customs Service and a variety of other legally mandated collections. Special fund receipts accounts. These receipt accounts are credited with cash from different sources earmarked by law for specific purposes, but which are not generated from a cycle of government operations. Examples include rents and royalties under the Mineral Leasing Act, visitor revenues at Yellowstone National Park, and proceeds from the sale of timber from federal lands. Congress may appropriate these receipts for use by the collecting federal establishment on an annual basis for indefinite periods of time. General fund expenditure accounts. These expenditure accounts are maintained by federal entities to record amounts appropriated by Congress to be spent for the general support of activities and programs of the federal government. The department and agency general fund expenditure accounts are classified according to (1) limitations established by Congress as to the period of availability for obligations (e.g., one-year, multiple-year, no-year) and (2) the department or agency that is authorized to enter into obligations and approve outlays.

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Special fund expenditure accounts. These accounts are established to record appropriated amounts of special fund receipts that are to be expended for special programs in accordance with specific provisions of law. Revolving fund accounts. Revolving funds are authorized by law to finance a continuing cycle of operations in which outlays generate receipts that are available for further outlay, generally with no further action of Congress. Such funds may be classified as public enterprise funds (i.e., receipts coming from outside of the government) or intragovernmental funds (i.e., receipts coming from other appropriations or funds within the federal government). Franchised fund accounts. In 1994, by the Government Management Reform Act, Congress established a number of franchise funds, which are financed in a manner similar to revolving funds. The franchise funds are reimbursed fees for services rendered. The reimbursed fees are set at a level to cover total estimated costs of the services and are deposited in the agency’s accounts to remain available until expended to carry out the purposes of the fund. These types of funds are generally no-year–type funds that may be expended with limitation as to the period of availability. Consolidated working fund accounts. Consolidated working fund accounts are established by Congress to receive and disburse advance payments from agencies pursuant to Section 601 of the Economy Act of 1932, as amended, and other laws. Under this Act, advances may be made by some agencies to the receiving entity, which is then responsible for accounting for the advance in a consolidated working fund account. Such a fund can be established for the period of appropriation availability applicable to the purpose for which the advances were received. The supporting subsidiary accounts must be maintained by the receiving agency to differentiate the several appropriations from which the funds were received. Thus, the account symbols and titles assigned to these funds must be those published by the Treasury. Consolidated working funds may be credited with advances received from more than one appropriation for procurement of goods and services. The goods and services would then be furnished by the performing federal entity in the same fiscal year. This type of working arrangement permits one federal agency to procure goods or services from another agency that might have a prior existing capability, thus saving the buying agency from establishing a duplicate capability. Monies in consolidated working fund accounts are subject to the same fiscal year limitations of the appropriations or funds from which advanced. That is, oneyear monies advanced by an agency to a consolidated working fund must still be obligated within the one fiscal year of availability. Limitations applied by Congress to appropriations do not change by the mere transfer of agency funds to a consolidated working capital fund. Consolidated working capital funds accounts may not be used to launder or change the terms attached to the original appropriation or budget authority of the buying agency. Management fund accounts. These accounts are authorized by Congress to facilitate accounting for and administration of intragovernmental activities (other than a continuing cycle of operations) that are financed by two or more appropriations. In

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many ways, the operation and classification of management fund accounts also applies to the consolidated working funds in the preceding section. Trust fund accounts. Generally, a nonfederal trust fund denotes money belonging to one party that is held in trust by another that is acting in a fiduciary status. In these circumstances, the trustee can collect or expend funds only in strict accord with the trust agreement; the trustee cannot unilaterally modify the terms of the trust. Legally, trust funds must be separately recorded and not commingled with the trustee’s own money. This is not the case with a federal trust fund account. For the most part, dollars collected for federal trust funds are commingled with other receipt accounts and included among the federal budget receipts. There is no legal fiduciary relationship between the federal government and the contributing public. Neither the donor of the cash nor the beneficiaries of the trust own the corpus of federal trust funds. Congress can and does unilaterally change the terms of the trusts. These special federal funds and trust funds are merely aggregates of budget accounts or accounting conventions, and consist of one or more receipts and expenditure accounts. The largest such federal trust funds include social insurance programs (e.g., Social Security and unemployment compensation) and federal employee programs (e.g., retirement and health benefits). From a congressional perspective, a trust fund account is an earmarking or separate accounting to record receipts and outlays of money held in trust. The congressional intent generally is merely to separately designate or earmark the use of receipts for specific purposes or programs in accordance with terms of a trust statute. Though by law separate receipt and outlay accounts are established, with few exceptions, there is no reserved cash fund corpus in these trust fund accounts. If the trust corpus is established to perform a business type of operation, the fund entity is called a “revolving trust fund.” Major trust fund accounts might be those financed by an excise tax, for example: highways, airports, and other public works. Yet even here, Congress can and does change the terms of these trusts. Transfer appropriation accounts. Transfer appropriation accounts are established by the Treasury to receive, account for, and disburse allocations of congressional appropriations. Allocations, in this sense, are not expenditure transactions within the government at the time the allocations are made. That is, at the time of transfer from one agency to another, no disbursement has been made outside of the government. Other accounts. At times, the Treasury maintains another kind of account—a deposit account. Deposit fund accounts that combine receipts and outlay accounts are established for money to be held by the government either in suspense, and to be later refunded or paid into some other fund upon legal determination of the proper disposition, or as a banker or agent for others, and paying the funds at the direction of the depositor. Typically, these deposit funds are not available for paying salaries, expenses, grants, or other outlays of the government.

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TREASURY FISCAL POLICIES AND PROCEDURES Like the Office of Management and Budget, the Treasury has its own codification of federal fiscal policies, procedures, and instructions, as well as circulars for discharging its responsibilities and promulgating guidance to federal establishments. Principal among the Treasury’s publications is the Treasury Financial Manual, with guidance on the form, content, and reporting frequencies relating to its central accounts responsibilities as well as the procedures and standard forms relating to payrolls and other disbursements, receipts, and the collection and deposit of public money. By several laws, federal departments and agencies must incorporate Treasury requirements into their appropriation accounting and reporting systems, recognizing that the Treasury Financial Manual contains only a portion of the financial data needed to manage a federal department or agency. A relatively recent addition to the Treasury Financial Manual is the United States Standard General Ledger (SGL), mandated by the Treasury as the accounting and reporting basis for the federal government. For example, this supplement to the 5 manual states • The SGL is to be used in all federal financial systems as defined in OMB Circular A-127, Financial Management Systems. Consistent with OMB Circular A-127, all financial management data should be recorded and reported in the same manner throughout the agency, using standard definitions and classifications of the SGL. • The SGL is to be incorporated by each agency into its “single integrated financial system.” The purpose of the SGL is to provide a uniform chart of accounts and uniform supporting transactions to be used for standard federal agency accounting and the preparation of standard external reports, such as reports from departments and agencies to the Treasury, the OMB, and Congress. Cash Disbursements and Accountable Officers The disbursement process of the federal government requires that individual federal agencies provide controls over the incurrence of obligations and liabilities that will ultimately require the payment of money by the Treasury. Once a federal entity determines that a liability or claim must be paid, a request for payment is sent to the Treasury, which, in turn, by check, electronic funds transfer, or letter of credit, makes the actual disbursement of money. The Treasury then provides a report to the federal entities on whose behalf the cash was disbursed. Thus, most federal entities do not literally pay bills or issue checks; rather, payments are made through a coordinated disbursing process supported by a system of internal fiscal controls both at the Treasury and the individual federal agencies. Accountable officers defined. The federal disbursement process revolves around a group of federal executives and designated staff, referred to collectively as 5

Introduction to Treasury Department, U.S. Government Standard General Ledger (Washington, D.C.: Financial Management Service, last updated November 14, 2005).

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“accountable officers.” These individuals perform critical functions within the federal disbursement cycle. An accountable officer could be an authorized disbursing officer, certifying officer, collecting officer, or cashier (7-GAO-81-83). An accountable officer is a federal employee responsible for an “account” that must be “settled.” These two words, too, have specific meaning within federal financial management. An account is an accountable officer’s records pertaining to the public funds received, disbursed, or retained by this individual during his or her tenure as an accountable officer. (Certifying officers are not required to maintain an account, but the term is often used and refers to the vouchers and other documents approved by these officers during their tenures in office.) Settlement is the close-out reporting by an accountable officer and the final administrative determination of amounts due or discrepancies remaining at the end of the final reporting period for which an accountable officer is liable. The GAO describes the functions of accountable officers as relating to or including • Federal funds on hand • Federal funds deposited in designated depositories, and which have been confirmed by the depositories • Federal funds deposited in designated depositories, the confirmation of which has not been received from the depositories • Cash and other funds advanced to government cashiers for use as imprest funds • Money disbursed on incomplete vouchers or voucher schedules • Money overpaid in contravention of completed vouchers or voucher schedules The responsibilities of the various accountable officers also vary. Not all will perform all of these functions. Disbursing officer responsibilities. The term “disbursing officer” usually refers to officials or employees of the Treasury. However, employees of other federal entities may also be authorized to receive money and make cash disbursements. Still others might be authorized to make limited, minor disbursements; these are known as imprest fund cashiers. In most instances, these cashiers are not employees of the Treasury, but exercise their fiscal responsibilities in accordance with Treasury regulations and guidance. These responsibilities of a disbursing officer have been formalized by statute (Title 31 UCS 82): • To disburse monies only upon and in strict accordance with vouchers duly certified by the head of the department, establishment, or agency concerned, or by an officer or employee thereof, duly authorized in writing by such head to certify such vouchers • To make such examination of vouchers as may be necessary to ascertain whether they are in proper form, duly certified and approved, and correctly computed on the basis of the facts certified • To be held accountable accordingly

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It is a general practice of federal entities to establish imprest or petty cash funds and to designate employees as cashiers or alternate cashiers. Typically, the fund is instituted by the federal entity receiving an advance for the fund corpus from the Treasury. The imprest fund controls are established by the Treasury, and fund disbursements are generally limited to such disbursements as minor vendor payments, advances to employees, and reimbursements to employees for authorized expenses. An indication of the extent of the federal disbursing system is the number of people in certifying and disbursing officer roles—there are over 14,000 certifying officers in civilian federal entities and another 859 disbursing officers within the Department 6 of Defense. Certifying officer responsibilities. The certification of vouchers upon which a disbursing officer will rely in making a disbursement is an administrative action and a responsibility of the individual federal entities. The individual federal agency must comply with government-wide Treasury regulations governing disbursements. Specific legislation may contain additional criteria that must also be considered by the certifying officer of a federal entity. Title 31 USC 82 states • An agency certifying officer shall be held responsible for the existence and correctness of the facts cited in the certificate or otherwise stated in the voucher and its supporting papers and for the legality of the processed payment under the appropriation or fund involved. Disbursing officers shall not be held accountable for the correctness of such computations. • An agency certifying officer must be bonded with sufficient surety, approved by the Secretary of the Treasury, in an amount determined by the agency head pursuant to Treasury standards. • An agency certifying officer is held accountable for and required to make personal restitution to the government for any illegal, improper, or incorrect payment resulting from any false, inaccurate, or misleading certificate, as well as any payment prohibited by law that does not represent a legal obligation under the appropriation or fund involved. Accountable officer liabilities. The existence and functioning of fiscal controls at the federal entity are important to ensure compliance with the funding intent of Congress. Personal liability exists for those accountable officers violating the conditions of congressional appropriation and funding limitations. The government devotes considerable resources to the monitoring of fiscal practices to ensure compliance with the Anti-Deficiency Act. Specifically, federal accountable officers generally have detailed knowledge of and take deliberate actions to avoid violating regulations historically referred to as Section 3679 of the Revised Statutes. Anti-Deficiency Act prohibitions. The several prohibitions contained in the Revised Statutes of the United States provide that no officer or employee of the United States shall 6

Joint Financial Management Improvement Program, Study on Roles and Responsibilities of Certifying and Disbursing Officers (Washington, D.C.).

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• Make or authorize an expenditure from, or create or authorize an obligation under, any appropriation or fund in excess of the amount available therein. • Involve the government in any contract or obligation for the payment of money for any purpose in advance of appropriations made for that purpose, unless such contract or obligation is authorized by law. • Accept voluntary service for the United States or employ personal service in excess of that authorized by law, except in cases of emergency involving the safety of human life or the protection of property. • Authorize or create any obligation or make any expenditures in excess of an apportionment or reapportionment or in excess of the amount permitted by agency regulations prescribed and approved pursuant to the Act. The violation of any of these prohibitions requires that the officer or employee be subject to appropriate administrative discipline, including suspension without pay or removal from office. Where the violation is willful or knowingly committed, an officer or employee, upon conviction, shall be fined not more than $5,000 or be imprisoned for not more than two years, or both. In the discharge of their roles as accountable officers, any disbursing officer, certifying officer, or cashier may obtain advance decisions as to the legality of anticipated obligations and disbursements from the legal counsel of the GAO. The GAO (actually the Comptroller General, who heads the GAO) is required by law to provide decisions in advance of obligating or disbursing actions when requested by agency accountable officers. The GAO’s Office of General Counsel is responsible for preparing these decisions, which are final and conclusive on executive branch entities. The decisions are not binding on actions of Congress or the judiciary or nonfederal contractors, grantees, vendors, or others having a claim against the federal government. These GAO decisions are published individually as issued and annually in bound form by the GAO. Reporting Anti-Deficiency Act violations. Should a violation occur, laws and federal regulations require that the head of the violating federal entity immediately furnish to the President of the United States through the director of the OMB and to Congress through the Speaker of the House and the President of the Senate information on the Anti-Deficiency Act violations. This report is to take the form of a letter that must contain detailed information relating to the title and number of the appropriation or budget authority exceeded or violated; the violator(s); the primary reason for or cause of the violations; statements by the violator(s); the administrative discipline imposed; and, if required, confirmation that a willful and knowing violation has been submitted to the Department of Justice. In addition to the violating actions cited in the Anti-Deficiency Act, OMB Circular A-11 lists several additional reportable circumstances: • Overobligation or overexpenditure of an allotment or suballotment—The OMB describes this as any case in which an officer or employee of the United States has authorized or created an obligation or made an expenditure in excess of the amount permitted by the prescribed and approved agency fund control system.

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• Overobligation or overexpenditure of a credit limitation—The OMB describes this as any case in which an officer or employee of the United States has authorized or created an obligation or made an expenditure exceeding a credit limitation contained in an appropriation Act, restricting the amount that can be obligated or committed for a credit program. • Overobligation or overexpenditure of other administrative subdivisions of funds—The OMB states that, generally, the overobligation of other administrative subdivisions of funds (e.g., allowances, financial plans, statutory limitations other than those in appropriation acts, etc.) are violations of the AntiDeficiency Act when the violation causes an overobligation or overexpenditure of an allotment, apportionment, or appropriation, unless the apportionment or agency fund control regulations specify otherwise. Violations may also occur for that portion of an appropriation that is allocated to another agency. These violations must also be reported through the OMB to the President, by the agency administering the allocation account through the agency administering the parent appropriation account. To comply with the Anti-Deficiency Act and its subsequent revisions and amendments, each federal entity is directed by law and federal regulations to have a system of accounts and controls that permit subdividing (i.e., allotting) the apportioned appropriations among operating units with the objective of monitoring the expenditure of funds at the highest practical level within the agency. Implementation of the Anti-Deficiency Act, as amended, has generally resulted in the design of a system of signatory authorizations and approvals by designated federal entity officials as well as adherence to fiscal review and fund certification procedures. Reporting by accountable officers. Accountable officers of the government must maintain appropriate supporting documentation to account for their stewardship and must additionally make a reporting of their accounts or the funds received, disbursed, or retained. The reporting responsibility is accomplished on two standard forms used government-wide: a statement of accountability and a statement of transactions. Statement of accountability. The statement of accountability is prepared monthly by the disbursing accountable officer regardless of whether there are any transactions to be reported for the period. Generally, this statement will be retained by the officer along with all supporting documentation. In some instances, though, the statement must be submitted to the GAO. In either event, the officer must certify in writing that the submitted report is “a true and correct statement of accountability for the period stated at the office referenced in the report.” An accountable officer must submit the final statement as of the close of the last business day or his or her appointment as an accountable officer for a specific location. The initial statement of accountability by the successor accountable officer must be rendered at the end of the first month in which the successor is appointed. The successor’s opening balance must be the same as the closing balance of the predecessor accountable officer. Statement of transactions. The statement of transactions is prepared monthly and submitted to the Treasury by each accountable officer. This statement forms the basis of the Treasury’s central accounting and reporting on a government-wide ba-

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sis. The statement shows the classification of collections and disbursements specifically identified by appropriation; receipt and fund accounts; and related summary totals for the month. When consolidated statements of transactions are prepared for a federal entity, that entity must maintain an audit trail by the submitting officer from the consolidated statement to the underlying support documents. Settlement audits. The GAO is required to perform settlement or close-out audits of each accountable officer’s account within three years of the GAO’s receipt of the final statement of accountability from an officer. The law requires that this settlement be made by the GAO in this time period if officers are to be held personally liable for any deficiencies. In cases of fraud or criminality, the three-year limitation would not apply. Historically, the GAO, upon completion of the settlement audit, had sent a certification of settlement notice to the accountable officer involved. Federal Disbursements Disbursements in the federal government are payments of cash, which take a variety of forms, including checks issued, letters-of-credit drawndowns, and, increasingly, electronic funds transfers and direct deposits. Payments may be for advances or settlement of claims related to a federal entity’s operations or activities. The OMB, in Circular A-11, defines a disbursement as an outlay of funds. Outlays are amounts of checks issued or payments made, including advances to others. The OMB also states that the terms “expenditure” and “net disbursement” are frequently used interchangeably with the term “outlay.” By law (31 USC 82b), disbursing officers in the executive branch may disburse money pursuant only to properly prepared vouchers received from federal entities. These vouchers must be certified by that requesting entity, and the disbursing officer need only determine that the vouchers are proper in format, properly certified and approved, and accurately computed. The Treasury prescribes the standard disbursement forms used by almost all federal entities. If the invoice or bill includes all of the required information, these documents may be used in lieu of the standard forms. Generally, though, the federal standard forms are used. The required information to support each disbursement must include an identification or reference to facts such as • The items purchased, performance rendered, or services received • The quantity of units received • An acceptance by the government of the items, performance, or services • Applicable contracts, grants, or other agreements • The party to whom the amount is owed • The amount of the debt or payment due • The account, including appropriation, to be charged By law, the Comptroller General may relieve the certifying officer of liabilities for erroneous payments if • The certification was based on official records that the certifying officer did not know to be false, and the facts were such that reasonable diligence and inquiry could not have ascertained that they were false.

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• The obligation was incurred in good faith, payment was not contrary to any statutory provision specifically prohibiting payments of the character involved, and the government has received value for such payment. The Comptroller General is also authorized to relieve accountable officers of liability when losses were caused by a subordinate and not as a result of the accountable officer’s negligence in the discharge of his or her duties. Further, low-dollar disbursement items may be randomly sampled with accountable officers who were not responsible for improper payment not falling within the sampled population. Under certain conditions, federal entities may compromise or settle claims against accountable officers up to $20,000. Such actions relieve these accountable officers for the accounts so compromised or settled. Forms of disbursements. Certain federal entities other than the Treasury— such as the Department of Defense, a few selected offices of the federal government, and federal government corporations—are authorized to disburse federal funds. The Treasury, nonetheless, disburses the vast majority of funds for executive branch entities in various forms and from many geographically dispersed locations. By a network of disbursing centers and regional offices throughout the country, disbursing officers disburse federal funds in their own name. Minor petty cash disbursements are made by cashiers who are located in almost every federal entity. In the case of imprest funds, payments are made from an imprest fund or cash balance initially provided by a Treasury disbursing office. Tens of billions of dollars are authorized by federal entities and disbursed by the Treasury monthly. Many payments are by check, but a significant number of payments are made with increasing frequency by paperless transfers, such as direct deposits. Some such paperless transfers include • An interentity system of vouchers and schedule of withdrawals that permits transfers of funds from one government account to another. This system is limited to transactions between federal entities for which the Treasury is the disbursing agent. A standard government-wide form, processed by the proper disbursing center, serves as a record of payment, thus eliminating the need for a separate payment and reconciliation of checks and balances relating to the transfer of funds. • A simplified intragovernmental billing and collection system enables simultaneous billing and collection of funds between federal entities. The decision to use the expedited payment form must be made by the federal entity doing the billing. Typically, this system is used by federal entities with a high volume of interagency transactions. The OMB and the General Services Administration, two agencies with government-wide responsibilities, use this payment form. • The journal voucher system is another paperless payment transfer system developed and used by the federal Office of Personnel Management for conducting its interentity transactions. • The letters-of-credit system involves nonfederal organizations. Letters of credit are used to make payments to public and private organizations. Under

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this system, the recipient nonfederal organization draws cash against a letter of credit on file with either a Federal Reserve Bank or a Treasury disbursing center (the Treasury Regional Disbursing Office system). The recipient obtains immediate cash, and the recipient organization must shortly thereafter make a reporting of funds withdrawn and of the expenditures or costs incurred for which the withdrawal is made. • The Treasury financial communication system is a computer-to-computer link between Treasury and the Federal Reserve for the automatic transmission of payment and deposit messages between the public and the federal government. This system is used primarily for large, nonrecurring payments, such as transfers of the federal contribution to state unemployment compensation and certain contributions to the International Monetary Fund programs. • The direct deposit/electronic transfer system is used by the federal government to transfer certain types of benefit payments (Social Security, civil service, railroad retirement annuities, etc.) directly to the beneficiary’s account in a commercial bank or other financial organization through the Federal Reserve System. Regardless of format, accounts of disbursing officers must support payments of vouchers duly certified by the requesting executive who has primary control of the appropriation under which the funds are being disbursed or paid. The federal entity requesting payment, not the Treasury, is solely responsible for ensuring that vouchers are not certified for amounts in excess of available funds. Internal controls. Federal entities have established procedures to ensure that requests for Treasury disbursements are for authorized and proper amounts only and that sufficient funds are available from the entity’s appropriation to meet the requested disbursement. While some are similar to any well-managed business enterprise, others are unique to the federal government. Review of anticipated obligations. In advance of a disbursement, each anticipated obligation must be reviewed. The objective of this review is to determine and to have a federal executive certify that no obligation is entered into until after a decision has been made that an unobligated and available appropriation exists to meet the anticipated commitment. The underlying rationale is that an improper disbursement cannot be made for an improper obligation if the questionable obligation is avoided altogether by this earlier review. Certification to funds availability. Prior to obligating funds, federal entities must examine the appropriation funds balance. This action precedes the preaudit (to be described) and is often referred to as the “reservation of funds.” Certifying officials are required to formally acknowledge in writing the appropriateness of the intended obligation; their approval signifies that the purpose, amount, accounting, and anticipated time period of the intended obligation are consistent with the terms and conditions of the appropriation. The reservation of unobligated appropriated funds is generally based on an estimate of the intended obligation. Adjustments are often required once the precise amount of the obligation is known. For contracts and grants that could require prolonged periods to obligate funds, a commitment entry might be formally recorded in

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the entity’s accounting records. Once the obligation is known, the earlier commitment is reversed and the formal obligation is recorded. The fund control process generally takes the form of a manual or computerized fund balance reservation. These records are structured to show the funds status and cumulative data related to commitments, obligations, and the expended appropriated fund balance. More common reservation documents and certifying actions that precede disbursement or payment transactions relate to • Contracts and grants—Procurement requests or purchase orders must often be approved by the appropriate official before legally binding contracts are issued that formally obligate funds. • Grants—Funding authorization documents must generally be completed by appropriate officials for amounts anticipated before legally binding grants are issued that formally obligate federal entity funds. • Travel—Anticipated obligations for travel must be preceded by the completion of a travel order containing an indication of the period, amount, accounting, and purpose of the travel. For employees with extensive travel, a blanket travel order containing an estimate of anticipated travel cost for a full or partial reporting period may be used. With the blanket travel order, the employee need not complete and obtain approval of individual orders for each trip. However, frequent reporting of actual travel expenses is required to ensure that the accounting for the actual travel costs is current. • Salaries—An expeditious (but not suggested) practice exists in the government whereby a federal entity might obligate an estimated amount equal to the total personnel cost of all agency employees on the payroll at the beginning of the accounting period. Such a practice requires that changes or additional commitments be processed as the year progresses, as well as close surveillance to ensure that all obligations are supported by properly executed documents authorizing or approving appointments, transfers, promotions, and all other changes in employee status. • Other reservations—Other commitments (e.g., federal interentity transactions) must be reserved pursuant to specific agreement, legislation, or regulations to ensure that funds are available for financing these activities. Preaudit of disbursements. Another control to avoid improper disbursement relates to the preaudit of disbursement vouchers. This control entails an examination and approval of disbursement vouchers and related support documentation before the disbursement request is certified and transmitted to the Treasury for payment. The several objectives of this preaudit would be to assess whether • Required administrative authorizations for procurement and approvals for payment were obtained. • Payment is permitted by law and is in accordance with the terms of the applicable agreement. • Amount of payment and the name of payee are correct. • Payment will be a duplicate payment. • Goods received or services performed were in accordance with the agreement.

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• Quantities, prices, and amounts are accurate. • All cash, trade, quantity, or other discounts have been taken and, if not, the reasons are shown on the appropriate document. • Applicable deductions were made and credited to the proper account in the correct amount. • Appropriation or fund from which payment will be made is available for that purpose. • Proper forms of documentation were used. • Special certifications were furnished if required, particularly with respect to there being an available undisbursed appropriation balance. Segregation of fiscal duties. As with any financial management activity, the dispersion of the key fiscal functions to several individuals is an important control in preventing erroneous or improper disbursement. Within federal entities, care is often taken to ensure that segregation of key fiscal functions is made to as many individuals as feasible. These fiscal functions include personnel who (1) maintain accounting records; (2) enter data into financial systems; (3) prepare disbursement request forms; (4) authorize the disbursement requests; and (5) approve the disbursement voucher and schedule. None of these functions should be performed by the individuals performing the preaudit outlined earlier. With increasing reliance on computers, particular care should be taken to ensure that the financial system’s input equipment is not located in proximity to the entity’s fiscal and accounting sections. A partial listing of other operations that should be segregated or dispersed to the maximum number of different individuals includes • Authorization, approval, and purchase of goods and services • Receipt, custody, and recording of goods, services, or performance • Examination and approval for payment of invoices • Preparation of payment vouchers and schedule of voucher payments, and approval of these forms • Authorization, hiring, and payment of employees • Maintenance of time records, payroll accounting, and certification of payroll authenticity • Custody or archiving and accounting of support documents Other tasks that require dispersion to as many individuals as feasible might include approval and authority to incur obligations; all certifications of fund availability; receipt and control of cash from receipt and custody of other valuables; and conduct of the preaudit noted earlier. Other controls. When a federal entity requests that the Treasury make a disbursement, other control procedures often exist to avoid duplicate or erroneous payments. For example, to avoid duplicate payments, federal entities make an effort to ensure that the voucher, voucher schedule forwarded to the Treasury, and all supporting documentation are mutilated or conspicuously marked to prevent resubmission or reprocessing for duplicate payment. To this end, the GAO has communicated to federal entities that they take extreme care when one of these conditions exists, due to the likelihood of duplication:

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• Payments have been delayed for extended periods after due date and duplicate copies of invoices are received from vendors as follow-up claims. • Invoices or bills are submitted by vendors to more than one federal entity for payment. • Adjusted invoices are received after payments have been made. Support documentation for disbursements is retained by the originating federal entity for subsequent reference, analysis, and audit. This documentation includes all initiating purchase requisitions and orders; vouchers and voucher schedules; contracts and grants; evidence of receipts of goods, services, or performance; payroll records; utility and interentity billings; certification of funds availability; and other authorization that forms the basis for the disbursement. With few exceptions, federal policy requires that disbursements be made by check or electronic funds transfer to the maximum extent. Accounting for disbursements. Historically, the payment of a federal liability was viewed as the culmination of a federal accounting transaction. Today, with the emphasis on monitoring actual costs, the accounting for an economic event may extend over several years. This is particularly true if the disbursement was for an asset or inventoriable item that will be amortized or consumed in future accounting periods. But for most federal transactions, the ordered goods, services, and performance are received, consumed, and paid for within a single fiscal period. For these transactions, disbursement is the final event in the federal transaction life cycle. A brief description of the types of federal disbursements and their appropriate accounting entries follows. Payment of earlier obligations. For many federal transactions (i.e., contacts, grants, travel, transportation), an obligation is recorded earlier before the goods, services, or performance are received. At the time of receipt, the items will be accounted for as fixed or inventoriable assets that benefit the current as well as future periods or as operating or program expenses of the current period. The payment of such obligations is initiated by listing the appropriate payee on the Schedule and Voucher of Payments, which is transmitted to the Treasury to serve as the authorization for the Treasury to make payment. At the time of transmittal, the federal entity will recognize each disbursement by this entry: For Proprietary Accounting Purposes DEBIT: Accounts payable CREDIT: Fund Balance with Treasury

500,000 500,000

This entry recognizes the payment of a liability. The Fund Balance with Treasury (i.e., federal entity’s cash account) is reduced for the amount listed on the schedule and voucher of payments that is forwarded to the Treasury. This schedule is the authorizing document for the Treasury to make payment to the listed organizations and individuals. Disbursements for advances. Under certain conditions, no obligating entry will have been earlier recorded, nor have any goods, services, or performance been received. Such would be the case when a federal entity makes an advance of funds,

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which is made for various reasons (payrolls, contract or grant services, or financing of future performance by various parties). At the time of payment, these disbursements are not an expense or cost of the federal entity, but rather an advance of cash for which a later accounting will be made as the advance is reduced or liquidated. The accounting for an advance requires that a receivable due to the federal entity be established for the cash advanced For Proprietary Accounting Purposes DEBIT: Advances receivable—Due from [payee] CREDIT: Fund Balance with Treasury

1,000,000 1,000,000

Advances may also be made by a federal entity under a procedure known as a letter of credit. A letter of credit is a commercial bank account opened for the intended recipient of federal funds. By presenting the proper documentation, an authorized recipient may withdraw money from the commercial bank. The withdrawn amount may not exceed the amount obligated by the federal entity. In practice, the entries for letter-of-credit advances are often delayed because the withdrawal of advance funds must be reported through the Federal Reserve System before the federal entity is aware of the amount withdrawn. Advances under letters of credit are generally reduced or liquidated when advance recipients make the proper expenditure reporting to the federal entity advancing the funds. Imprest fund accounting. Minor disbursements are made by federal entities from imprest funds that must be authorized and funded by the Treasury. Once approved, the Treasury advances cash funds to the requesting entity to form the principal balance of the imprest fund. Receipt of cash for an imprest fund must be segregated and reported separately from an entity’s appropriated funds. Concurrently, a liability must be formally recognized as due to the Treasury for the amount of the imprest fund corpus. This might be done by an entry like this: For Proprietary Accounting Purposes DEBIT: Imprest fund balance CREDIT: Payable due to Treasury—Imprest fund

100,000 100,000

When cash is disbursed by the imprest fund cashier, receipt records and other support documents are accumulated and coded for recording in the entity’s appropriation accounts. Ultimately, the imprest fund must be reimbursed or replenished for the cash payments. Replenishment occurs when the fund custodian submits the accumulated disbursement documents to the federal entity. At this time, the federal entity records the expenses paid by the fund and reimburses the imprest fund for disbursements made on the entity’s behalf. It is important to remember that disbursements from an imprest fund have not been previously obligated, nor will expenditures have been recorded. Thus, the entries that follow are necessary to ensure that the obligation, expenditure, and disbursement of funds are recorded against the correct entity appropriation. The entry to record the obligation and expenditure for expenses paid from an imprest fund, since this required entry will not have been made, is

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For Budgetary Accounting Purposes DEBIT: Amounts available for commitment/obligation CREDIT: Expended appropriation—Operating programs

50,000 50,000

A concurrent parallel proprietary entry is required to reflect the incurred expenses and replenishment of cash to the imprest fund: For Proprietary Accounting Purposes DEBIT: Operating/program expenses CREDIT: Fund Balance with Treasury

50,000 50,000

Those entitled to receive advances of federal monies are specifically identified before funds are advanced and notification is made to the Treasury. When funds are advanced, these recipients are identified to the Treasury in the same manner as any other payee. While other documentation could be used, for the most part, federal entities use the standard schedule and voucher of payments. On this form, a federal entity must record such information as • Name, location, and federal entity number for the entity requesting that checks be issued or payment made • Name, address, invoice, and other identifying number of the payee to whom the check or payment will be addressed or sent by the Treasury • A certification by the appropriate federal entity official that the information contained on the schedule is correct and proper for payment from the designated appropriation After payment is made, the Treasury disbursing officer, on behalf of the entity, records the check number (if this is the payment medium) for each disbursement made. This information is then used by the federal entity for reporting and reconciliations that must be performed between individual federal entities and Treasury accounts. Federal entities must make a monthly reporting of receipts and disbursements to the Treasury. The reporting is made on the statement of transactions, the standard form discussed earlier that displays cash receipts and disbursements for the month, by each appropriation for which the federal entity is responsible. Accounting for letters of credit. As mentioned, considerable sums of money are disbursed to nonfederal organizations by federal entities through various letter-ofcredit and electronic funds transfer methods. Under a letter-of-credit arrangement, a federal contractor or grantee may be authorized by the federal entity to withdraw cash against a limitation set forth in the letter-of-credit terms, which may have been arranged with a Federal Reserve Bank or a Treasury disbursing center. When a federal entity receives evidence of withdrawals under a letter of credit, an account receivable must be established and an entry made to record the disbursement of cash, as in For Proprietary Accounting Purposes DEBIT: Advances receivable—to [Contractors/Grantees]—L of C drawdown CREDIT: Fund Balance with Treasury

250,000 250,000

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As is the case with other advances, no budgetary accounts have been affected by a letter-of-credit advance of funds since there has been no additional commitment or obligation of federal funds. The advance is merely a withdrawal of federal money that will later have to be repaid or used to offset reimbursable costs owed to the recipient of an advance. A federal entity could, in certain circumstances, demand full refund of advanced funds prior to the time goods, services, or performance is received. The advances receivable under letters of credit and other transfers will be reduced as reports are received from recipients detailing the extent of allowable expenditures made under contracts, grants, or other agreements. When that occurs, entries similar to those that follow are required to reduce or eliminate the advance receivable and record the reported allowable expenses or costs incurred: For Proprietary Accounting Purposes DEBIT: Operating/program expenses CREDIT: Advances receivable—to [Contractors/Grantees]—L of C drawdown

250,000 250,000

For Budgetary Accounting Purposes DEBIT: Amounts available for commitment/ obligation CREDIT: Expended appropriation—Operating programs

250,000 250,000

In most instances, an obligation would have been established earlier when terms and conditions were executed under contracts, grants, or other agreements. This earlier obligation must now be partially or fully liquidated or reversed or reduced. The preceding entry completes the accounting and adjusts the outstanding undelivered orders or unliquidated obligations.

7

FEDERAL FINANCIAL AND INFORMATION SYSTEMS

In the 1990s, with the mandate of the Chief Financial Officers Act, initiatives to improve financial management began in earnest. By 1991, the Federal Accounting Standards Advisory Board was recommending accounting policy. In 1993, there were new directives with respect to financial policy, uniform accounting and reporting standards, and government-wide systems requirements. The Office of Management and Budget had directed departments and agencies to establish and maintain a single, integrated financial management system that complied with the 1 FASAB, the OMB, and the Department of the Treasury promulgations. In Circular A-127, Financial Management Systems, the OMB defines an agency’s financial system as an information system comprised of one or more applications, used for any of these data functions: • Collecting, processing, maintaining, transmitting, and reporting data about financial events • Supporting financial planning or budgeting activities • Accumulating and reporting cost information • Supporting the preparation of financial statements The term “information system” means the organized collection, processing, transmission, and dissemination of information in accordance with defined procedures, whether automated or manual. The OMB requires that each agency establish and maintain a single, integrated financial management system to track financial events, provide financial information significant to the financial management of the entity, and generate the information required for the preparation of financial statements and a variety of other financial-type reporting. A “single, integrated financial management” system means a unified set of financial systems and the financial portions of mixed systems encompassing the software, hardware, personnel, processes (manual and automated), procedures, controls, and data necessary to carry out financial management functions; manage financial operations of the agency; and report on the agency’s financial status to central agencies, Congress, and the public. “Unified” means that the systems are planned for and managed together, operated in an integrated fashion, and linked together electronically in an efficient and effective manner to provide agency-wide financial system support necessary to carry out the agency’s mission and support its financial management needs.

1

OMB Circular A-127, Financial Management Systems, 1993, which updated and, in part, revised an earlier OMB Circular A-127 of December 1984.

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This is in contrast to a long history of federal systems whereby multiple or partial systems supported only a single function and activity, and had limited utility to broader entity financial reporting and management oversight. The term “application” is used by the OMB in a somewhat different manner from what is normally encountered by financial managers and systems analysts. In Circular A-127, the OMB related the term to both financial and nonfinancial systems and included within the definition of an application any group of interrelated components of financial or mixed systems that supports one or more functions and had these characteristics: • A common database • Common data elements • Standardized processing for similar types of transactions • Common version control over software FEDERAL ACCOUNTING AND FINANCIAL REPORTING Over many years, those involved with federal accounting standards have generally agreed that federal accounting and reporting systems must meet several criteria. Some or all of these have been cited at one time by the GAO, the OMB, the Trea2 sury, and the Joint Financial Management Improvement Program (JFMIP). Generally, all feel that federal accounting standards should include or permit the attainment of these criteria: • Understandability • Reliability • Usefulness • Consistency • Timeliness • Relevancy Some of these criteria have unique significance with respect to the federal government and are described next. Financial Data Must Be Understandable Users of financial information tend to have different levels of knowledge and sophistication about government operations and its accounting and reporting requirements. Many federal executives are political appointees with nonmanagement and nonfinancial backgrounds. In addition, the temporary tenure of these senior appointed federal executives, approximating on average less than 18 months in office, places a premium on having data that are comprehensible to managers with nonfinancial backgrounds. Further, the enormity of the public’s monies involved (trillions of dollars on an annual basis), plus the largest debt in the country’s history (even more trillions), make it critically important that government accounting and financial reports be readily understood, free of jargon, and yet as descriptive as possible. Financial data should be self-descriptive or user friendly to the maximum extent. 2

The JFMIP ceased to exist as a separate organization in December 2004, and responsibilities for financial management policy and oversight were reassigned to the OMB.

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Financial Data Must Be Reliable Financial data must be verifiable and free from bias, and must faithfully represent what the data purport to communicate. Financial data must be complete, in that nothing should be omitted from the data that is necessary to faithfully represent the events, conditions, activities, functions, and so on that are reported on. But reliability does not imply absolute precision. All financial reporting requires estimates, judgments, and allocations. The degree of precision must always consider reality and the significance of the subject being reported on. In many instances, properly reported estimates are meaningful, even essential, particularly if the alternative is no reporting at all. Financial Data Must Be Useful Financial data must present needed information that is useful to recipients. Usefulness should not be confused with detail. Unnecessary or excessively detailed reporting and accounting should be avoided since it tends to confound and confuse rather than enlighten. Historically, federal reporting was directed toward fiscal accountability—that is, tracking the financial execution of appropriation and budgets and checks issued. Obligation-based and cash-based information demanded by the OMB, the Treasury, and Congress was the priority. The increasing complexity of federal programs, however, demonstrated that this information had minimal utility to the executives and managers in federal entities responsible for overseeing or operating major operations. Today, there is a greater recognition that useful financial data must provide information to a variety of users on a variety of bases—budget, accrual, cost, and cash—and each basis is itself unique and needed for specific purposes. Financial Data Must Be Consistent Consistently compiled financial data leads to uniformity and comparability of information, both of which are crucial to federal overseers and managers, particularly at the highest levels. Consistency of data, primarily capturing data at the lowest level—the data point of entry—ensures that when data are aggregated, or “rolled up,” they yield standard information, uniform both within a federal entity and between federal entities. This feature has not yet been attained in the federal government. Financial Data Must Be Timely To be of maximum usefulness, accounting data must be timely. Timeliness, by itself, will not guarantee that the data are useful, but the passage of time will ensure that the data are less useful. Generally, financial data should not be delayed to produce relatively minor refinements within the data. To the contrary, timeliness may be of the essence and could require that some precision or detail be sacrificed. Timely estimates of financial data will always be more valued than the precise data that are never completely compiled.

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Financial Data Must Be Relevant Relevance is itself a relative criterion. If financial data are neither consistent nor uniform, the information is irrelevant. Similarly, if the accounting data are neither timely nor reliable, there is no relevance. To be relevant, a logical relationship must exist between the financial data and the purpose for which it is needed and when the data are available to managers. An important test of whether financial data are relevant is whether the data would make a difference in a user’s assessment of circumstances, conditions, operations, and events. FEDERAL FINANCIAL MANAGEMENT SYSTEM REQUIREMENTS The design, development, and implementation of a new financial system for any federal department or agency is a significant effort, requiring the dedicated work of professionals for four to five years or more. OMB Circular A-127 provides the requirements for federal agency systems, and they are summarized below. • Agency-wide financial information classification structure—Must be consistent with the Standard General Ledger and cover financial and financially related information • Integrated financial management systems—Financial management systems shall be designed to provide for effective and efficient interrelationships between software, hardware, personnel, procedures, controls, and data contained within the systems. • Application of the Standard General Ledger at the transaction level— Financial events are to be recorded at the transaction level following Standard General Ledger rules. • Federal accounting standards—Financial management systems shall maintain accounting data to permit reporting in accordance with accounting standards recommended by the FASAB and issued by the Director of the OMB, and reporting requirements issued by the Director of the OMB and/or the Secretary of the Treasury. • Financial reporting—The agency financial management system shall be able to provide financial information in a timely and useful fashion, and to capture and produce financial information required to measure program performance, financial performance, and financial management performance as needed to support budgeting, program management, and financial statement presentation. • Budget reporting—Agency financial management systems shall enable the agency to prepare, execute, and report on the agency’s budget in accordance with the requirements of OMB Circular A-11, Preparation and Submission of Budget Estimates, OMB Circular A-34, Instructions on Budget Execution, and other Circulars and Bulletins issued by the OMB. • Functional requirements—Agency financial management systems shall conform to existing applicable functional requirements for the design, development, operation, and maintenance of financial management systems.

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• Computer Security Act requirements—Agencies shall plan for and incorporate security controls in accordance with the Computer Security Act of 1987 and OMB Circular A-130 for those financial management systems that contain “sensitive information,” as defined by the Act. • Documentation—Agency financial management systems and processing instructions shall be clearly documented in hard copy or electronically. • Internal controls—The financial management systems shall include a system of internal controls that ensure that resource use is consistent with laws, regulations, and policies; resources are safeguarded against waste, loss, and misuse; and reliable data are obtained, maintained, and disclosed in reports. • Training and user support—Adequate training and appropriate support shall be provided to the users of the financial management systems to enable the users of the systems at all levels to understand, operate, and maintain the systems. • Maintenance—Ongoing maintenance of the financial management systems shall be performed to enable the systems to continue to operate in an effective and efficient manner. Core Systems Requirements A key objective of the federal government, as stated in the JFMIP’s Core Financial System Requirements (January 2006 Revision), is to …promote a common understanding among private- and public-sector financial managers and agency program managers regarding Core system functional and technical capabilities. Such requirements serve as a tool for the oversight agencies to evaluate systems. They help justify agency system improvements or replacements. They also help organize the private-sector market by communicating mandatory functionality that commercial software must provide to Federal agencies and identifying value-added features desired by Federal agencies.

This document is available from the Financial Systems Integration Office Web site (www.fsio.gov) and provides discussions and/or guidance on these major topics: • Federal financial management framework • Requirements interpretation guidelines • Core financial system overview • System management function • General ledger management function • Budgetary resource management function • Payment management function • Receivable management function • Cost management function • Fund Balance with Treasury management function • Technical system requirements Systems Complexities When considering the specific accounting procedures and practices discussed in this book, the reader must keep in perspective that the illustrative internal accounting

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events might be processed 10,000, 100,000, or 1 million times in a single year by a federal entity. Also, there are many reporting mandates imposed externally on a federal entity: by Congress through laws and its committees; by the Treasury in its regulations; and by OMB guidance and rules in its Circulars and Bulletins. Yet few of these reports want the same information displayed in exactly the same manner. Another complexity is that each entity is charged with bringing all of its financial activities together in an annual financial statement that is independently audited. All of this reporting is in addition to the reporting that is self-imposed by the federal entity’s managers to better operate their own programs, monitor contractors and grantees, oversee loans and loan guarantee programs, ensure that timely subsidy payments systems and controls are functioning, and so on. To meet federal accountability and stewardship responsibilities consistently and uniformly, federal systems must use an account coding structure that is hierarchical as well as relational, capable of providing financial information at any phase in the life cycle of a federal transaction (keeping in mind that the acquisition of an aircraft carrier or a large space project can span 10 or 15 years or more). An entity’s system must be capable of producing periodic reports that display budgetary and actual financial results, concurrently and in innumerable formats. Additionally, a federal entity’s systems might have to generate reports on an as-needed basis that could involve any or all of the states; some 90,000 counties, cities, municipalities, special districts, and public utilities; and tens of thousands of federal corporate contractors, grantees, borrowers, and more. And some agencies are tasked with the accounting for disbursements to tens of millions of individuals. The marvel is not that the historical federal budget and accounting systems did not precisely account for all federal resources on a timely basis, but that the federal systems provided the level of accounting that they did. Pursuant to legislation dating back to the Budget and Accounting Procedures Act of 1950, Congress permitted each entity of the federal government to design and implement accounting systems and internal control systems independently of other federal entities. Within the individual entities, systems were not integrated, and controls may not have existed or were not uniformly applied. Congresses and administrations often did not view investments to improve financial management and to acquire competent and computer-literate financial personnel, as well as new computer technology and software, as funding priorities. Transaction Classification Structure A federal transaction and account code structure, now a part of the federal government’s Standard General Ledger, was developed in the 1980s. Compliance with the general ledger requires that all federal transactions be classified at the time of initial data entry by no fewer than six and possibly more designations (see Exhibit 7.1).

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Exhibit 7.1: Required Federal Classifications and Coding Hierarchy for All Federal Transactions 1.

By Appropriation or Fund (usually a federal appropriation or other Congressional budget authority) • Period of availability

2.

By Program (generally a major activity or operation within a department and agency, which might be associated with one or more appropriations) • Decision unit • Program element • Subprogram

3.

Department Agency Administration/bureau Office

Branch Unit Budget center Cost center

• Work unit/job order • Function

By Object Classification (of revenues and expenditures; basic financial data elements) • Personal services • Supplies and material • Equipment

6.

• • • •

By Project (a subcomponent or subactivity of a program; one of the lower levels for federal cost accounting) • Subproject • Task/work order

5.

• Activity • Subactivity

By Organization (the entity charged with managing and having the fiscal responsibility for a program) • • • •

4.

• Fund account number

• Travel and transportation • Utilities

By Other Data (compiled by identifying several sub-elements in greater detail, or by further refining or subdividing the account structure)

SOURCE: U.S. Department of the Treasury, hierarchy prescribed by the Federal Government’s Standard General Ledger (Washington, D.C.).

1. Classification by Appropriation or Fund A federal appropriation or other congressional budget authority is given a form number by the Treasury that relates the funding authority to a specific federal entity. Each fund provides the framework for establishing a set of balanced accounts. Once legal spending authority is approved by Congress in the form of an appropriation, appropriation or fund accounts are established by the Treasury. Then the OMB and the federal entity monitor the appropriation for its full legal life in order to track program accomplishments and ensure that neither the rate of obligation, nor the expenditure exceeds congressional authority. This accountability commonly spans several years, and in some instances, 10 to 15 years. Each appropriation must be separately accounted for, and each appropriation law contains specific fiscal criteria with which compliance is required. The conditions of an appropriation limit the timing, purpose, and amount of expenditures that can be made by a federal entity. Heads of federal entities and their executives must

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manage and report by appropriation or funding sources and provide comparisons of planned to actual expenditures by each appropriation assigned to the entity. The fund account structure, designed and maintained by the Treasury, is referred to as the Federal Account Symbols and Titles. Federal fund accounting requires that, for every transaction affecting a fund, these data must be entered into the Treasury’s central account system: the department or agency identity; the period for which the congressional authority or fund is available (generally either a fiscal year, multipleyear, no-year, or indefinite availability); and the main fund account number. 2. Classification by Program A program is generally a major activity or operation within a department or agency, and could be associated with one or more appropriations. Programs and activities are often the subject of congressional and presidential budget decisions and appropriation fundings and the focus of department or agency senior management. Often a program is a large unit or operation or a significant subdivision of a federal department or agency for which Congress has appropriated funds or provided spending authority. From this perspective, a federal program is a major cost center. Most federal policy and financial decisions are based on the costs, benefits, and effectiveness of the individual federal programs, which often have unique operating and environmental characteristics. Thus, programs must be analyzed from a finan3 cial and operational perspective. In reference to the federal government, however, the term “program” lacks precision. The public might refer to major federal initiatives as programs (as in the defense, education, Social Security, and space programs). The individual federal entities might refer to “programs” as specific entity initiatives; most often, activities (which could be many) and purposes (which could be varied) might also be known as programs. Generically, the term is used to describe the activities and resources of an entity that are marshaled to meet congressionally imposed purposes, goals, or objectives. Since program performance and management is the subject of considerable analysis by parties within and external to government, the classification of accounting data—for each entered transaction—must be in sufficient detail to permit aggregating financial results by each program subcategory for which budgetary decisions are made. Budgetary decisions could be related to such factors as new or revised legislation; presidential passbacks of budget guidance to programs; congressional markups of program budget requests; determination of expenditures by every congressional district; and internal managerial decision making. At a minimum, these core financial systems requirements dictate that each transaction be recorded at the time of system input in a manner that meets essential federal specifications. Thus, when input, data must identify these relationships within a program: decision unit, program element, subprogram, activity, and subactivity (and sub-subactivity, if one exists). 3

U.S. Government Accountability Office, Financial Reporting: Framework for Analyzing Federal Agency Financial Statements (GAO AFMD-91-19), March 1991.

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3. Classification by Organization All federal entities are charged with program management responsibilities and must comply with budgets, control expenditures, monitor costs, and attain prescribed program objectives. These responsibilities might be performed by an entity’s subordinate offices, divisions, branches, sections, and so on. Within federal entities, responsibility assignments are made to organizations; some are for operational purposes, others for budget purposes, and still others for financial reporting purposes. These organizational structures may not necessarily be consistent with programs. The core financial system requirements dictate that the accounting entry of each transaction identify the relevant operational organization having responsibility for managing a federal program. Typically, this type of accounting and reporting conforms closely to an entity’s organization chart. At a minimum, accounting for an operational organization structure might require coding of input data by each department or agency, subordinate administration or bureau, office within the bureau, division of the responsible bureau, branch, and unit of the involved branch. Additionally, the organization identification must provide accounting information by responsibility centers and benefiting centers. These are identified in the core financial system requirements as • Budget centers—The lowest level in the organization structure for which a supervisor has a degree of control over resource consumption • Cost centers—The lowest organizational unit or activity to benefit from costs that are incurred; normally a subdivision of a budget center • Responsibility centers—The organizational units that have financial or fiscal processing responsibility; in other words, the accounting office and, where applicable, an agency location code Responsibility center costing could also be closely related to performance- and activity-based costing. While a responsibility center might generally parallel an entity’s subordinate organizations, there could be significant differences. This is particularly true if responsibility centers lend personnel to or support interentity activities. 4. Classification by Project A project is often a subcomponent or subactivity of a program and one of the lower levels required for federal cost accounting. Projects are defined as planned undertakings of something to be accomplished, produced, or constructed, having a finite beginning and finite end. (Excluded from a project would be Social Security payments and Medicare or Medicaid assistance payments to individuals.) Through the year, a federal entity may have the need to accumulate expenditures and cost data by special projects, specific jobs, or groupings of activities. Some examples of special projects or activities that require ad hoc, temporary, or specific costing (and therefore coding) could include (1) short-term information needs not warranting formal changes to the entity’s accounts or transaction coding structure; (2) information needs that arise after the start of a fiscal year, possibly imposed by Congress or entity management to meet additional reporting mandates; or (3) events occurring during the year and requiring a need-to-know cost, possibly an unantici-

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pated interentity transaction that needs separate accumulation of cost to permit multiappropriation reporting. For departments or agencies with project management responsibilities, data entries must be coded, at the time of input, by this structure: project, subproject, task/work order, work unit/job order, and function. This coding would provide the essential details for later cost accounting and performance measurement analyses if desired. 5. Classification by Object Classification The federal government has long adhered to a type of reporting referred to as “reporting by object classification.” Object classes identify for what federal monies are used. An object classification of an obligation or expenditure of federal funds is the most basic elemental fiscal data typically accumulated by federal entities, for example, for salaries, travel, grants, contracts, and supplies. Often the object classes are further divided between capital (expenditures of significant dollar values that benefit future fiscal periods) and operating (expenditures benefiting the current fiscal period). The object classification of revenues and expenditures for government-wide application is provided by the OMB in its Circular A-11, Preparation, Submission, and Execution of the Budget. For expenditures, object classes relate to the nature of services or articles procured (i.e., input-type data) rather than the end product or services provided (i.e., output-type data). At the time of entry into the accounting system, object class data must be captured for each transaction. Accounting by object classes is a method of identifying obligations and expenditures of departments and agencies according to types of services, articles, and other items involved, such as personal services, supplies and materials, equipment, travel and transportation, contracts, and grants. The major object classes and selected subobject classes are prescribed by the OMB for use by federal entities when submitting budget estimates and later reports on the actual costs related to budget execution. 6. Classification of Other Data It follows that the reporting system of a federal department or agency must be capable of recording the accounting data at the elemental levels, but permit data summarization and aggregation into useful accounting and financial management information for reportings required by Congress, the OMB, the Treasury, entity management, and others. Thus, the reporting system must have the ability to provide for relational data reporting for several purposes: to support management’s fiduciary responsibilities; to monitor compliance with various legal and regulatory requirements; and to meet other or special reporting mandates. The aggregation capabilities of a department or agency system must include the ability to report information on several accounting bases, including cash, modified cash, full accrual, cost, and credit reform. Federal entities are responsible for designing and requiring other data classifications for their own management purposes. This need for data requires that an entity’s

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system compile data by subentity elements through further refining or subdividing the account coding structure. Some other dimensions of federal accounting and reporting might include location, function, system or life-cycle costing, and mission. Location. Federal entities are regularly called upon by Congress, the OMB, and at times other levels of governments and the general public to provide a reporting of federal expenditures by locations. Reporting by location could take several dimensions: (1) by geographic locations of the federal entity operations; (2) by the more than 500 congressional districts or standard metropolitan statistical areas; (3) by one or more of the 90,000 state and local governmental units; or (4) by one or more of the tens of thousands of contractors, nonprofit grantees, and educational institutions. Function. Accounting, costing and reporting by an entity’s functions is increasingly significant, particularly so with the laws of the 1980s and 1990s that placed greater emphasis on performance measures and managerial costing. While the definition of “function” is not uniform government-wide, it could include reporting on expenditures for or by supplies, procurement, grants, training, personnel, accounting, budgeting, research, computers, and so on. A single appropriation could support or be relatable to a single function, but, in practice, this is not the norm. Generally, because of operational economies and efficiencies, a centralized function may spend resources from more than one appropriation. Thus entities must have a financial perspective that crosses appropriations. System or life-cycle costing. Some government entities perform multiyear, multiappropriation costing for major federal investments. These investments are long term (measured in years) and expensive (often in the billions of dollars). Clearly, entities like the Department of Defense (DoD) and the National Aeronautics and Space Administration (NASA) must meet this reporting challenge at least monthly for many weapons and space systems, but so do other entities. Life-cycle costing imposes a reporting that necessitates the accumulation of obligations, expenditures, disbursements, and cost data by end products, program outputs, and outcomes, from initial planning to final obsolescence. Mission. The term “mission,” as imposed by Congress, refers to the goals and objectives explicit or implicit in a federal entity’s authorization and appropriation legislation. An integrated system approach is mandatory to meet this matrix of accounting and reporting viewpoints. Achievement of a program mission could require the integration of funds from many appropriations and the performance of many functions, possibly of federal entities, dispersed throughout the country or internationally. Transaction coding hierarchy. The transaction and account code structure highlighted in Exhibit 7.1, now a part of the Standard General Ledger, is the most recent attempt to provide for consistent and uniform accounting and reporting at the federal entity-level, as well as government-wide. The accountability and stewardship reporting is made more complex because each of the discussed coding requirements must be replicated for every congressional appropriation or budget authority. Increased difficulty arises when, at times, federal entities provide financial or other support to another federal entity. Under these circumstances, the providing entity must report the data to permit total costing by the benefiting entity activities.

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Exhibit 7.2 illustrates, in part, the types, purposes, and uses of information that may be required of any federal entity. Exhibit 7.2: Types, Purposes, and Uses of Information Required by Agency Management Types of information Appropriation

Purpose Identify legal fund entity appropriated by Congress

• • • • • •

Uses Budget formulation Budget justification Initial distribution of funds Monitoring distribution rates Reprogramming decisions Prevention of “3679” violations

Location

Identify the expenditure of agency resources by geographic location

• Isolate geographically the utilization of agency resources • Support planning and management control processes

Organization

Identify an agency organization responsible for the execution of missions, programs, activities, etc.

• Identify responsibility for the execution of activities and operating results • Provide management evaluation and control

Functions

Identify specific activities or tasks during the execution of assigned responsibilities

• Segregate tasks and duties common to all agency activities • Provide management planning, evaluating, and control • Support integrated PPBS • Develop comparisons between activities • Provide function-unique detail • Provide additional information on functions

System

Identify physical and technological resources and related costs

• Identify acquisition of resources • Capture certain life-cycle costs

Mission

Identify the purpose for which resources are being utilized or spent

• Identify direct agency mission costs • Provide agency-wide data for evaluating accomplishment of goals or mission

Object class

Identify the nature of costs incurred

• Meet requirements of OMB and Treasury reporting • Provide management control and evaluation

Program

Identify resources by specific programs

• Meet agency reporting requirements • Provide program managers with planning and control information

Special projects

Satisfy critical information requirements not accommodated by other components

• • • •

Responsibility center

Identify specific areas of responsibility

• Provide reports by responsibility center

Accounting control

Provide required accounting control information

• • • •

Provide congressional visibility Permit changes during year Identify unforeseen events Monitor special projects

Control funds Identify funds Identify organizations Control report balances

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THE STANDARD GENERAL LEDGER Though the accounting standards published in the 1950s by the GAO (generally referred to as Title 2) were not implemented by every federal department and agency, there was a high adoption rate. Probably no federal establishment failed to predicate much or most of its accounting structure and reporting processes on the GAO promulgations. Nonetheless, the Department of Justice voiced its concerns about whether it was constitutional for a legislative agency (the GAO) to impose legislative management policy on the executive branch. This objection, a nonaccounting issue at the time, was one reason that the CFO Act of 1990 did not restate certain earlier responsibilities of the GAO for federal accounting. Even so, subsequent efforts to continue the improvement of federal financial management have built on years of study and contributions of the GAO. Over the years, various other significant efforts were adopted by departments and agencies and were acknowledged by the FASAB. These efforts related to the design and development of (1) a federal Standard General Ledger, (2) the Core Financial Systems Requirements for federal agencies, and (3) the Standardization of Basic Financial Information Requirements of Central Agencies. All three of these products relied heavily on and drew extensively from the earlier work of the GAO. Then in 1984, the OMB initiated an interagency group under the leadership of Department of Transportation financial executives and tasked the group with developing a Standard General Ledger chart of accounts for government-wide use. The idea was to modify the existing uniform chart of accounts in use at the DoD. Now, according to OMB guidance, any Standard General Ledger must • Provide control over all financial transactions and resource balances • Satisfy basic OMB and Treasury reporting requirements (i.e., the program and financing report, budget execution report, and related Treasury report) • Integrate proprietary and budgetary accounting in a federal department or agency This effort was completed in 1989, and a U.S. Standard General Ledger was proposed that captured all agency transactions and resource balances in the general ledger or subsidiary accounts, with provisions also being made for accrual accounting of public enterprise funds, industrial funds, and other applications required by agency managers. The overall purpose of the Standard General Ledger was to provide a uniform chart of accounts and the supporting transactions to be used to standardize all federal agency accounting and support the preparation of standard external reports containing uniform information. The Standard General Ledger includes accounts and transactions that can be incorporated into individual agency general ledger systems. The recommended accounts meet the basic financial statement and budget execution requirements for all departments and agencies. Of course, not all agencies will be expected to have a need for all accounts, nor will all of the standard transactions be applicable to the operations of all agencies. The Standard General Ledger is now required by law and the OMB; it must be considered in the redesign of any departmental or agency system and is given great

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credence by the FASAB in its accounting standards deliberations. In 1989, the operational responsibility for maintaining the Standard General Ledger was assumed by the Treasury; the results of these maintenance activities are a formal supplement to the Treasury Financial Manual. The highest summarization of financial data by a federal department or agency is at the Standard General Ledger account level. As a result of JFMIP research, a federal general ledger must maintain the real, nominal, and statistical accounts by (1) appropriation or fund, and (2) the individual prescribed Standard General Ledger accounts. Accounting transactions, whether budgetary or proprietary, and regardless of the financing or budgetary source, must be directly entered into the general ledger. Additionally, the general ledger must be capable of accepting data from other functions of the core financial system and interfacing with ancillary systems. Major Account Groups A standard chart of accounts, including both proprietary and budgetary accounts, provides the basic structure for the federal government’s Standard General Ledger. To the extent appropriate to specific operations, federal entities must implement a uniform general ledger chart of accounts with each account group identified by a four-digit number. Exhibit 7.3 lists these government-wide budgetary and proprietary ledger account groups. Exhibit 7.3: Federal Entity General Ledger Account Groups Account group number 1000 2000 3000 4000 5000 6000 7000 8000

Account group Assets Liabilities Net position Budgetary Revenue and other financing sources Expense Gains/losses/miscellaneous Memorandum

SOURCE: U.S. Department of the Treasury, Standard General Ledger (Washington, D.C.).

Also imposed on federal departments and agencies is the requirement that the Standard General Ledger be supported or supplemented by whatever subsidiary account structure is necessary to provide detailed information for asset protection, management information, and fund accounting. Further, the subsidiary account structure must permit accounting for the current fiscal year as well as concurrent accounting for several additional fiscal years. It is not uncommon, in fact, for the appropriations of an agency to be for (1) a single fiscal year, (2) multiple fiscal years, (3) no designated year, (4) a specific undertaking, or (5) all of these time periods and other authorized undertakings. Additionally, other federal laws require that departments and agencies maintain detailed accounting for and reporting on all expired congressional appropriations for a period of five years after the spending authority has legally ended.

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Technical Ledger Requirements The Standard General Ledger imposes certain technical requirements on departments and agencies with respect to operational features of the financial system. For example, to satisfy the accounting requirements, the accounting system and ledger accounts must be structured in a manner that • Allows each transaction to update at least four pairs of debits and credits to general ledger accounts, ensuring that debits equal credits, and permitting accounting events to be covered by a single transaction entry (possibly a pseudocode). • Allows transactions to generate other transactions in cases where a single transaction is not sufficient. For example, when data for an event are entered into the system, the system has been preprogrammed to react to this entry by automatically creating and posting other transactions. • Allows users to define the logic for liquidating, reducing, or changing balances resulting from earlier transaction entries. This is an important feature of a federal accounting system since it is this entry that creates the ability to provide both budgetary and proprietary accounting. • Provides for capturing, classifying, summarizing, and reporting current year and cumulative data on the acquisition, disposal, and balance on hand of capital assets over the several-year reporting life of a federal appropriation or other budgetary spending authority. Budgetary Accounting By laws, Treasury regulations, and OMB pronouncements, federal entities are responsible for designing and implementing accounting and control systems to ensure that federal funds are not obligated or disbursed in excess of the amounts legally appropriated or otherwise provided under other budgetary authority of Congress. Properly implemented, the Standard General Ledger permits federal executives to distribute, track, control, and report on the status of congressional spending authority by fund and with an account classification code structure that is used government-wide. By integrating budgetary accounting practices with proprietary ones, the government has implemented an essentially seamless accounting system. The Standard General Ledger’s logic permits the matching of every expenditure transaction to earlier obligation transactions. The earlier obligation cannot be incurred unless a federal executive had previously declared that spending authority remained in the appropriation balance. Accounting control for obligations and expenditures (i.e., the fund control, or administrative control of funds) is accomplished in the “4000” series of accounts of the Standard General Ledger. Reports compiled from balances of the 4000 accounts provide (1) the amount of initial or amended congressional appropriation or spending authority; (2) the appropriation, budget, or spending authority actually used; and (3) congressional spending authority still available for use. In practice, reference is made to the budgetary accounting system, though there is actually no such separate system. Rather, this series of 4000 accounts comprises a self-balancing set of accounts within a department’s accounting system.

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Cost Accumulation Within the context of the Standard General Ledger, the term “cost accumulation” or “cost accounting” refers to the financial measurement of departmental resources used or consumed in accomplishing a specified purpose. Purpose, in this context, could include performing a service, providing a product, carrying out an activity, completing a project, or operating a program. The cost accumulation logic of the Standard General Ledger requires the distribution of the compiled costs from the unit providing the service to the unit receiving the benefit. Thus the parameters of an entity’s cost accumulation system must • Use the accounting classification code structure of the Standard General Ledger • Record allocations of resources, based on the accounting classification code structure of the Standard General Ledger, in a manner that permits one to identify and record direct costs, allocate indirect costs, and support reimbursable billings and costing services of a federal entity Capturing and maintaining cost data within the guides of the Standard General Ledger ensures that all the financial data of an entity are subject to the same classification structure and the same internal control system for the same time period. Additionally, government-wide application of the Standard General Ledger ensures a uniformity of accounting and reporting across federal entities. The FASAB, as a result of extensive research, recommended that managerial cost accounting be a fundamental part of every entity’s financial management system and that it be integrated with other parts of the system. The FASAB’s position is that cost accumulations are best accomplished by a formal cost accounting system, structured cost finding techniques, or intermittent special cost studies. Regardless of the methods employed, federal entities must report full cost of outputs in their general-purpose financial reports. Full cost is defined by the FASAB as the sum of (1) the costs of resources consumed by the segment that directly or indirectly contributes to the output, (2) the costs of identifiable supporting services provided by other responsibility segments within the reporting entity, and (3) costs of identifiable supporting services provided by other reporting entities. With respect to the latter (i.e., the federal interentity support costs), the entity providing the services has the responsibility to provide to the receiving entity the full cost information, through either a billing or another advice form. Cost accounting for interentity costs that are not fully reimbursable (i.e., not billable) should be limited to material or financially significant items that (1) are significant to the benefiting or receiving entity; (2) form an integral or necessary part of the benefiting or receiving entity’s output; and (3) can be identified or matched to 4 the benefiting or receiving entity with reasonable precision. 4

Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting Standards (SFAS) No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government (FASAB: Washington, D.C., June 1995).

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General Ledger Structure Until development and adoption of the Standard General Ledger during the 1980s and 1990s, there was no federal guidance to explain what, where, when, and how the multipurpose, multidimensional, exceedingly complex accounting demands of federal entities could be accomplished. That guidance is now provided by the federal government’s Standard General Ledger, which represents the most detailed federal accounting and reporting guidance, and the manner by which the financial will of Congress is to be accounted for and reported on. In format, the Standard General Ledger is a multivolume publication that identifies specific general ledger accounts and Standard General Ledger accounting transactions; contains an established account and transaction coding hierarchy; and illustrates, defines, describes, and gives detailed descriptions of • Chart of Accounts—Section I identifies, by a four-digit code, the scores of summaries and postings to budgetary and proprietary accounts, and displays the normal carrying balance (debit or credit) for each of these accounts. • Account Descriptions and Postings—Section II defines the debit and credit side of 1,000 standard entries that affect summary and subsidiary ledger accounts. Along with the standard journal entry description and the numeric journal entry identifier that affects the debit or credit side of each account, the Standard General Ledger guidance identifies the logical contra accounts for all summary and posting accounts in the general ledger. • Accounting Transactions—Section III provides an index of the 1,000 standard transaction numbers and descriptions, plus illustrative examples of all transactions that affect both proprietary and budgetary accounts by the transactions most common to federal entities. (Exhibit 7.4 lists the summary transaction groupings.) • US Standard General Ledger Account Attributes for FACTS I and FACTS II Reporting—Section IV presents attribute definitions and tables required by the Treasury’s Financial Management Service to meet financial and budgetary reporting requirements. • Crosswalks to Standard External Reports—Section V is a detailed matrix relating the Standard General Ledger accounts to reports required by the FASAB, the OMB, and the Treasury. Exhibit 7.4: Standard General Ledger Accounts and Transaction Groups Standard group transaction number A 100-300 B 100-400 C 100-300 D 100-800 E 100-200 F 100-200

Description Funding sources Disbursements and payables Collections and receivables Adjustments/accruals/nonbudgetary transfers other than disbursements and collections Memorandum entries Year-end preclosing and closing entries

SOURCE: U.S. Department of the Treasury, Standard General Ledger (Washington, D.C.).

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SYSTEM INTEGRATION AND INTERRELATIONSHIPS Many within and outside the federal government have extolled the merits of output and performance-based financial data of federal operations. This was 5 documented in many studies, laws, and reports dating to the 1920s, but probably not until the 1980s and later years were federal systems technologically capable of meeting the integrated financial management needs of a federal entity. Refinements of computer hardware and software technologies now permit the development of integrated financial systems of the type required by Congress and the OMB and needed by federal entities charged with managing multibillion-dollar programs. The structure of these reporting requirements might be portrayed in a somewhat hierarchical fashion, as shown in Exhibit 7.5, which also illustrates to a cursory degree the multiple dimensions, interrelationships, or matrix considerations of a federal entity’s financial information system. As might be apparent, not all data for these reporting requirements can be transaction-related. For example, although data relating to appropriation, organization, function, and object class can generally be identified with specific transactions, other reporting requirements, such as programs and missions, are most often met by summing or allocating data compiled at the transaction-level to meet other requirements. For perspective on the magnitude of effort required to design and implement an integrated financial information system for a federal entity, one might consider the several phases required to develop a system, each of which could take, at a minimum, months or even years to complete: • Define and determine the scope of the desired financial system. • Identify the system input, processing, and output requirements. • Construct the conceptual system design and, possibly, define the implementation plan. • Construct the system program specifications. • Perform program activities and other preliminary implementation efforts. • Test and validate systems specifications, software programming, and pilot operations. • Install and operate the financial system. • Conduct postimplementation quality assurance reviews. While these phases might be worded differently, the efforts, by whatever name, must be performed. It is not unusual—in fact, it is more the rule—that a federal entity could devote four to five years or more, spend tens of millions of dollars, and utilize upward of 100 professionals from inception to completion of an integrated financial system that meets federal accounting and reporting requirements. 5

See the testimony, evidence, and conclusions of the Taft Commission on Economy and Efficiency (1912), Brownlee Commission (1937), First Hoover Commission (1949), National Performance Review or related to the Budget and Accounting Act (1921), the Congressional Budget and Impoundment Act (1974), and (more recently) the Chief Financial Officers Act (1990), the Government Performance and Results Act (1993), the Government Management Reform Act (1994), and the Federal Financial Management Improvement Act (1996), to mention just a few.

•

•

System

Function

Location

Organization

•

•

•

•

•

Mission

Object class

Appropriation Location Organization • Identifies organizations • Identifies programs • Identifies involved in program being executed within a appropriation funding execution given location required to execute • Provides additional level program of detail • Identifies program for organization-related elements • Identifies resources and • Identifies resources or • Identifies specific services employed by a services used by the resources (e.g., facility organization personnel/equipment) or services (e.g., contracting, travel) acquired with each appropriation

Requirements Agency program

Object Function System Mission class • Identifies • Identifies • Identifies material • Identifies specific tasks resources or agency acquired , supported, required to support program services objectives or used by each execution employed supported by program • Provides additional level of in programs • Identifies program detail execution element for system• Identifies program element programs related cost for function-related program elements • Identifies resources • Identifies • Identifies resources or or services related to services used in the specific the system performance of a function resources or • Determines whether services used transaction is in executing or acquisition, capital accomplishing expenditures, or agency operating cost objectives • Identifies agency objectives • Identifies agency • Identifies agency • Identifies agency Identifies how supported/ accomplished objectives executed or objectives supported by specific agency objectives through performance of a supported by the activities taking place at objective are funded function organization the facility • Identifies material • Identifies material Provides life-cycle • Identifies material acquired purchased by a facility funding by purchased and/or in support of a function and/or system-related appropriation systems system-related activities • Identifies systems activities at a facility supported by the facilities by an organization • Identifies all functions • Identifies the tasks Identifies function (including facility performed by the financed by each support) being organization appropriation performed at each Identifies funds and sources of funds location required to finance specific tasks (function) Identifies individuals • Identifies all organizations supported responsible for budget by a given facility execution Identifies sources of • Identifies the geographic distribution funds that support the of a given organization organization Provides total costs and sources of funding of a given agency facility

Exhibit 7.5: Interrelationship of Financial System Requirements

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COMMON PROBLEMS IN SYSTEMS PROJECTS Some common issues and problems have surfaced in federal system development efforts. In recent testimony before congressional subcommittees, the GAO has 6 described common systems problems and environmental characteristics based on 40 reports by the GAO and the Inspector General community on implementation failures. Common problems identified in projects with problems include • Requirements management—Ill-defined or incomplete requirements have been identified by system developers and program managers as a root cause of system failure • Testing—Flawed test plans, inadequate timing of testing, and ineffective systems testing • Data conversion—Problems in data conversion are often the result of poor data conversion plans and the conversion of unreconciled data • Risk management—Inadequate risk management planning and practices • Project management—Problems include inadequate project management structure, unrealistic schedules, and lack of performance metrics and oversight • Quality assurance—Ineffective or inadequate independent verification and validation (IV&V), lack of IV&V, and IV&V recommendations not followed The problems identified appear in multiple projects and cross many agencies. They represent considerations in project planning and management that should be addressed in order to ensure success in any proposed system project. Financial systems also pose other unique considerations that are not always given the attention necessary to ensure project success. These considerations and/or project steps include • Concept of operations—A concept of operations should be developed that includes the purpose of the system, where it will reside, what functions are to be automated, how it will support the agency financial functions, what efficiencies are to be attained, what processes need to be reengineered, what steps will remain manual, how it will be deployed, and so on. Development of this concept is essential to ensure that the project and system objectives are clearly articulated at the outset. • Management—Senior financial management needs to assume leadership responsibility for the project. That means success or failure rests with the chief financial officer community, and the need to produce audited financial statements and provide stewardship reporting during every phase of the project remains the responsibility of the chief financial officer of the agency. • Auditability—The issue of auditability needs to be considered at the outset of a financial system project and addressed in every facet of the project plan. If the financial statements produced by the new system cannot be audited, the system will be labeled a failure. Several agencies have experienced a change from 6

U.S. Government Accountability Office, Financial Management Systems: DHS Has an Opportunity to Incorporate Best Practices in Modernization Efforts (GAO-06-553T), March 2006.

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a clean audit opinion to a qualified audit opinion simply because they failed to consider the auditability issue in planning and implementing a new system. • Requirements—The development of requirements for a new system is critical to system success. One of the key considerations of a financial system is to ensure that best practices are incorporated into the system requirements in addition to the “as-is” requirements. If not, the agency runs the risk of automating procedures and losing the opportunity to reengineer processes to take advantage of changes in communications and technology. • Data conversion—A financial system is unique in that the data converted must tie to prior period audited financial statements. That means that data conversion should reflect postclosing reconciled balances. If the agency has not been audited previously, additional planning is needed to ensure that audit trails exist and that feeder system controls can pass the auditability tests. • COTS packages—The use of commercial off-the-shelf (COTS) software can provide a readily available, cost-effective, and widely used alternative to custom software. Many of the COTS packages have been designed for use in a commercial environment and tailored to meet the requirements of federal users. An important consideration in a COTS implementation is providing the correct mix of functional expertise to supplement the “as-is” user community and the technical systems staff to ensure that the package is configured and installed in an efficient and effective manner.

8

FEDERAL FINANCIAL STATEMENTS

Maximum financial disclosure is seldom effective reporting. To be effective, reporting must transform data into meaningful information. Several objectives should be considered in the design of reports to ensure that appropriate information is being reported to management. Historically, within the federal government, considerable effort was expended to meet the legally required disclosures mandated of Congress. While such reports were important, these requirements were not the reporting most needed by federal entity executives to manage activities and operations. For 200 years, Congress and executives of federal departments and agencies were almost exclusively concerned with accounting for and reporting appropriated amounts, the status of apportioned budget authority, and the rate of obligation and expenditure. As long as the obligated and expended amounts remained below the amounts appropriated by Congress, few expressed any concern about the absence of other types of data. In the 1940s, 1950s, and 1960s, Congress, the Government Accountability Office, the Office of Management and Budget, and many federal executives recognized the limitations of obligation and expenditure accounting and reporting. This type of stewardship reporting was not sufficient to meet the scope of financial management needs of the government. In the 1970s and 1980s, Congress became increasingly concerned that federal entities were not managing programs to ensure that the rates of expenditures were consistent with program plans and desired economic thrusts, and the financial reporting reflected promised accomplishments or results. As a result, new laws imposed fiscal and performance restrictions on programs. Time limitations were placed on the period for obligation of appropriated funds and on the periods by which federal monies had to be fully expended. If both time limitations were not met, the entity’s funding authority might lapse. The OMB issued Circular No. A-136, Financial Reporting Requirements, in 2005 in conjunction with financial management legislation of the 1990s and the Accountability of Tax Dollars Act of 2002. This Circular established a central point of reference for all federal agencies for financial statement reporting. OMB Circular A136 significantly contributed to the increased timeliness of federal reports. Agencies are now required to submit their audited Performance and Accountability Report 45 days after the end of the fiscal year (i.e., November 15 for a September 30 fiscal year-end). Agencies are also required to submit unaudited interim financial statements to the OMB 21 days after the end of each of the first three quarters of the fiscal year. Government agencies are required to submit their annual management reports, described in the Government Corporations Control Act, to the OMB and Congress along with their Performance and Accountability Report within the 45-day deadline. Finally, the Treasury is required to issue the Financial Report of the United

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States Government no later than one month after the 45-day deadline for agencies (i.e., December 15 for a September 30 fiscal year-end). USERS OF FEDERAL FINANCIAL INFORMATION Upon its establishment, the Federal Accounting Standards Advisory Board set forth a basic objective that federal accounting and financial reporting should assist in fulfilling the federal government’s duty to be publicly accountable for monies raised through taxes for reporting that federal expenditures were made in accordance with federal appropriations laws. The FASAB suggested that there could be several levels of accountability: policy, program, performance, processes-procedural, and probitylegal. In its statement of objective, the FASAB noted that this accountability must have utility to a variety of users, which the FASAB categorized into four groups: 1. Individual citizens (e.g., taxpayers, voters, or service recipients of federal assistance) 2. Congress (individual members, committees, plus legislative agencies with budget and other federal financial responsibilities such as the Congressional Budget Office and the GAO) 3. Federal executives and those with oversight responsibilities (including the President and those acting as his agents) 4. Program managers (i.e., those federal entity executives responsible for 1 operating plans, program operations, and budget execution) To meet the needs of these myriad users and purposes, the FASAB recommended that financial statements and reports be issued for individual federal departments and agencies and government-wide for the total of all federal entities. Limits of Appropriation Reporting for the User Historically, the concern with appropriations status inhibited entity management and may actually have impeded the development of financial management information systems. The restrictive nature of appropriation accountability was clearer each time Congress funded portions of an entity’s operations from a variety of appropriations. Under these conditions, agency management encountered difficulty in managing programs and operations and relating the cost of resources used to several appropriations. When an entity received its funding from a number of appropriations, the reporting to Congress, the OMB, and the Treasury made it appear that each funding source was separately supporting the full program or operation. Such, of course, was not the case. Macrolevel reports and statements on appropriation balances provide few clues to the economy, efficiency, or relative effectiveness of federal operations; the primary conclusion that they offer is whether certain spending levels or ceilings have been attained or exceeded.

1

Federal Accounting Standards Advisory Board, Objectives of Federal Financial Reporting— Statement of Recommended Accounting and Reporting Concepts (Washington, D.C., July 1993).

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Entity management must conduct operations in a manner to achieve the stated goals of Congress and the administration, whether using funds of a single appropriation or a multitude of appropriations. Reporting by appropriation was, to a degree, artificial and not reflective of the way in which the agency managed its resources to achieve the will of Congress. Expenditure and Expense Reporting for the User An issue often discussed by federal financial personnel is the relative importance of cash expenditures versus expense reporting. Cash expenditure data reflect the level of budget authority needed to acquire the resources required for a particular level of activity. In contrast, expense data reflect the level of costs or resources required to sustain a level of activity in a specific fiscal period, whatever the financing source, and including any consumed resources carried over from an earlier fiscal year. As in accounting in the private sector, fixed assets, inventories, prepaid costs, and deferred expenses have value to activities of a future period. Without such resources, the financing for the future period would have to be greater. The use of fixed assets and consumption of inventory and prepaid costs financed by expenditures of some earlier period reduce the level of the current year’s budget authority necessary to sustain the activity of the current period. The issue is not which is the more important—cash basis reporting or expense basis reporting; both bases are needed to manage effectively, since each meets a different unique need. Utility of Data to the User The utility of data is paramount to agency financial managers. Unless data have utility, the transformation of raw data into useful information has not occurred. The utility of data is principally related to its content, structure, and timeliness. With respect to content, data must provide facts on the activities, organizations, functions, or other responsibilities of a manager. Typically, a requirements analysis is made to determine the nature of the monitoring to be performed, indicators of performance, and the types of decisions to be made by various levels of management. Only after this analysis should decisions be made on data content and the structure of required reporting. The structure or format of information is also important. The practice of providing voluminous computer printouts of data to management consumes considerable resources and accomplishes little. The format of the data must be consistent with the manner in which management desires to examine and manage the activities for which it is responsible. Reports must highlight information reflective of or in response to the responsibilities exercised. Exception reporting, trend analyses, variances, changes, and performance indicators are all attempts to ensure that information is structured or formatted in a manner most responsive to the inquiries that management must answer. Timeliness has historically been a problem in public-sector reporting, particularly with respect to federal financial data. Often the practice was to give federal financial reports a low priority. Even preliminary financial reports and statements

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were not available to agency users until the third or fourth week after the end of the prior month or fiscal quarter and several months after the close of a fiscal year. Reporting that is subject to long delays is not responsive reporting. Late reports and financial statements have limited or no value. In fact, late reporting, when ultimately received by federal executives, might even be misleading and result in flawed decisions. The lateness of the data precludes their use in the planning, budgeting, and other decision-making processes. Real-time access to databases and the increasing reliance on computeraccessible terminals has enhanced the timeliness of reported data. The integration of state-of-the-art electronic data processing, accumulation, and display techniques will further reduce delayed reporting of data essential to the agency. Flash reporting and issuance of preliminary reports and statements has improved information in many federal entities. ENTITY FINANCIAL STATEMENTS Financial statements and operational reports are necessary if a federal entity is to provide an accountability of the federal monies used, resources consumed, level of performance, and program effectiveness achieved. Some of this accountability is external to the federal government, as in the case of financial statements read by citizens in general. In other instances, the accounting is external to the federal entity, but still within the federal government, as when the individual federal entities report to Congress, the Treasury, or the OMB. Still another accounting includes those reports that are internal to the federal entity itself and used by its managers to monitor programs and ensure compliance with various federal laws and regulations. Under the CFO Act, the OMB has the lead role in setting and monitoring federal financial management policies, including prescribing the form and content of financial statements and other reportings to be submitted by federal entities. With the establishment of Circular A-136, Financial Reporting Requirements, the OMB provided universal guidance as to the framework within which individual federal entities are to provide the information needed by Congress, the President, their own federal entity managers, and the public. Structure of Federal Financial Statements OMB Circular A-136 incorporated and updated OMB Bulletin 01-09, Form and Content of Agency Financial Statements, the fiscal year 2002 memorandum, Financial and Performance Reporting, as well as reporting requirements related to the government as a whole, as in its Financial Report of the United States, and OMB significantly accelerated reporting requirements. Federal agencies must now ensure that information in their financial statements is presented in accordance with federal generally accepted accounting principles (GAAP) and the requirements of OMB Circular A-136. Comparative financial statements displaying current and preceding fiscal years are to be presented with footnotes containing the information necessary for full disclosure. Reported details will and must still include an accounting by appropriations of related financial positions, obligations, expenditures, cash disbursements, and costs

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of authorized programs, products, activities, and services managed. Systems of federal entities also are expected to provide a ready and accurate reporting by congressional districts in America for an entity’s programs that could impact states and territories, counties, cities, towns, and other local governmental units receiving federal financial assistance. Not overlooked is the reality that some agencies make payments directly to tens of millions of individual citizens, each requiring an individual “account” and some type of reporting. Such an accounting and financial reporting has no counterpart in the private sector. The financial statements of federal entities must comply with 31 United States Code 3515 and other legal criteria for presenting the financial position and results of operations of federal entities. The OMB Bulletins prescribing the form and content of federal financial statements incorporate the several federal financial accounting concepts and standards researched and recommended by the FASAB. The six current financial statements include 1. Statement of Financial Position or Balance Sheet 2. Statement of Net Cost 3. Statement of Changes in Net Position 4. Statement of Budgetary Resources 5. Statement of Financing 6. Statement of Custodial Activity The financial statements also must contain such other information as • Supplementary stewardship information relating to property, plant, and equipment, entity investments, and program-related risks • Supplementary information, such as Management’s Discussion and Analysis (MD&A) and segment-related information, where appropriate • Other accompanying information, such as data on performance measures, forgone federal revenues, and tax burden and tax gaps, as appropriate for specific entities To be complete, a federal entity’s financial statements must also include several required footnotes, plus other notes that are unique and necessary to describe the financial and other activity of the specific entity. These OMB-prescribed financial statements must reflect the summarized information contained in some 2,000 ledger, subledger, and subsidiary accounts of the federal government’s Standard General Ledger. In addition to providing the most meaningful reporting to citizens, the data in these entity-level financial statements also forms the basis for the consolidated financial statements for the United States government. And law requires that these financial statements must, for each entity and for the government as a whole, annually undergo an independent audit. FEDERAL ENTITY BALANCE SHEETS The balance sheet is the statement of financial position for individual entities and the government as a whole, and resembles in many respects the balance sheet required by the Securities and Exchange Commission for corporations. Within the

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federal government, the terms “balance sheet” and “statement of financial position” are interchangeable. Analysts, investors, creditors, and others utilize information in a corporate balance sheet to compute rates of returns and assess the corporate financing sources, cash flows, and liquidity or solvency among other financial barometers. The balance sheet is also viewed as a periodic statement of a corporation’s financial position showing assets, liabilities, and stockholders’ equity, wherein these accounts are classified by current accounts, long-term accounts, intangible accounts, voting versus paid-in capital, and retained earnings. Though important in the corporate sector, not all of this accountability information is relevant to understanding, monitoring, or overseeing activities of federal entities. The purpose of accountability—for federal entities and the government as a whole—is different. A partial listing of the ways in which corporate and government accounting differ follows: • Government agencies have no cash account, as the term is used in corporate sector accounting. • The collectibility of receivables is monitored in government accounting, but for different reasons. For example, bad or defaulted debt repayments on federal direct loan and loan guarantee programs must be projected and financing provided at the outset of the program (historically estimated to be between 25 and 40%). Since many federal programs are directed to highest-risk constituencies, these default-related costs are certain to be incurred; only the timing is uncertain. • Concerns with property, plant, and equipment are different too. The nature of many of the federal assets is unique to government. For example, the service lives of multibillion-dollar capital investments could be measured in minutes rather than years for a fully armed aircraft carrier under enemy attack in a combat zone. • For federal entities, there are no equity issues or shareholder concerns. Because the government’s financing is ultimately from taxes, the objective is not to compile significant equity. Classifications of a Consolidated Federal Balance Sheet An entity’s balance sheet presents data as of a specific moment in time. A federal balance sheet could present the financial position of a federal entity as of the end of a month or quarter. The balance sheet must be prepared at least quarterly and as of September 30, the government’s fiscal year-end. Exhibit 8.1 is a generic example of the classified Consolidated Balance Sheet required of federal entities by the OMB. Not all federal entities will necessarily issue a balance sheet with this illustrated content or this format due to the differing missions and programs for which an agency is responsible.

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Exhibit 8.1: Consolidated Balance Sheet A Federal Entity As of September 30, 20XX (in dollars/thousands/millions) 20XX

20XX

$ xxx xxx xxx xxx xxx xxx

$ xxx xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx xxx x,xxx

xxx xxx xxx xxx xxx xxx xxx xxx x,xxx

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx

x,xxx

x,xxx

Net Entity Position Unexpended appropriations Cumulative results of operations Total net position

$ xxx xxx xxx

$ xxx xxx xxx

Total Net Entity Position

$x,xxx

$x,xxx

Total Liabilities and Entity Position

$x,xxx

$x,xxx

Assets Intragovernmental Fund balance with Treasury Investments Accounts receivable, net Interest receivable Other assets Total intragovernmental Investments Accounts receivable, net Interest receivable, net Credit program receivables, net Foreclosed property, net Inventory and related property, net General property, plant, and equipment, net Other assets Total assets Liabilities Intragovernmental liabilities Accounts payable Interest payable Other intragovernmental liabilities Total intragovernmental liabilities Accounts payable Interest payable Liabilities for loan guarantees Lease liabilities Pensions, other retirement and other postemployment benefits Insurance liabilities Other governmental liabilities Total liabilities

Congress ultimately determines what a federal entity must report and how. It is Congress that authorizes certain federal entities to operate certain programs and not others, and Congress that designates which constituencies a federal entity must serve and how (e.g., large corporations by big contracts; small businesses by subsidized loans and set-aside programs; nonprofit and educational institutions by grants; the young, old, hungry, and homeless by grants and direct subsidies; or others by loan and loan guarantees programs for education, health, economic development, natural

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disasters, etc.). The major balance sheet classification for a federal agency’s assets and liabilities is intragovernmental versus governmental, although entity versus nonentity assets and liabilities must be disclosed in the footnotes to the financial statements. Intragovernmental versus governmental liabilities. To be responsive, a balance sheet of a federal entity must be classified to show an accounting and reporting by intragovernmental and governmental assets and liabilities. Intragovernmental assets are claims of a federal entity against other federal entities. Intragovernmental liabilities are claims against the federal entity by other federal entities. Governmental assets are claims of the federal government or an entity within the federal government against nonfederal entities. Governmental liabilities are amounts that the federal government or an entity within the federal government owes to nonfederal entities. Entity versus nonentity. Entity assets are those that the reporting federal entity has congressional or legal authority to use in its operations. Nonentity assets are those assets held by an entity, but which are not available to that entity to finance its operations or use for its programs. An example of a nonentity asset could be property held by the federal government in trust for others. Two other examples are the income taxes and customs duties collected by the Internal Revenue Service and the US Customs and Border Protection for the benefit of the entire federal government and not just their own operations. Assets and liabilities. In addition to the previous classifications, the data in an entity’s balance sheet must be further organized by assets, liabilities, and net entity position. Assets have been defined as tangible or intangible items owned by or owed to the federal government that would have probable economic benefits that can be ob2 tained or controlled by the federal entity. These assets include cash, investments, real and personal properties, and claims of the federal entity against nonfederal entities or parties (e.g., accounts receivable, interest receivable, and amounts due from federal advances and advances or prepayments to these nonfederal entities or parties). With some exceptions, assets are initially recorded at purchased costs or donated values. The FASAB and the OMB define a federal liability as a “probable and measurable future outflow of resources arising from past transactions or events.” The liabilities grouping of accounts includes an enormity of transactions and events, such as accounts payable, end-of-period accrual liabilities, federal commitments and guarantees legally assumed or entered into, contingencies, damages from litigious proceedings, and so on. Liabilities are measured and recorded in a federal entity’s accounts in the period incurred and removed from the accounts in the period liquidated or paid. Also, liabilities represent amounts owed and are not dependent on re-

2

Federal Accounting Standards Advisory Board, FASAB Original Statements, Volume I, Consolidated Glossary, March 1997.

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ceipt of an invoice or request for payment. Liabilities must be reported irrespective of whether federal funds are available or authorized for their payment. Such liabilities can arise from (1) exchange transactions (generally for services rendered); (2) government-related events; (3) government-acknowledged events (i.e., voluntary assumption of debts, risks, or costs of others); and (4) nonexchange transactions (i.e., debts and amounts due to the sovereign government, such as taxes). Any advance payments and prepayments from other entities for goods or services yet to be delivered by a federal entity must also be recorded as other current liabilities. On entity balance sheets, liabilities must be disclosed in the footnotes to the financial statements as being funded or unfunded. Federal funded liabilities are covered by budgetary resources. That is, the federal entity has congressionally approved expenditure authority, through an appropriation law or other budgetary or contract authority, that permits the entity to recognize and pay these liabilities. Federal unfunded liabilities are simply those not covered by budgetary resources. Such unfunded liabilities should be separately disclosed and segregated from payables or liabilities that are covered by budgetary resources. Net position. Net entity position is defined by the FASAB as the “unexpended appropriations and the cumulative result or residual balance” resulting from: (1) the initial investment to commence a federal operation; (2) the cumulative results of the operation’s revenues or resources and expenses; or (3) donations, collections, or transfers of funds or other property by or to a federal entity as permitted by Congress. • Unexpended appropriations are appropriations not yet obligated/expended and undelivered orders. • Cumulative results of operations include amounts accumulated over the years by an entity from its financing sources, less expenses and losses, including donated capital and transfers in the net investment of the government account and the entity’s liabilities (for accrued leave, credit reform, and actuarial liabilities not covered by available budgetary resources). • Residual balance is comprised of appropriated capital provided by Congress; invested capitalized assets or expended appropriations for purchased goods or property; or receivables due for loaned or advanced monies. As stated by SFFAS No. 27, Identifying and Reporting Earmarked Funds, federal agencies are required to report earmarked funds separately from all other funds, if material, on the face of the balance sheet for both unexpended appropriations and cumulative results of operations. Earmarked funds represent funds that are financed by specifically identified revenues and are required by statute to be used for designated activities or purposes. An entity’s net position investment could relate to a single appropriation, several appropriations, or other congressional budgetary authority accounts.

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STATEMENT OF NET COST The Statement of Net Cost (Exhibit 8.2) is the most significant of the required entity financial statements. Unless specifically authorized by Congress, most federal entities do not have the authority or responsibility for earning fees and revenues for services or goods provided or for collection of taxes and other receipts for the federal government. Yet all federal entities incur liabilities and authorize disbursements to pay the costs of program operations and administrative activities. In fact, for many federal entities, the only transactions in their general ledger are expense or cost transactions. Exhibit 8.2: Consolidated Statement of Net Cost A Federal Entity For the year ended September 30, 20XX (in dollars/thousands/millions) 20XX

20XX

Program Costs Program A Gross costs Less: Earned revenues Net program costs

$xxx (xxx) xxx

$xxx (xxx) xxx

Other Programs Program B Program C Program D Program E Program F Other program costs Total other program costs

xxx xxx xxx xxx xxx xxx x,xxx

xxx xxx xxx xxx xxx xxx x,xxx

Costs not assigned to programs Less: Earned revenues not attributed to programs

x,xxx (xxx)

x,xxx (xxx)

Net Cost of Operations

$x,xxx

$x,xxx

The OMB has defined the Statement of Net Cost as specifically meeting the federal financial reporting objective to “provide information that helps the reader to determine the costs of providing specific programs and activities and the composition of and changes in these costs.” In other words, the statement should display, in clear terms, the net cost (i.e., total costs less all revenues attributed to a program and permitted to be offset against program costs) by an entity’s suborganizations and of its programs and other costs (i.e., administrative and other costs not allocated to specific programs). Organization and Program Costs Federal entities are permitted to display additional classifications and show costs by suborganizations, by programs, or by the object classifications (which are the basic expenditure elements of federal financial systems). According to the FASAB and the OMB, a program’s costs shall include • All costs that can be directly traced to a program

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• All costs that can be assigned to a program based on cause and effect • All costs that can be allocated to the program on a reasonable and consistent basis • Any nonproduction costs that can be assigned to a program Costs not directly traceable, assignable, or allocable are to be considered program support or management support costs, which may be incurred by the reporting federal entity and/or another federal entity in administering or managing the reporting federal entity’s organizations or program activities. The costs and revenues arising from transactions with other federal entities are to be displayed with the nonfederal entity costs and revenues; however, intragovernmental gross costs and earned revenues should be disclosed in the footnotes to the financial statements. Of particular reporting significance for the Statement of Net Cost is the high-level general management and administrative support costs that cannot be directly traced or assigned on a cause-and-effect basis, nor reasonably allocated to organizational segments and program outputs. Management costs not directly attributable to programs, but nonetheless necessary to operating them, are not to be buried in the reporting entity’s program or organizational costs. A reporting category to separately identify these costs is called the “Costs not assigned to programs.” The nonproduction costs (those not related to the production of goods, services, or other performance by a federal entity) must be separately reported. Some nonproduction costs would include the cost of acquiring, constructing, improving, reconstructing, or renovating federal mission property, plant, and equipment; heritage assets; and the cost of acquiring stewardship lands. Deferred maintenance, one such nonproduction cost, is defined by the OMB as maintenance not performed when it should have been, or maintenance scheduled to be performed, but that was delayed to a future period. A federal entity must also include a line item for deferred maintenance in its Statement of Net Cost. No dollar amount is recognized on the face of the statement, but an entity must include a footnote reference as part of its reporting. Net Cost of Operations Net cost of operations is the gross cost incurred by an entity, less any exchange revenues earned by its operations and activities. The net cost of operations represents the amount funded by sources other than exchange revenues, and must be reported on an entity’s Statement of Changes in Net Position. The reported net cost of operations must be the same amount reported on the Statement of Changes in Net Position and on the entity’s Statement of Financing for the same fiscal period. In research leading to its entity and display standard, the FASAB recommended that the total and net costs shown in this statement be the same as the total and net costs recorded by a federal entity in its own cost accounting and financial systems. Additionally, costs of program outputs must include costs of services provided by other entities, regardless of whether the providing entity is fully reimbursed, and

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even when the financing source of the costs is from different appropriations or budgetary authority. STATEMENT OF CHANGES IN NET POSITION The purpose of a federal entity’s Statement of Changes in Net Position is to identify all financing sources available or used by a federal entity to support its net cost of operations and the net effect or change in the entity’s financial position. As illustrated in Exhibit 8.3, these financial data are arrayed by the same organizational components or responsibility segments as appeared in the Statement of Net Costs. Exhibit 8.3: Consolidated Statement of Net Position A Federal Entity For the year ended September 30, 20XX (in dollars/thousands/millions) 20XX Cumulative results of operations Beginning Balance Adjustments Change in accounting principle Correction of errors

$xxx xxx xxx

20XX Unexpended appropriations $xxx xxx xxx

20XX Cumulative results of operations

20XX Unexpended appropriations

$xxx xxx xxx

$xxx xxx xxx

Beginning Balance, As Adjusted Budgetary Financing Sources Appropriations received Appropriations transferred in/out Other adjustments Appropriations used Nonexchange revenue Donation and forfeiture of cash Transfer in/out without reimbursement Other budgetary financing sources Other Financing Sources Donations and forfeitures of property Transfers in/out with reimbursement Imputed financing cost absorbed by others Other

xxx xxx xxx xxx

xxx xxx xxx (xxx)

xxx xxx xxx xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx xxx

xxx xxx

Total Financing Sources

xxx

Net Cost of Operations

xxx

xxx

xxx

xxx xxx xxx (xxx)

xxx

xxx

Net Change Ending Balance

$x,xxx

$x,xxx

$x,xxx

$x,xxx

Obviously there is a considerable amount of overlap between these two types of statements. The net cost of operations is the same amount that appears in the entity’s

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Statement of Net Cost, and the net position is the same amount that appears in the entity’s Statement of Financial Position (the entity’s balance sheet). Classifications of Financing Sources Since the purpose of this statement is to identify changes in the net position, or how an entity’s costs were financed, the OMB has prescribed specific data classifications to be used. These classifications must be identified, whether shown in a Statement of Changes in Net Position or combined with the Statement of Net Cost. • Appropriation received represents amounts of congressional budget authority, including all transfers of budget authority from other entities, that are received during the current fiscal year. • Appropriation used represents amounts of congressional budget authority, including all transfers of budget authority from other entities, that may be used by federal entities to finance mandated operations. • Taxes and nonexchange revenues includes all receipts of taxes and nonexchange revenues such as dedicated taxes, fines, and other revenues that the federal government demands in its role as a sovereign power. Once collected, these major funds then become monies to be appropriated by Congress. The collection function involves only a few federal entities (e.g., the IRS for personal and business taxes and the Customs Service for import fees and duties). These entities are not authorized to use all collections for their operations, but rather serve as the collecting agency and custodian of cash received and later turned over to the Treasury. (For these entities, a Statement of Custodial Activities, discussed later, would be appropriate.) For all other federal entities, nonexchange revenues collected would be shown on this statement. • Donations are monies and materials given by private persons and organizations to the federal government without receiving anything in exchange. Not all federal entities are authorized to accept donations or contributions; specific authority must be provided by Congress. • Imputed financing sources are costs incurred by a federal entity that are financed by another federal entity. This classification must include costs attributable to the reporting federal entity’s activities but that do not require a direct cash payment in the reporting period (such as interest costs associated with carrying inventory or investing in physical assets). For example, Congress provides a direct appropriation of funds to the Office of Personnel Management to pay retirement and other postretirement costs to former federal employees, most of whom were employed by federal entities other than the OPM. • Transfers in are amounts of cash or other capitalized assets received by one federal entity from another federal entity without reimbursement. Transfers out are amounts of cash or other capitalized assets provided by one federal entity to another without reimbursement. If exchange revenue included in calculating an entity’s net cost of operations is transferred to the Treasury or another federal entity, the amount transferred is recognized as a transfer out and not netted against the entity’s cost of operations. If the cash or book value

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is not known for these transferred amounts, the recorded value is the estimated fair value of the asset at transfer date. • Net results cost of operations must be the same amount as reported on the Statement of Net Cost and on the entity’s Statement of Financing for the same fiscal period. As stated by SFFAS No. 27, federal agencies are required to report earmarked funds separately from all other funds, if material, on the face of the Statement of Changes in Net Position for nonexchange revenue and other financing sources, including appropriations, and net cost of operations. Earmarked funds represent funds that are financed by specifically identified revenues and are required by statute to be used for designated activities or purposes. Adjustments and Changes to Costs Changes in accounting principles are changes from one generally accepted accounting principle to another generally accepted accounting principle that can be justified. The cumulative effect of the accounting principle change should be reported as part of the Statement of Changes in Net Position, and the nature of the change should be disclosed. Corrections of errors are adjustments due to errors in prior year financial statements resulting from mathematical mistakes, misapplication of accounting principles, or management oversight. The nature of the error and its impact on financial statement balances should be disclosed on the Statement of Changes in Net Position. The OMB does not require that Statements of Changes in Net Position for prior periods be restated for prior period adjustments. Any adjustments related to changes in accounting principle and corrections of errors are treated as adjustments to prior fiscal periods and shown as adjustments to the beginning balance on the Statement of Changes in Net Position. Net Position at the End of the Period The net position at the end of the period is equal to the total unexpended appropriations and the cumulative results of operations of the federal entity and would also be reported in the entity’s Statement of Financial Condition (the entity’s balance sheet). The end-of-period balance becomes the beginning balance of unexpended appropriations for the next fiscal period. STATEMENT OF BUDGETARY RESOURCES The Statement of Budgetary Resources is particularly meaningful since data are provided on how a federal entity obtained its budgetary resources and the status or remaining balances of these resources at the end of the reporting period. This statement, illustrated in Exhibit 8.4, is prepared by federal entities whose financing comes wholly or partially from congressional appropriations or from budgetary or contract authority. This statement is prepared for each financing source (e.g., each congressional appropriation) to ensure compliance and management of appropriations and appropriateness of budget execution. Then an aggregated statement is

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needed to include all financial activity for the entity for the year from all financing sources. Exhibit 8.4: Combined Statement of Budgetary Resources A Federal Entity For the years ended September 30, 20XX and 20XX (in dollars/thousands/millions)

20XX Budgetary Budgetary Resources 1. Budget authority 1a. Appropriations received 1b. Borrowing authority 1c. Contract authority 1d. Net transfers (+/–) 1e. Other 2. Unobligated balance 2a. Beginning of period 2b. Net transfers, actual (+/–) 2c. Anticipated transfers balances 3. Spending authority from offsetting collections 3a. Earned 1. Collected 2. Receivable from federal sources 3b. Change in unfilled customer orders 1. Advance received 2. Without advance from federal sources 3c. Anticipated for rest of year, without advances 3d. Transfers from trust funds 3e. Subtotal 4. Recoveries of prior year obligations 5. Temporarily not available pursuant to Public Law 6. Permanently not available 7. Total budgetary resources Status of Budgetary Resources 8. Obligations incurred 8a. Direct 8b. Reimbursable 8c. Subtotal 9. Unobligated balance 9a. Apportioned 9b. Exempt from apportionment 9c. Other available 10. Unobligated balance not available 11. Total status of budgetary resources Relationship of Obligations to Outlays 12. Obligated balance, net, beginning of period 13. Obligated balance transferred, net (+/–)

20XX Nonbudgetary credit program financing accounts

20XX Budgetary

20XX Nonbudgetary credit program financing accounts

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx

xxx xxx xxx

xxx xxx xxx

xxx xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx xxx xxx

xxx xxx $x,xxx

xxx xxx $x,xxx

xxx xxx $x,xxx

xxx xxx $x,xxx

$xxx xxx xxx

$xxx xxx xxx

$xxx xxx xxx

$xxx xxx xxx

xxx xxx xxx xxx x,xxx

xxx xxx xxx xxx x,xxx

xxx xxx xxx xxx x,xxx

xxx xxx xxx xxx x,xxx

xxx

xxx

xxx

xxx

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20XX Budgetary 14. Obligated balance, net, end of period 14a. Accounts receivable 14b. Filled customer orders from Federal sources 14c. Undelivered orders 14d. Accounts payable 15. Outlays 15a. Disbursements 15b. Collections 15c. Subtotal 16. Less: Offsetting receipts 17. Net outlays

20XX Nonbudgetary credit program financing accounts

20XX Budgetary

20XX Nonbudgetary credit program financing accounts

xxx

xxx

xxx

xxx

xxx xxx xxx

xxx xxx xxx

xxx xxx xxx

xxx xxx xxx

xxx xxx xxx xxx $x,xxx

xxx xxx xxx xxx $x,xxx

xxx xxx xxx xxx $x,xxx

xxx xxx xxx xxx $x,xxx

Budgetary information is reported by agencies in the Federal Agencies’ Centralized Trial-balance System II (FACTS II). FACTS II data submitted are based on US Standard General Ledger trial balance amounts, which are used to formulate the SF-133, Statement of Budget Execution. The government’s Standard General Ledger trial balance amounts are also utilized in preparing the Statement of Budget Execution. There is a FACTS II revision period at the end of the fiscal year, allowing agencies to modify existing balances. Any changes subsequent to the publication of the audited Statement of Budgetary Resources that are material are discussed between the agencies and their auditors to determine if a restatement is necessary. The basis for accounting and reporting on this statement is prescribed by the OMB in its longstanding and regularly updated budget guidance. The Statement of Budgetary Resources must be classified into three major sections or groupings. 1. Budgetary Resources. This section presents the total obligational and nonbudgetary resources (generally from congressional appropriations and budgetary and contract authority) under the stewardship of a federal entity. These accountable resources could include new budget authority, various obligation limitations and spending authority, unobligated balances at the beginning of a period and those transferred in during the period, and spending authority that could arise from offsetting collections and any adjustments made to an entity’s budgetary resources. The calculated total for budgetary resources is the total amount made available to the federal entity for the fiscal period. 2. Status of Budgetary Resources. This section of the statement provides an analysis of the status of budgetary resources by the specific components of obligations incurred, unobligated balances of available budget authority, and unobligated balances that are unavailable except to adjust or liquidate obligations charged to prior years’ appropriations. The calculated total of this section is equal to the budgetary resources still available to the federal entity as of the reporting date. 3. Outlays. This section shows the net outlays or cash disbursements by a federal entity for the fiscal period. The section provides a reconciliation of the

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gross disbursements during the fiscal year, offsetting collections or receipts, and net outlays. Data appearing on the Statement of Budgetary Resources are, in condensed form, the same data reported by federal entities to the OMB on the Report of Budget Execution (i.e., the government’s SF [standard form] 133) pursuant to OMB Circular A-11, Preparation, Submission, and Execution of the Budget. These data are reported government-wide in the Treasury’s monthly statement and its annual report, as well as in the President’s budget request submitted annually to Congress. STATEMENT OF FINANCING The Statement of Financing (see Exhibit 8.5) is a reconciling statement that ensures there is a proper relationship between the proprietary accounts (cost-based) and the budgetary accounts (budget-based) in an entity’s accounting and reporting systems. Neither basis, cost nor budgetary, is superior to the other. Use of both bases is essential to the decisions that must be made by federal entities, and entities’ accounting and reporting systems must provide these data in parallel. The Statement of Financing provides data on the total resources provided to a federal entity for the fiscal period. This statement is also a report on how those resources were used. Exhibit 8.5: Consolidated Statement of Financing Department/Agency/Reporting Entity For the years ended September 30, 20XX and 20XX (in dollars/thousands/millions) 20XX

20XX

Resources Used to Finance Activities Budgetary resources obligated 1. Obligations incurred 2. Less: Spending authority from offsetting collections and recoveries 3. Obligations net of offsetting collections and recoveries 4. Less: Offsetting receipts 5. Net obligations

$xxx xxx xxx xxx xxx

$xxx xxx xxx xxx xxx

Other resources 6. Donations and forfeitures of property 7. Transfers in/out without reimbursement (+/–) 8. Imputed financing from costs absorbed by others 9. Other (+/–) 10. Net other resources used to finance activities 11. Total resources used to finance activities

xxx xxx xxx xxx xxx x,xxx

xxx xxx xxx xxx xxx x,xxx

xxx

xxx

xxx

xxx

xxx xxx xxx

xxx xxx xxx

Resources Used to Finance Items Not Part of the Net Cost of Operations 12. Change in budgetary resources obligated for goods, services, and benefits ordered but not yet provided (+/–) 13. Resources that fund expenses recognized in prior periods 14. Budgetary offsetting collections and receipts that do not affect net cost of operations 14a. Credit program collections that increase liabilities for loan guarantees for allowances for subsidy 14b. Other 15. Resources that finance the acquisition of assets

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16. Other resources or adjustments to net obligated resources that do not affect net cost of operations (+/–) 17. Total resources used to finance items not part of the net cost of operations 18. Total resources used to finance the net cost of operations Components of the Net Cost of Operations that Will Not Require or Generate Resources in the Current Period Components Requiring or Generating Resources in Future Periods 19. Increase in annual leave liability 20. Increase in environmental and disposal liability 21. Upward/downward reestimates of credit subsidy expense (+/–) 22. Increase in exchange revenue receivable from the public 23. Other (+/–) 24. Total components of net cost of operations that will require or generate resources in future periods Components Not Requiring or Generating Resources 25. Depreciation and amortization 26. Revaluation of assets or liabilities (+/–) 27. Other (+/–) 28. Total components of net cost of operations that will not require or generate resources 29. Total components of net cost of operations that will not require or generate resources in the current period 30. Net costs of operations

20XX xxx

20XX xxx

xxx x,xxx

xxx x,xxx

xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx

xxx

xxx

xxx xxx xxx

xxx xxx xxx

xxx

xxx

x,xxx $x,xxx

x,xxx $x,xxx

Financial data based on accrued or applied costs are essential to managing, measuring, and determining total financial resources needed to achieve a particular output or outcome. For planning and financing decisions by the President and Congress, however, budgetary basis data are equally important. The Statement of Net Cost (Exhibit 8.2), discussed earlier in this chapter, is cost-based. The Statement of Budgetary Resources (Exhibit 8.4) is budget-based. The Statement of Financing (Exhibit 8.5), with five major sections or groupings, provides the reconciliation between budgeted obligations and nonbudgetary resources to a federal entity’s net cost of operations for a fiscal period. 1. Obligations and Nonbudgetary Resources. This section includes a reporting of obligations incurred, adjusted for offsetting collections and recoveries of budget authority from others, and some other items defined by the OMB. Some federal entities have the authority to earn and use revenues from services rendered. In these instances, these exchange revenues would not have been recognized earlier since the dollar amount of earnings would not be known in advance of providing services. Once known, these exchange revenues are reported as a reduction from obligations and gross costs. The reported total obligations, as adjusted, including nonbudgetary resources, constitute the total amount for which the federal entity may have a future liability and for which cash payments may ultimately be made by the government. 2. Resources That Do Not Fund Net Costs of Operations. This section identifies and adjusts budgetary transactions recorded by an entity for three types of events: (a) a change in goods, services, and benefits ordered but not yet

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received or provided; (b) goods or services received, but that were capitalized on the balance sheet and were not consumed as a cost of the current reporting period; and (c) items treated as prior periods’ financing resources that have been recognized as budgetary resources of the current period that still had not been funded. These items are included in the reported obligations as adjusted and nonbudgetary resources, but are not in the net cost of operations. Thus, the three items must be subtracted for reconciliation purposes. 3. Costs That Do Not Require Resources. This is required to adjust the reported obligations, as adjusted for other resources, that were used or consumed by a federal entity during the fiscal period in order to ultimately calculate the net cost to operate the federal entity. In this section, an entity must report costs of the reporting period that did not require financing by either budgetary or nonbudgetary resources in this period. Typically, these types of obligations relate to costs incurred in an earlier fiscal period, but not yet consumed in operations. Two of the more common of these resources are depreciation for fixed assets capitalized in an earlier period and expenses related to any revaluation of assets or liabilities. The value of these items would not be part of the current period’s obligations, but do become a part of the period’s cost of production or performance and are added to arrive at the net cost of operations. 4. Financing Sources Yet to Be Provided. This section identifies the costs of a federal entity that have not been funded by Congress or earlier obligated by the federal entity. These costs, the most common of which is the earned but unused annual leave of federal employees, will normally be funded by Congress through direct appropriations to the Office of Personnel Management. However, the cost of annual leave is earned by agency personnel and is incurred when federal services are rendered. Thus, an additive adjustment “financing sources yet to be provided” is required in calculating the net cost of operations for a fiscal period. 5. Net Cost of Operations. The amount reported on this statement must be the same amount that appears as the “net cost of operations” on the Statement of Net Cost and on the Statement of Changes in Net Position for the same fiscal period. STATEMENT OF CUSTODIAL ACTIVITY The Statement of Custodial Activity (see Exhibit 8.6) is only required of those federal entities authorized by Congress to collect nonexchange revenues and serve as custodians for the general fund of the Treasury, or for a designated trust fund, or a few other federal recipient entities.

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Exhibit 8.6: Statement of Custodial Activity Department/Agency/Reporting Entity As of September 30, 20XX and 20XX (in dollars/thousands/millions) Sources of Collections Cash collections (by type of tax or duty) Individual income taxes and FICA Corporate income taxes Excise tax Total cash collections Accrual adjustments Disposition of Collections Transferred to others Increase/decrease in amounts yet to be transferred Refunds and other payments Retained by the reporting entity Net Custodial Activity

20XX

20XX

$xxx xxx xxx xxx xxx

$xxx xxx xxx xxx xxx

xxx

xxx

$xxx xxx xxx xxx

$xxx xxx xxx xxx

$x,xxx

$x,xxx

The collecting entities often cannot use these collections that have been or should be transferred to other federal entities as their own operating revenues. Collecting entities must account for the sources and disposition of all collections as fiduciary activities on the Statement of Custodial Activity. An exception is when the custodial collections are not material and incidental to a federal entity’s mission. In these instances, the collections are identified in footnotes to the entity’s financial statements. Custodial collections are usually for nonexchange revenues of the government (e.g., imposed taxes, duties, and fees) of which the largest custodial collectors are the IRS and the US Customs and Border Protection. (Exchange revenue—earned for services or performance provided by a federal entity—would normally not be reported in this Statement of Custodial Activity, but rather in the entity’s Statement of Net Cost. However, as specified in SFFAS No. 7, certain selected exchange revenues, such as oil and gas, must be recognized on the Statement of Custodial Activity instead of the Statement of Net Cost.) MANAGEMENT DISCUSSION AND ANALYSIS The Securities and Exchange Commission requires that the financial statements of publicly listed corporations include a MD&A section to help readers better understand the entity’s financial position and operating results. The MD&A required of federal entities serves the same purpose, but is expected to answer questions more directly related to a federal entity’s activities, such as • What is the entity’s financial position and condition, and how did these occur? • What were the significant variations from prior years, from the budget, or from performance plans in addition to the budget? • What is the potential effect of these factors, of changed circumstances, and of expected future trends?

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• Will future financial position, condition, and results, as reflected in future financial statements, probably be different from this year’s, and if so, why? • Are the systems of accounting and internal administrative controls adequate to ensure that transactions are executed in accordance with budgetary and financial laws, that assets are properly acquired and used, and that performance measurement information is adequately supported? In 1998, the FASAB recommended that the MD&A be treated as required sup3 plementary information to federal financial statements. The FASAB wanted the MD&A section of federal financial statements to address an entity’s: • Mission and organizational structure • Performance goals and results • Financial statements • Systems and controls • Future effect on the entity’s current demands, risks, uncertainties, events, and conditions and trends The FASAB states that the subjects in the MD&A could be based on information in other sections of the entity’s general-purpose financial report or other reports that may be separate from the general-purpose financial report. FOOTNOTES TO FEDERAL ENTITY FINANCIAL STATEMENTS In its regulations concerning the form and content of federal entity financial statements, the OMB requires that federal financial statements contain footnotes covering discussions, descriptions, or explanations of various subjects. Note 1: Accounting policies. The entity’s significant accounting policies must be detailed, including any changes in reporting or aggregating information for reporting purposes, the impact of these changes, changes in accounting principles, and restated financial statements for all prior periods presented. Note 2: Nonentity assets. This footnote must disclose intragovernmental nonentity assets separately from other nonentity assets and provide any information necessary to understand the nature of nonentity assets. Note 3: Fund Balance with Treasury. A summary analysis of a federal entity’s Fund Balances with Treasury must be included, showing entity and nonentity assets, and total balances of all trust funds, revolving funds, appropriated funds, and other fund types. Note 4: Cash, foreign currency, other monetary assets. This footnote is an analysis, by entity and nonentity assets, of all cash (coin, paper currency, purchased foreign currency, negotiable instruments, amounts on deposit in banks and other financial institutions) under control of an entity; the dollar equivalent of nonpurchased foreign currency in foreign currency accounts; and other monetary assets. Federal entities must disclose in Note 3 cash restrictions, escrowed cash, foreign currency, and other monetary assets (e.g., gold, monetary reserves with the International Monetary Fund). 3

FASAB, Concepts for Management’s Discussion and Analysis, Washington, D.C., November 1998.

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Note 5: Investments by federal entities. Federal entities must normally report possession of securities at either cost or amortized cost. Although market value disclosure of all marketable securities, intragovernmental and governmental, must still be shown in the footnote, market value is used for main balance sheet purposes (except for securities related to pension and other retirement plans) when two conditions prevail: (1) there is an intent to sell the securities prior to maturity, and (2) there is a reduction in value that is more than temporary. Securities of a federal entity might include • Intragovernmental securities, which are reported in one of three categories in an entity’s financial statement. • Marketable federal securities are securities that can be bought and sold on the open market. • Nonmarketable par value Treasury securities are issued by the Bureau of Public Debt (a unit of the Treasury) to federal accounts and are purchased and redeemed at par exclusively through the Treasury’s finance and funding branch. • Nonmarketable market-based Treasury securities are not traded on any securities exchange, but mirror the prices of marketable securities with similar terms. • Investments for earmarked funds are investments in Treasury securities for earmarked funds. • Governmental securities, which are separately categorized on the balance sheet by issuing organizations other than the federal government (e.g., state and local governments, private corporations, and governmentsponsored enterprises). Note 6: Accounts receivable. With respect to accounts receivable, federal entities must present entity and nonentity receivables, gross receivables, the method for estimating allowance for uncollectible accounts, and the net amount due to the government. Note 7: Taxes receivable. Here federal entities must disclose the gross taxes receivable, allowance for uncollectible taxes receivable and net taxes receivable, as well as the method used to compute the allowance for uncollectible taxes. Note 8: Loans and loan guarantees. For entities with outstanding direct loans and loan guarantees involving nonfederal borrowers, extensive reporting is required. This reporting requires data on the nature and amounts of loans and loan guarantees, plus the amounts of subsidy and administrative costs, present valuations, interest receivable, and defaults status, to mention a few selected subjects. This rather detailed footnoting was imposed by the Federal Credit Re4 form Act of 1990. Note 9: Inventory and related properties. Numerous specific disclosures are required for those federal entities that have possession of various classes of 4

The description alone by the OMB in its guidance for the form and content of federal financial statements for this footnote disclosure requires ten pages.

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properties, including inventory, materials and supplies, stockpiled materials, seized property, forfeited property, and goods held under price support and stabilization programs. Note 10: General property, plant, and equipment. Footnote disclosure of costs, accumulated depreciation, useful lives, depreciation methods, capitalization thresholds, and restrictions on use is required for all major classes of an entity’s general property, plant, and equipment. These categories would include properties such as buildings, structures, furniture, fixtures, equipment, vehicles, and land. Other categories more unique to the federal government bear additional disclosure criteria. These include federal mission property, plant, and equipment (e.g., those of military and space programs), heritage assets, stewardship lands, and the like. Note 11: Other assets. Another footnote must list and describe the major homogeneous components of other entity and nonentity assets. Note 12: Liabilities not covered by budgetary resources. For those liabilities not reported or disclosed elsewhere, entities must include a footnote that conveys those not covered by budgetary authority. Intragovernmental liabilities must be disclosed separately from those liabilities with the public. Note 13: Debt. Those federal entities that hold or have issued debt obligations must disclose the debt and its type: (1) public or interentity, and (2) held by government accounts or by the public. Other debts must also be reported as debt to the Treasury, debt to the federal financing bank, or debt to other federal agencies. Note 14: Federal employee and veteran benefits. Not all federal entities are responsible for administering federal pensions, retirement benefits, or postemployment benefits. Those that are must calculate and report these liabilities and related expenses in their financial statements and include footnote disclosures. The assumptions underlying the calculations of these liabilities must be disclosed for each category. Also, because Congress has historically financed these liabilities on a pay-as-you go basis, the OMB criteria for this footnote requires that these liabilities be separated between those covered by congressional budgetary authority and those not covered by budgetary authority. Note 15: Environmental and disposal liabilities. In this footnote, federal entities must disclose environmental and disposal liabilities in accordance with SFFAS No. 5 and SFFAS No. 6, including the sources of cleanup requirements, method for assigning estimated total cleanup costs to current operating periods, unrecognized portion of cleanup, material changes in total estimated cleanup costs due to law changes, and nature of estimates regarding changes due to inflation, deflation, technology, or applicable laws and regulations. Note 16: Other liabilities. For those liabilities not reported elsewhere, entities must include a footnote that discloses the current portion of other liabilities and other information necessary for understanding those liabilities. Note 17: Leases. The OMB has issued accounting criteria relating to recognizing, accounting for, and reporting of federal capital and operating leases, including the recognition of assets and liabilities and of costs that may originate

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from these lease agreements. This footnote must separate these liabilities between those covered by budgetary authority and those not covered by budgetary authority. Note 18: Life insurance liabilities. Certain federal entities provide whole life insurance and are required to apply private-sector footnote disclosure standards. Note 19: Commitments and contingencies. Probable and possible loss contingencies (i.e., a situation involving uncertainty as to possible loss to an entity) must be recognized and disclosed by federal entities. Disclosure must be made for estimates of obligations related to canceled appropriations for which the federal entity has a contractual commitment for payment. Note 20: Earmarked funds. Earmarked funds are those financed by specifically identified revenues and are required by statute to be used for designated activities or purposes. These funds must be accounted for separately from the government’s general revenues. While other footnote disclosures are required by the OMB in specific circumstances, the listed notes are the more general subjects requiring disclosure in the annual entity financial statements. REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION Some federal entities are entrusted with responsibilities for stewardship assets: stewardship property, plant, and equipment (e.g., heritage assets such as monuments, memorials, and historical cultural artifacts; mission property, plant, and equipment, such as munitions used by the Department of Defense; and stewardship land); stewardship investments; and other stewardship responsibilities. The reporting and disclosure of these assets may be in terms of physical units rather than cost, fair value, or other monetary values. GOVERNMENT-WIDE FINANCIAL STATEMENTS For almost 25 years prior to fiscal year 1997, the Treasury issued unofficial, unaudited prototype financial statements for the federal government as a whole. In the spring of 1998, the first consolidated and audited financial statements were issued for the United States government covering its fiscal year ended September 30, 1997. The Secretary of the Treasury proclaimed it a historic event, stating “never before has the United States Government attempted to assemble comprehensive financial statements covering all of its myriad activities and to subject those financial statements to an audit.” Format of Consolidated US Financial Statements The 1997 consolidated government-wide financial statements differed somewhat from those prescribed and used by individual federal entities. The variations are related primarily to the difference between the reporting perspectives for the government as a whole and the reporting required of the individual federal entities.

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Government-wide consolidated statements, while still evolving, are currently comprised of • A management discussion and analysis section by the Secretary of the Treasury • An audit opinion (or disclaimer of audit opinion) on the government-wide consolidated financial statements • A report on internal controls, another on compliance with laws and regulations related to financial reporting, and various other information transmitted by the Chief Accountant of the GAO • A consolidated balance sheet for the United States government • A consolidated Statement of Net Cost for the United States government • A consolidated Statement of Changes in Net Position for the United States government • Notes to the financial statements • A consolidated stewardship reporting for the United States government • A consolidated stewardship reporting that reconciles changes in net position reported on a cost basis to the deficit position reported on the budgetary basis To date, attempts by the GAO to conduct an independent audit of the consolidated financial statements of the United States government cannot be concluded satisfactorily; thus the GAO is unable to issue an audit opinion on this governmentwide data. The GAO has cited, among other reasons for its inability to render an audit opinion, the federal government’s serious systems, recordkeeping, documentation, and control deficiencies. In addition, amounts reported in the resulting financial statements did not provide a reliable source of information for either the government or the public. Content of Consolidated US Financial Statements These financial statements include the financial activities of the executive branch and parts of the legislative and judicial branches of the government. For example, the property, plant, and equipment of the judicial branch and Congress are not reflected in the statements. Also excluded from the consolidated financial statements are the Federal Reserve System and privately owned government-chartered enterprises (such as Freddie Mac, Fannie Mae, and Sallie Mae). The rationale for excluding these entities is that their activities pertain to monetary policy and are viewed as separate from other central government organizations and functions. Further, the consolidated financial statements do not include information on natural resources (i.e., depletable resources such as mineral deposits and petroleum, or renewable resources such as timber); nor were values for stewardship land (land not used in government operations) included in the financial statements, although information about the composition and quantity of such land was reported in the stewardship section of the statements. Also excluded are heritage assets (e.g., national monuments and library collections) and federal stewardship investments.

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Basis of Accounting for Consolidated US Financial Statements The consolidated financial statements are prepared in accordance with the form and content guidance specified by the OMB, which incorporates the recommendations of the FASAB as well. Under this basis of accounting, expenses are recognized when incurred and nonexchange revenues are recognized on a modified cash basis. Cash remittances are recognized when received, and any related receivables are recognized when measurable and legally collectible by the federal government. Exchange revenues are recognized when earned. The basis of accounting appearing in the federal government’s consolidated financial statements differs significantly from the budgetary basis historically used to provide information on the financial position of the federal government as an allencompassing composite entity.

PART 2 ACCOUNTING PRACTICES FOR SELECTED FEDERAL ACTIVITIES AND TRANSACTIONS

9

PAY, LEAVE, AND ALLOWANCES, AND TRAVEL AND TRANSPORTATION

All federal departments and agencies must conform to a government-wide financial transactions coding system that requires a uniform classification of allotments, obligations, costs, expenses, and disbursements referred to as object classifications. The object classification presents obligations by items of services purchased by the federal government and not the end product or purpose or outputs. The degree to which departments and agencies further subdivide categories of object classes is dependent on factors such as the nature of the entity’s activities and programs, requirements mandated externally (by Congress, the Treasury, and the Office of Management and Budget), and agency management’s expressed desires or needs for further costing refinement. The federal major compensation and benefits object 1 classes include: Object Class 10 11 12 13

Account Title Personnel Compensation and Benefits Personnel Compensation Personnel Benefits Benefits to Former Personnel

Considerable resources are devoted to the accounting, reporting, and payment of Object Class 10, Personnel Compensation and Benefits. Staffing levels, compensation levels, amounts for meritorious performance, benefits, annual and sick leave, and retirement are all predetermined by law. One of the federal entity’s roles is to administer these costs, with minimal discretion, in full compliance with myriad requirements promulgated by Congress, the Office of Personnel Management, the OMB, and the Government Accountability Office. All of these participants are contributors to the reality that this object class of expenditures is probably the most micromanaged of any federal fiscal area. PAY, LEAVE, AND ALLOWANCES Timing of Personal Compensation Obligations Within the federal government, obligations are legally binding agreements that are liabilities which will result in an immediate or future cash outlay. Generally, a legal obligation occurs when one places an order, signs a contract, issues a grant, 1

OMB Circular A-11, Preparation, Submission, and Execution of the Budget (2005), Section 83.

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and makes a purchase. It is a violation of the Anti-Deficiency Act, carrying imprisonment and financial penalties, to obligate the government to make a payment unless the department or agency has an available appropriation balance in excess of the obligation. Further, the timing of the obligation must be within the period set forth by Congress in the department, agency appropriation, or budget authority. Additionally, to be legally valid, the support documents for any obligation must take one of only eight congressionally prescribed formats. When accounting for pay, leave, and other allowances, the amount of department or agency payroll is generally not the issue. Compensation levels, numbers, and types of personnel are prescribed by law, described in myriad implementing regulations of the OMB, the OPM, and every operating department and agency, and are the subject of annual congressional budget hearings. The issue is the appropriateness of the timing of accounting for compensation transactions. The OMB, in its Circular A-11, Preparation, Submission, and Execution of the Budget, states that, in general, amounts are recorded as compensation obligations when earned during each reporting pay period. Definitions Payroll and related expenditures of a federal entity include specific cost elements that comprise the object classification Personnel Services and Benefits, with its subobject classifications Personnel Compensation and Personnel Benefits (among others). Personnel compensation. This represents the gross pay due to federal employees for personal services performed by civilian employees, military personnel, and certain nonfederal personnel. Personnel compensation also includes regular salaries and wages paid to employees while on annual, sick, compensatory, or other paid leave as well as terminal leave payments. Night-work differential, hazardous duty pay, flight pay, and special payment based on environmental conditions, where applicable, would also be accounted for as federal entity compensation costs. Annual leave is not generally funded by operating agencies and is, therefore, not reported as an obligation until the cost of the annual leave becomes due and payable to the employee, as in the case of terminal leave. The exception is when such payments come from revolving funds that are required to operate on a full cost recovery or fully funded basis. In these instances, the cost of earned but unused leave should be determined and factored into the costs to be reimbursed for services or performances rendered. Also, when personnel transfers are made between revolving funds, budgetary resources equal to any funded annual leave must be transferred along with people. If a transfer is made from revolving funds to nonrevolving funds, the transfer of the personnel must also be accompanied by transfers of budgetary resources equal to the funded annual leave, with these resources being considered as miscellaneous receipts of the receiving agency. Furthermore, to determine total cost and for financial statement purposes, the Federal Accounting Standards Advisory Board requires that individual federal entities recognize the full accrued costs of providing future pension benefits to eligible employees while they are actively working. The excess total pension expense over

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amounts contributed by individual federal entities and their employees is financed by the congressional funding authority provided to the OPM. Thus, the FASAB also recommended that the OPM’s share be recognized in an entity’s financial statements and for total cost purposes as an imputed financing source. Prior to 1997, federal entities had recognized and reported as pension expense only the amount of the individual federal entity’s contributions to retirement plans. Accounting and reporting for payroll and related costs is an extensive undertaking in a federal entity. The accounting for personnel compensation must separately record expenditures related to permanent positions; positions other than permanent; other compensation (e.g., overtime and night work); military personnel; special personnel services payments (e.g., retirement and disability fund payments for reemployed federal annuitants); and annual leave (e.g., vacations for federal employees). This accounting and reporting is typically performed by recording the expenditures for various types of personnel compensation in separate general accounts and subsidiary as well as cost accounts, as will be discussed later in this chapter. Personnel benefits. These are amounts paid for authorized benefits to currently employed civilian and military personnel. Benefits could include a wide variety of items, including quarters allowance; uniform allowance; locality allowance; dependents’ education; foreign transfer costs; and relocation for changes in station. Also included is the employer’s share of retirement; life insurance; health insurance and benefits; accident compensation; and employer’s Federal Insurance Contributions Act (FICA). Included within the personnel benefits object class would be other obligations, such as those for cash incentive awards, cost of living allowances, uniforms and quarters (in some instances), and military reenlistment bonuses. A subcategory within this object class is benefits to former personnel, which represents payments for pensions, annuities, and other benefits to former employees. Normally, accounting for this cost element applies only to the OPM. Federal Entities with Responsibilities for Payroll Congress. Through its authorization and appropriation process, Congress sets the overall policy and guidance for federal personnel matters. By its laws, Congress has established detailed criteria that govern not only the nature or skills and compensation levels of federal employees, but also the number of employees who may be employed, duration of employment, location of employment, nature of benefits, and vacation and sick leave provisions. Laws also establish the absolute employment ceilings—for full time, part time, and overtime—for each federal entity and the government as a whole. Congress may opt to set an absolute number of personnel that might be hired by skill category, possibly establishing guidance to ensure that personnel are competent. All disbursements for personnel compensation—initial hiring, in-grade annual adjustments, promotions, transfers, and so on—are set forth in law or in the enabling regulations of key federal entities. Laws have also set the dollar level and defined eligible constituencies for federal benefits for health, vacation and sick leave, and cost of living adjustments for higher-cost geographical areas.

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All federal entities, both civilian and military, must conform their employment and compensation practices to these laws and regulations. Office of Personnel Management. The federal Reorganization Plan No. 2 of 1978 created the executive branch entity, the Office of Personnel Management, to succeed the long-established Civil Service Commission (CSC), and gave the OPM the responsibility for setting implementing guidance on federal personnel matters. The OPM was also given responsibility for conducting evaluations, studies, and audits to ensure compliance with laws and OPM rules, regulations, and instructions. The basic, universal guide published by the OPM and the earlier CSC is the Federal Personnel Manual, which includes policies, principles, standards, and criteria for implementing the many and varied laws, presidential executive orders, and other rules and regulations for managing and executing federal personnel programs. The OPM is responsible for four such programs: (1) retirement; (2) life insurance; (3) health benefits; and (4) grants to strengthen personnel resources of state and local governments. Under these programs, the OPM controls and oversees recruiting, examining personnel for competitive civil service positions, developing and maintaining qualifications and job-rating standards, and managing the federal Senior Executive Service (SES). (The SES is the federal civilian executive corps for managers, equal to the earlier grade 16 and higher level through the federal Executive Level IV positions in the executive branch.) Office of Management and Budget. By specific laws relating to personnel and the exercise of the OMB’s responsibilities as the budget entity and advisor to the President, this office monitors the direct and indirect cost of personnel: the disbursements for pay, leave, and allowances of individual federal entities, and the government as a whole. The OMB has continuing authority and responsibility to revise, reduce, or increase federal entity requests for appropriations, which affects what an entity can pay, and the number of personnel who can be employed. The OMB monitors the level of expenditures being incurred by the government under existing appropriations so that required reports may be made to Congress. The several reports comprising an entity’s annual budget submission and reports on budget execution address past, present, and forecasted levels of expenditures for all personnel and related costs. Individual entity employee ceilings, the average number of personnel employed during the year, and the year-end number of employees are all known to and closely monitored by the OMB. From time to time, in order to achieve specific purposes, to meet policy goals, and in particular, to comply with laws, the OMB will provide specific guidance to federal entities concerning absolute levels of personnel, permitted rates, and absolute limits on compensation expenditures. Government Accountability Office. The Budget and Accounting Procedures Act and other legislation required the Government Accountability Office, a legislative branch agency, to prescribe principles, standards, and related requirements for payroll accounting and fiscal requirements to be used by each federal entity. These standards, internal control requirements, government-wide standard forms, and other requirements for civilian and military pay and allowances are set by the GAO’s

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Manual for Guidance of Federal Agencies, Title 6, “Payroll, Leave, and Allowances.” Because of the technicalities, complexities, and legality of compensation issues, the GAO has issued additional authoritative guidance relating to various statutes and federal regulations. Numerous Comptroller General (CG) decisions exist relating to payment of compensation and allowances by federal entities. Many court decisions and CG decisions exist with respect to matters such as promotions, demotions, separations, employee rights, conflicts, allowability, and legality, all related to the disbursing of appropriated monies for personnel-type matters. Individual federal entities. The Budget and Accounting Procedures Act of 1950 also gave the head of each federal entity responsibility for establishing and maintaining an adequate payroll system as part of the required entity-wide systems of accounting and controls. Payroll Controls and Procedures Controls. Systems of accounting and controls for each federal entity must permit the timely and accurate calculation, recording, and disbursement of the gross-tonet pay of all employees. In addition, in the more recent years, payroll accounting must support labor cost distribution accounting, cost accounting, performance measurement, and costing by organizations, programs, functions, activities, projects, outputs, and outcomes. Integration of the payroll accounting and control system with an entity’s overall financial and information system is the ideal, but some federal entities continue to operate the payroll system separately from the primary financial system. This requires separate recording as well as time-consuming reconciliations of detailed payroll records to overall compensation data posted to ledger accounts and recorded in agency financial statements. Whether separately operated or integrated with the overall accounting systems, every federal entity, as part of the payroll accounting and control system, has several monitoring procedures and checks and balances in place. Some of these include • Suitable control records and detailed payroll forms and source documents must be maintained and controlled to provide evidence of approval, timeliness, and accuracy of computer payrolls. • Procedures to control the accurate processing of payroll must be incorporated in the entity’s accounting system to ensure that all data are considered in processing and that no unauthorized alterations are made to transactions or records during processing. • Payroll vouchers (the authority for coding and paying a payroll) must be certified prior to payment by the entity’s certifying officer, who must examine the facts underlying the payroll voucher and consider the internal controls designed to ensure the correctness and validity of payments. • All federal entities are directed to make payroll disbursements by check or electronic means (e.g., direct deposits through the commercial banking system); disbursement by cash requires compelling reasons and special authorization.

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• For reasons of cost effectiveness, regular federal employees are paid not more often than every two weeks, unless otherwise required by law; compensation payments for which amounts are irregular or must be separately calculated (e.g., overtime, bonuses, hazardous duty) are paid less frequently, but still on a regular schedule, such as monthly. • To permit accurate preparation of a payroll, a sufficient lag must exist between the end of the pay period and the actual disbursement of the payroll, but for federal entities this lag may not exceed 12 days. The accounting and processing of federal payrolls is systematized. Entities report time worked on a positive or exception basis. A positive basis means that, unless an exception is made known by a notation on or by processing an appropriate leave or attendance form, an employee will be paid for the full regular work period. Exception documentation often requires a special payroll, or at least special processing procedures. Agencies may have unique processing steps and controls to ensure compliance with specific conditions or operations. Exhibit 9.1 identifies the basic payroll-related forms and generally outlines the process, which consists of several steps: • An employment application is carefully examined by the federal entity to assess the prospective employee’s qualifications. If found acceptable and the appropriate vacancy exists in the entity’s approved staffing table, a notice of appointment is prepared and approved by responsible entity officials, placing the person on the payroll. • Periodically (usually every two weeks) the employee or the supervisor must submit an attendance report showing an accounting for the employee’s time. • Assuming that an employee worked the full pay period or, if absent, had sufficient vacation or sick leave or was on other authorized leave that still qualified the employee for full pay, a regular payroll is prepared for that employee. • All changes authorized by the employee, required by law or to meet other circumstances, are incorporated into the payroll. These changes could affect the normal pay that would have been disbursed to the employee. • Individual and master payroll earnings records are maintained by each federal entity displaying the gross-to-net (i.e., total earnings, less all authorized payroll deductions) pay history of each employee. • Upon receipt of a properly certified payroll voucher from a federal entity, the Treasury issues payroll checks to designated employees or makes direct deposits to commercial accounts designated by employees.

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Exhibit 9.1: Overview of Payroll Process FEDERAL AGENCY FUNCTIONS

PAYROLL TRANSACTIONS OR ACTIVITIES

ACCOUNTING PROCESS

PAYROLL UNIT

PERSONNEL DIVISION

EMPLOYEE • Makes application for employment • Completes and submits periodic report on attendance, vacation, leave, and overtime • Requests deductions, changes, etc.

• Maintains listing of vacancies • Monitors staff levels of organizations and agencies • Issues official notices of appointment • Processes forms to enter employees on agency payrolls • Issues notices of change in pay status (advancement, demotion, retirement, termination, etc.)

• Enters employees into payroll system • Maintains periodic payroll and master employee accounts • Makes changes in payroll for employees • Accounts for other payroll-related transactions (withhold amounts for taxes, and other deductions) • Prepares voucher schedule for Treasury

ACCOUNTING SECTION

TREASURY DEPARTMENT

• Records gross amounts of payroll, withholdings, bonds, and deductions • Performs cost distributions, accounting by organizations • Records payment • Performs fund accounting • Completes internal and external reports

• Issues checks to make payment for services • Reports checks issued to agency

Application

Employment application

Appointment

Notice of appointment

Change

Time Report S M T W T F S

Change in pay status • Promotion • Termination • Transfer • Demotion • Pay increase • Other changes

Time and attendance report • Time worked • Vacation • Sick time • Compensatory time

1

KEY Required Accounting Process 1

Distribution of labor cost by organization, location, activity, etc.

2

Record obligation and accrued expenditure for payroll

3

Account for payroll expenses, withholdings, employer contributions, payables, and disbursements

Payroll

Master and individual payroll records • Gross pay • Withholdings • Contributions Magnetic tape • Net pay for payment

2 3

Electronic Funds Transfer or Check

Those forms and records necessary for processing disbursement requests to the Treasury for pay, leave, and allowances originate in, are controlled by, or require authorization and approval by several organizations within a federal entity. Authorizations, approvals, and actions related to payroll must be closely coordinated, or the individual employee and the employing entity could suffer from an improper dis-

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bursement. Generally, the forms are grouped as: (1) personnel forms, (2) payroll forms, or (3) accounting records. Exhibit 9.1 identifies the several functional organizations within a federal entity responsible for various aspects of a government payroll and illustrates the relationships to personnel and payroll support documents, and the ultimate journal entries required to record, account, and report on pay, leave, and allowances. Personnel forms. Personnel functions (also called human resources offices) of federal entities are responsible for compliance with requirements of the OPM Federal Personnel Manual as well as other requirements regarding employee appointments. The personnel function uses a set of standard forms to document and monitor the appointment, promotion, demotion, transfer, or termination of personnel. In every instance in which such a change will affect the compensation level of an employee, the personnel function is responsible for making the change known to the payroll function. To be accepted for a change in payroll, each personnel form must provide for full identification of the employee, the reason or basis for change in compensation, the amount of the change, and the new compensation level authorized. In some instances, the personnel function will initiate the pay status change, as in when an employee is due a pay increase for satisfactory performance over a given time period. Alternatively, the employee, by completing and processing a change to a health benefit plan, a savings bond deduction, or a desired withholding, could affect the net pay due in a pay period. In either event, the change form must be examined, signed by an authorizing official, and be accepted as a valid request for change in pay status. Payroll forms. Standard payroll forms are required to support the processing of a payroll entry and ultimately the issuance of a check or a direct deposit to a commercial account on behalf of an employee. There are many such forms and, although they are similar, some variations exist between federal entities. The more common forms are discussed next. Time distribution sheets. These are records of work performed by or for a federal organization, activity, unit, or project that, for the most part, are maintained by individual federal employees or their immediate supervisors. The time distribution sheets show product time, overhead or unassigned time, status of various types of leave, and personal identification data (e.g., employee name, number, organization, possible activity or project worked on), plus the beginning and ending dates of the pay period. When time distribution sheets are required, they may also serve as the time and attendance report for the pay periods. Also, if a time distribution sheet is required, the supervisor might summarize the total hourly data on a composite time and attendance report for the group. Time and attendance reports. These reports are summary records of attendance and any approved absences and overtime worked. These reports are prepared by an authorized person who is knowledgeable about the attendance of the employee or by individual employees. Individual and master payroll records. These payroll records provide a full accounting of the gross-to-net wages paid to individuals and in total for all employees

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on the payroll both for the current pay period and cumulatively for the current fiscal year. These records show the total authorized compensation, mandatory deductions (e.g., taxes, retirement), voluntary deductions and allotments, and the net amount paid or to be paid to an employee. Summary payroll vouchers. These are summary forms showing the total amount of the payroll, supported by details identifying the individual employee and amount due, that comprise the total payroll. These documents exist either in hard copy or in a telecommunication format that is forwarded to the Treasury to permit the printing of checks or making of direct deposits on behalf of employees. These records will support amounts entered into the general ledger and other summary accounts of a federal entity for payroll and related disbursements. The forms for payroll accounting, in particular, may also vary between federal entities. Some are used for government-wide compensation purposes, while others are directed toward supporting a federal entity’s unique accounting or reporting requirements. However, although the format and title may vary, the purpose of the documentation is rather uniform. Examples of accounting records for pay, leave, and allowances are discussed next. Payroll distribution journal (or run). This form is a record summarizing the payroll charges by the benefiting organization, activity, unit, or job cited on the time distribution sheets. The journal summary shows the total labor resources consumed by the benefiting entity or job for the pay period. The summary data in the journal also form the basis for setting amounts for labor costs due under revolving funds, federal franchising operations, and services performed under other reimbursable agreements. Accrual, adjusting, and closing entries. Standard or predetermined journal entries often exist to permit the accurate reflection of other costs, in addition to the actual cash payroll disbursements, in the accounting records for the fiscal period. Typically, the end-of-period accruals, adjustments, or closing entries exist in a standard form or, in the case of computerized systems, a preprogrammed form. In these instances, only the calculation of the dollar value is required in order to post the accrual entry to appropriate preidentified accounts. Payment to others. Standard and special forms exist that must be completed by an entity when making payments to other organizations for amounts withheld from employee salaries. Withholdings are held in trust and deposited by federal entities periodically with the Treasury or OPM for taxes, bonds, and retirement payments. Subsidiary accounts. As part of its responsibility to maintain an adequate system of accounting and controls, a federal entity must design and use an integrated ledger account structure that will permit the accounting for resources consumed, the measuring of program performance, and the determining of the cost of outputs and outcomes, including the cost of pay, leave, and allowances by appropriation, organizational segment, budget activity, program structures, and increasingly, the operating costs of units and cost centers. General ledger accounts. Each federal entity is now required to adapt the structure, accounts, standard journal entries, and transaction coding hierarchy to the structure of the federal government’s Standard General Ledger and subsidiary

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accounts. This permits accounting and reporting in conformity with both government-wide and individual entity requirements. This ledger structure must include the appropriate payroll accounts and related subsidiary accounts. Office of Management and Budget Obligation, Accrual, and Costing Criteria The OMB in its Circular A-11 prescribes criteria for the accounting recognition of obligations, expenditures, and recorded and reported costs for personal services and benefits. Obligations incurred. Except when specifically precluded by law, federal entities must record and report on the obligations and applied costs below: • Amounts earned by employees during the reporting period • Charges based on salary and wages (e.g., living allowances, locality equalization allowances, insurance premiums [health, life, FICA]), which are obligated at the time the related salaries and wages are earned • Other allowances, such as uniform and incentive awards, when these amounts become payable to the employees • Severance pay, reported as an obligation in the pay period covered, pay period by pay period, as the pay is earned • Annual leave (recorded as a separate obligation only when due and payable as terminal leave, except in the case of a revolving fund; revolving funds that pay for annual leave report obligations when such leave is earned) Accrued expenditures. Generally, the accounting for accrued expenditures for personal services and benefits is consistent with the criteria established for obligating other transactions. Statement of Federal Financial Accounting Standards (SFFAS) No. 1, as recommended by the FASAB, provides this guidance relating to end-of-period accruals for compensation and benefits: • An accrual must be made for employees’ wages, bonuses, and salaries for services, rendered in the current year, for which paychecks will be used in the following year. • An accrual must be made for entitlement benefits payable (e.g., old age survivors’ insurance, veterans’ compensation, and pension benefits) applicable to the current period but not yet paid. • An accrual must be made for annuities administered by trust, pension, or insurance programs, for which payment would have to be made in the next fiscal year. These accruals must be reported on by a federal entity in its financial statements as Other Current Liabilities. Applied costs. Similarly, the reporting of applied costs of personnel services and benefits is prescribed in OMB Circular A-11 as • The costs for a federal entity’s personnel services and benefits, and allowances to employees and others is to be charged when such amounts are earned during the reporting period, regardless of whether payment has been made.

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In addition, when data are provided in the accounting system: • Accrued vacation leave will be included as an applied cost when earned, rather than when taken, even though the leave is unfunded at that time by an appropriation or other budget authority. • The pro rata share of other leave (sick, administrative, etc.) anticipated to be taken and employee benefits that accrue in periods when leave is taken will be included as applied costs of the period. • The pro rata share of employee benefits that accrue in periods when leave is taken will also be included as applied costs of the period. • Authorized reimbursements for real estate, temporary subsistence, and other dislocation expenses are reported as accrued expenditures on the basis of amounts earned by and payable to employees. Accounting Entries for Pay, Leave, and Allowances The paragraphs that follow provide brief explanations of the many entries required to account for a federal entity’s payroll and related costs. The accounting entries relating to payment of personnel services, benefits, and allowances are highlighted in Exhibit 9.2. Exhibit 9.2: Accounting Entries Relating to Payment of Personnel Services, Benefits, and Allowances Accounting Transactions: Pay and Allowances Budgetary entries

DR CR

Proprietary entries

DR CR

Entry 1: Record Payroll Allotments available for commitment/obligation Expended appropriation— Operating

x x

Program/operating expenses— Payroll Salaries payable Payable to other agencies: Withheld—FICA Withheld—Retirement Withheld—Bonds Withheld—Insurance

x x x

Entry 2: Record Employee Benefits Allotments available for commitment/obligation Expended appropriation— Operating

x x

Program/operating expenses— Benefit expenses Benefits payable—Employees Payable to other agencies: Employer share—FICA Employer share— Retirement Employer share—Insurance

x x x

Entry 3: Pay Compensation/Benefits (None)

Salaries payable Payable to other agencies Fund Balance with Treasury

x x x

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x x

Program/operating expenses— Payroll and benefits Accrued funded payroll and benefits

x x

Entry 5: Closing Entries Expended appropriation Appropriations realized

x x

Net results of operations Program/operating expenses —Payroll —Benefits —Employer share

x x

Recording payroll costs (Exhibit 9.2, Entries 1 and 2). Because the elapsed time between calculating the obligation for compensation and paying the obligation is generally minimal, federal entities process the budgetary accounting entry to obligate appropriated funds concurrently with the proprietary entry to pay the liability for compensation and disburse cash. However, the budgetary entry is still necessary to reflect a reduction in a previously unobligated appropriation balance. In the case of payroll, the dollar amount of this entry would be equal to the total gross compensation due to all entity employees for the pay period. The gross amount of the payroll includes all amounts due for compensation (e.g., total salaries and wages before deductions for withheld taxes, retirement contributions, or special deductions that may be authorized by employees). The parallel proprietary entry is required to record payroll and related costs in the proprietary accounts. It is this entry that supports the actual disbursement of cash for pay, allowances, and other benefits. For cost accounting purposes, federal entities must make an accounting distribution of total payroll costs to various subsidiary accounts, which should be structured to permit the accumulation of personnel and benefit costs by organization, activity, function, job, or cost center, and even program outputs and outcomes. This cost distribution is necessary to report on the resources consumed by department or agency divisions and operations during the fiscal period. Amounts withheld either by law or on behalf of employees represent monies held in trusts by the employing federal entity to be paid to another federal entity or other organization at a specific time. The employing federal entity must match the withheld amounts and provide a payment combining the amount withheld from employees with the entity’s share to a designated agency. Pay compensation/benefits (Exhibit 9.2, Entry 3). An entity’s payment for compensation and disbursements for benefits may not always coincide. Laws impose depository requirements and matching payments that have different compliance dates, necessitating separate entries. These entries record payment of personnel compensation due to employees and make payments to designated depositories for benefit-related liabilities. If the payroll and amounts for benefits are paid at the same time, the accounting would be similar to Entry 3 in Exhibit 9.2. Note that no budgetary entry is required when cash is disbursed by a federal entity.

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Accrual, adjusting, and closing entries (Exhibit 9.2, Entries 4 and 5). Adjusting entries, often related to the correction of earlier errors, may be made to accounts at any time during the accounting period. Such entries generally relate to adjusting earlier incorrect entries or redistribution of allocable costs to more appropriate accounts. Accrual entries are processed at the ends of fiscal periods (possibly quarterly), but more often only at fiscal year-ends. Accrual entries provide for a full accounting of all cost and other resources consumed in the fiscal period. The most frequent accrual-type entry relates to costs that have been incurred but for which no end-ofperiod liability has been recorded, nor has payment been made. For example, in the case of personnel compensation costs, the government practice is to pay every two weeks. This payment cycle will not always coincide with the end of a month or end of a fiscal year. If payment has not been made for the last eight workdays in a fiscal period, an accrual entry for this unpaid but earned personnel compensation must be recorded to account for the full compensation costs through the close of the fiscal year. An accrual entry may be processed as of the last day of a reporting period—for example, a month, a quarter, or fiscal year-end. The accrual entry could remain on the accounting records and be treated as part of the compensation payment entry for the next payroll period. Accrual reversal entries are often employed in computer-based systems. Note that in Exhibit 9.2, two entries are required to record the end-of-period accrual: (1) a budgetary entry to reduce the unexpended and unavailable appropriation or budgetary authority for the amount of the accrual, and (2) a proprietary entry to record the accrued, but not yet paid, compensation costs. (See Exhibit 9.2, Entry 4.) In practice, an accrual entry is reversed at the beginning of the next month, thereby returning the expense accounts to the equivalent of the cash basis. The reversal entry permits the full recognition of the cash disbursed in the next fiscal period when payment is made and recognition for the compensation costs that are allocated to two fiscal periods. Closing entries are made at the ends of fiscal periods to provide for proper proprietary accounting cutoff and recognition of the unliquidated obligation that must be met for accruals in the next fiscal period. Two parallel entries, one budgetary and one proprietary, are necessary to ensure that the end-of-period accounting for accruals is proper. At the same time, an entry must be made to close out the proprietary program and operating expense accounts for the year; the offsetting entry is to a federal entity’s account, net results of operations. (See Exhibit 9.2, Entry 5.) Annually, the budgetary and proprietary accounts should be closed to permit a year-end accounting and reporting for the expended appropriation and the unexpended appropriation, as well as to properly reflect outstanding undelivered orders that will be received in the next fiscal year. These undelivered orders will have been previously obligated in the budgetary accounts. At the end of the fiscal year, the amounts that were earlier recorded as credits to the expended appropriation account are closed to the appropriations realized account, reflecting the amount of the total appropriation that has been used.

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Accrued annual and sick leave. Before the advent of the FASAB, federal entities generally did not include amounts for earned but unused annual and sick leave in their final cost accounting and reporting for a fiscal year. Today, however, federal entities are required to make an estimate of accrued but unused annual and sick leave costs. For nearly all appropriations and budgetary authority accounts, accrued but unused annual leave and sick leave have not been funded. Thus, these amounts would represent an unfunded liability of a federal entity until used by the employee or until a lump-sum payment is made. An exception to this accounting relates to the costing and billing of services for a cost reimbursable-type activity (e.g., franchise operations, revolving funds, stock funds, and reimbursable services). In these instances, the servicing entity must bill and recover the full cost of the period from all benefiting entities. Accrued annual and sick leave are accounted for a funded liability and reported as part of the end-ofyear accrued expenditures and cost of performing services. TRAVEL AND TRANSPORTATION As noted earlier, all federal departments and agencies must conform to object classifications. The object classification presents obligations by items or services purchased by the federal government and not by the end product or purpose or outputs. The degree to which departments and agencies further subdivide categories of object classes is dependent on factors such as the nature of the entity’s activities, programs, and requirements mandated externally (by Congress, the Treasury, and the OMB) and management’s expressed desires or needs for a further costing re2 finement. The travel and transportation object class is comprised of Contractual Services and Supplies Object Classes Object Class 21.0 22.0

Account Title Travel and Transportation of Persons Transportation of Things

Travel and transportation costs are closely monitored by federal entities, as there is constant concern that these costs represent the opportunity for personal abuse. More importantly, such funds represent one of very few sources of discretionary funds available to most agencies. Since these funds are discretionary, the rate, timing, amount, and purpose of expenditures for travel and transportation are generally within the discretion of agency management. Definitions Prior to 1973, the OMB was responsible for prescribing uniform, governmentwide regulations for travel and transportation. These regulations were set forth in OMB Circular A-7, Standardized Government Travel Regulations (SGTR). On August 31, 1973, OMB Circular A-7 was rescinded and replaced by the General Services Administration’s (GSA) Federal Personnel Management Regulations (FPMR) 101-7. While the responsible organization changed, the content of definitions and 2

OMB Circular A-11, Preparation, Submission, and Execution of the Budget (2005), Section 83.

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compliance pronouncements governing travel and transportation expenditures have remained relatively constant. A logical distinction is made between the transport of persons and things. Travel and transportation of persons. The OMB defines expenditures related to Travel and Transportation of Persons, Object Class 21, as including transportation costs of government employees or others while in authorized travel status that may be paid directly by the government to the provider or by reimbursing the traveler. This subobject class includes the traveler’s per diem (i.e., meals and lodging) allowances while in travel status and other expenses incidental to official travel to be paid by the government. This object classification and cost category includes expenses such as those related to • Travel away from official stations and local travel and transportation in and around the official station of government employees • Contractual obligations from services in connection with carrying persons from place to place by land, air, or water and any accommodations incident to that travel • Commercial transportation charges; rental or leased passenger cars; charters of trains, buses, vessels, or airplanes; ambulance or hearse services; expenses incident to operation of rented or chartered vehicles • Mileage allowances of privately owned vehicles and highway and ferry tolls; rentals or leased vehicles from government motor pools; subway, streetcar fares, and tips • Subsistence of travelers, per diem rates for meals and lodging, and allowances or reimbursement of actual expenses for subsistence • Transportation expenses incident to a permanent change of station • Other incidental travel expenses related to official travel (baggage transfer, telephone, etc.) Individual federal entities may establish their own policies and procedures governing the allowances for these expenditures and the nature of approvals and authorizations that are required to incur such costs. However, no agency may exceed the rates or allowances set forth in the federal government’s SGTR. Transportation of things. Object Class 22, Transportation of Things, is defined by the OMB as including the contractual obligation of the government for movement of things, the care of such things while being transported, and services incident to the movement of things. This object classification and cost category includes such expenses as • Charges by common carrier and contract carrier, including freight and express, demurrage, switching, recrating, refrigerating, and incidental expenses • Charges for trucking, hauling, handling, and costs incidental to local transportation • Postage used in parcel post and express package services • Transportation of household goods related to permanent station change

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Responsibilities for Travel and Transportation Congress. Congress has generally recognized the need to place responsibility for control of travel and transportation expenditures with the management of individual federal entities, with the requirement that there be conformance with government-wide guidelines as set forth by the OMB or the GSA. Nonetheless, Congress reserves the responsibility to establish specific maximum rates for travel and transportation and allowances at which employees and others will be reimbursed and the circumstances under which payment will be made for official travel and transportation. Office of Management and Budget. Historically, the OMB has been responsible for prescribing uniform, government-wide guidelines related to travel and transportation expenditures. These guidelines provided for maximum per diem reimbursement rates for costs incurred for lodging and meals while away from the official duty station. Rates were also established to pay for or reimburse employees for transportation costs incurred on behalf of the government. Today, the OMB is more concerned with the budgeted levels of such expenditures and the rate at which such expenditures are being incurred by an entity during budget execution phases. These concerns are set forth in OMB Circular A-11, Preparation, Submission, and Execution of the Budget. General Services Administration. The GSA is responsible for prescribing government-wide regulations and allowances for travel and transportation. In recent years, inflation and the significantly disparate costs of lodging and meals among urban, suburban, and rural locations have complicated this responsibility. Allowances for lodging and subsistence have been established for many individual cities in the country, significantly complicating the accounting for these types of expenditures. Federal entities may have their own administrative regulations defining alternative allowances, but in no event may such administrative determinations exceed those established by the GSA. Additionally, the GSA is responsible for the development and execution of the federal government’s programs concerned with transportation and traffic management, auditing all government transportation bills, and processing of transportation claims by and against the government. Individual federal entities. Inherent in the responsibility placed with the head of each federal entity to establish and maintain an adequate system of accounting and internal controls is the responsibility to establish appropriate controls over travel and transportation expenditures. Such controls must provide for advance authorization by proper officials and, often, include a procedure for prepayment audits of employee travel vouchers and claims. Travel and Transportation Controls and Procedures Travel and transportation (of persons) expenditures are closely monitored by most government entities. The controls often require conformance to pre- and posttravel procedures in order for employees to be expeditiously reimbursed or paid for these costs. These procedures often include

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• Submission of a request to travel, in advance of commencing travel, identifying the duration of travel, itinerary, estimates of lodging and subsistence costs, and other related expenses and transportation costs • Maintenance of a register to ensure the availability of unobligated appropriations equal to the estimated cost of the travel or transportation • Close control and continuous monitoring of requests for payment of and settlement of advances made to travelers • Formal certification as to the availability of funds prior to the commencement of travel • A detailed accounting by the traveler of all expenses of travel and transportation within a timely period after incurring these costs and a review and approval for payment by an authorized and knowledgeable person • Prepayment audit of the submitted travel voucher or other expense form claiming payment, settlement, an outstanding advance, or reimbursement for the costs incurred • Use of prenumbered, controlled forms relating to the authorization and any advances and expense vouchers To minimize cash transactions and provide increased control over payments for transportation services, the government requires employees to use standard government transportation request forms in place of cash. Because transportation request forms are highly negotiable, federal entities have established systems of personal accountability for these forms and closely monitor their use. These forms, once properly completed by the traveler, are accepted in much the same manner as a check by public or common carriers in payment for transportation services. The carriers must later submit claims for reimbursement for all honored transportation requests for specific federal entities. With respect to the transportation of things, standard forms must be submitted by common carriers to receive payment. Bills of lading must be properly completed, receiving reports must exist, and appropriate officials must signify receipts of the services or goods. Detailed prepayment audits of claims are made. Bills of lading are serially numbered and controlled with fixed accountability because the forms are negotiable when completed. Standard forms exist for billing freight and express transportation charges to government agencies. Forms and records—for travel of persons. The authorizing, accounting, and paying of travel costs are tedious processes in many federal entities, involving many internal checks and controls. Generally, travelers must have travel intentions approved in advance, must obtain formal certification of fund availability, and must submit precise itineraries should they require an advance of money to perform the travel. Designated officials must approve the initial travel requests and the requests for all travel advances, and must review and approve the subsequent vouchers for cost of travel. Formal reservation of funds before performing the travel is required; advances of funds must be recorded; and tentative itineraries are preaudited for reasonableness of estimated costs and later audited, posttravel, for costs claimed.

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Exhibit 9.3 illustrates the nature of the forms and processes that a federal entity might require, ensuring that travel funds are properly expended, documented, and recorded for the travel of persons. Travel request and authorization. Each federal entity may have its own version of a travel request and authorization form that must be completed by the employee in advance of travel. The form provides for • Full identification of the employee, including organization, position, official duty station, and phone number • Description of the itinerary, including origination and destination, intermediate stopovers, beginning and end date of travel, and purpose of the travel • Estimated cost of the travel, including the per diem rate for lodging and subsistence, local travel costs, and common carrier transportation costs • Mode of travel, such as common carrier (air or other), private vehicles, rented vehicles, and government-owned vehicles • Approval and certification to fund availability (typically requiring signatures from an approving officer and authorizing official, plus fiscal personnel who identify accounting and appropriation accounts to be charged and certify to the availability of unobligated funds to meet the anticipated travel cost) The request and authorization form is the support documentation for the formal obligation of appropriated funds. In some instances, the same form will provide for approval of a cash advance and the use of government transportation requests to pay for common carrier costs. Request for travel advance. Requesting a travel advance often requires the traveler to complete and obtain approval on a separate form, which becomes the supporting documentation maintained by fiscal personnel responsible for monitoring accounts receivable or advances in possession of officials and employees. Once funds are advanced, the employee must make a cash refund or repayment or submit a travel expense voucher claiming an amount equal to or in excess of the advance in order to reduce, liquidate, or eliminate the advance. Travel voucher. The travel voucher in support of actual costs claimed is submitted by the traveler upon the completion of the itinerary. Most federal entities use a federal standard form entitled simply “Travel Voucher.” On the form the traveler must enter such information as • Identification information, similar to the employee information entered on the request and authorization form • References to the original travel request and authorization • Specific identification of all transportation requests used • Actual itinerary (including origination and destination and intermediate stopovers, and beginning and end dates) • Actual mode of travel used, with a daily accounting of costs incurred while in travel status • A certification that the amounts claimed are correct and proper for payment

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Exhibit 9.3: Overview of Travel—Persons FEDERAL AGENCY FUNCTIONS

TRAVEL AND TRANSPORTATION ACTIVITIES

ACCOUNTING PROCESS

EMPLOYEE

AUTHORIZING AGENCY OFFICE

ACCOUNTING SECTION

COMMON CARRIER

• Submits travel request • Requests travel advance • Submits expense voucher • Settles outstanding advance • Custody and renders transportation requests

• Approves travel request • Approves travel advance • Reviews, approves expense voucher

• Confirms funds available for commitment • Records obligation for approved travel • Accounts for advances due from employees • Audits and accounts for travel expenses on voucher • Prepares schedule for issuance of checks by Treasury • Records payment • Performs fund and cost accounting • Completes internal and external reports

• Honors transportation request • Provides transportation • Bills agency

Travel report • Time period • Destination • Mode of travel • Cost estimate

Request

Advance

Request for advance • Amount • Purpose

2

1

Payment Schedule

• Payees • Amounts

2 Checks

1 KEY Required Accounting Process 1

Record obligation for estimated cost of travel

2

Establish accounts receivable for advance due from employee; record payment of cash

3

Reduce obligation and record expenditure; record expense and liability

4

Reduce obligation; record expenditure and related liability to employee for expenses due

5

Liquidate advance due from employee

6

Reduce liability; record payments

Transportation requests

Public voucher

3

Travel voucher

Expense report • Cost of travel, meals, lodging • Destinations • Time periods

4 Payment Schedule

• Payee • Amounts

5 6

Electronic Funds Transfer or Check

TREASURY DEPARTMENT • Issues checks • Reports checks issued to agency

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Considerable personal penalties will befall a traveler who submits fraudulent claims, including forfeiture of the amounts claimed, fines, and even imprisonment. The travel voucher is the support documentation to reduce or liquidate the earlier estimated obligation and record the actual costs of travel. If reimbursement is not made immediately, a payable may be recorded as due to the traveler for any amounts owed. The federal entity must await the submission of the transportation requests from the common carrier; thus a payable should be established for these transportation costs as well. Voucher and schedule of payments. Payments or disbursements are initiated by a federal entity requesting that the Treasury issue a check or make an electronic transfer for a specific amount to the payee identified by the entity. The form used throughout the government to make such a request to the agency is the voucher and schedule of payments. If a payment is required to be issued for the travel advance or for an amount due to the traveler for travel costs incurred, the entity, after completing the required fiscal reviews, lists the traveler’s name and other information and the amount due on a voucher and schedule of payments, which it then submits to the Treasury. This form represents the authorization and support documentation for the entry to reflect funds disbursements. The data on these schedules are monitored by both the entity and the Treasury on a monthly basis. The form or authorization contains the necessary appropriation identifiers, account coding, and a certifying signature by an entity official that the amounts on the schedule are correct and proper for payment from the designated appropriation. Public vouchers—transportation of passengers. Common carriers that have honored transportation requests and provided transportation to government employees still have the task of obtaining payment for their services. The carrier must bill the federal entity cited on the transportation request. The scheduling of transportation requests for which payment is requested, and the formal record for submitting such claims, is the public voucher for transportation. Upon receipt of this form, entity fiscal personnel make a review of the costs claimed to other information submitted by the traveler and reconcile any differences. Once the costs claimed are approved for payment, the carrier’s claim constitutes supporting documentation for authorizing a disbursement of funds. The formal submission of the voucher and schedule of payments to the Treasury is the authorization to the Treasury to make disbursement by check, direct deposits, or electronic funds transfers. Forms and records—transportation of things. For many federal entities, only minimal costs are incurred relating to the transportation of things. Often the only transactions within this object classification are those related to costs incurred in the movement of employees’ household goods at times of changes in permanent duty stations. Other types of transportation costs could be incurred for services rendered by rail, highway, water, or air common carriers. Such costs may also be incurred by a contractor of an agency on the agency’s behalf. As illustrated in Exhibit 9.4, the forms and processes for monitoring costs related to the transportation of things is simpler than that related to employee travel

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and transportation. Common carriers are generally aware of the government’s requirements. Exhibit 9.4: Overview of Transportation—Things FEDERAL AGENCY FUNCTIONS AUTHORIZING EMPLOYEE AGENCY OFFICE

TRANSPORTATION ACTIVITIES

• Submits transportation requests

ACCOUNTING PROCESS

• Approves transportation requests • Issues Government Bill of Lading (GBL) • Receives services

ACCOUNTING SECTION

TREASURY DEPARTMENT

COMMON CARRIER

• Confirms funds available • Honors GBLs • Provides for commitment transportation • Records obligation • Bills agency • Accrues expenditure • Audits carrier’s claim • Prepares schedule for Treasury checks • Records payment • Performs fund and cost accounting • Completes internal and external reports

• Issues checks • Reports checks issued to agency

Request

Travel request • Time period • Destination • Mode of travel • Cost estimate

1 GBL

KEY Required Accounting Process 1

Record obligation

2

Reduce obligation, record expenditure

3

Record cost and liability

4

Reduce liability, make payments

Bill of lading • Origin and destination • Cost 1 • Account number • Approval 2 • Receipt

Way bill

Travel voucher

2

Way bill • Origin and destination • Cost • Account number • Approval • Receipt • Delivery

3 Public voucher

3

Payment Schedule

• Payee • Amount

4

Electronic Funds Transfer or Check

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Travel request and authorization. An entity might use the same travel request and authorization for the movement of an employee’s household effects as was used to authorize the travel of the employee. The employee must then provide an estimate of moving expenses on the form. Typically, the estimate is prepared by the employee by obtaining a quotation from a carrier/mover. Government bills of lading. Use of the standard government bill of lading is prescribed for the procurement of freight or express transportation services by all modes of common carriers. This form, serially numbered and controlled, is comprised of several parts: • The original bill of lading, containing terms and conditions of the transportation, identification of items to be shipped, evidence of delivery, shipment costs, and appropriation to be charged • The shipping order, retained by the carrier’s agent • The freight-way bill that accompanies the shipment to destination • Extra copies of the bill of lading for internal entity uses The bill of lading represents the support document for the incurrence of the obligation for freight or express transportation services. In instances in which the time lag between issuance of the bill of lading and the performance of services is short, the obligation and cost of these transactions are recorded simultaneously. When the lag time is significant, the amount of the bill of lading should be obligated and an adjustment made to actual cost, if required, at the later date of delivery. Public voucher for transportation charges. The public voucher for transportation charges is used by the common carrier to bill government entities for services provided, and requires the listing of each bill of lading on the voucher by serial number and amount. An approved, properly completed voucher for transportation charges is the necessary documentation to support the recognition of an account payable and the reduction or liquidation of the earlier estimated obligation. Voucher and schedule of payments. As mentioned earlier, the voucher and schedule of payments is the formal request by the federal entity to the Treasury to make payment (by checks or electronic transfers) for specific amounts to identified payees. Payments due to carriers will be listed on the schedule and forwarded to the Treasury for payment. The schedule represents the documentation in support of the cash disbursement entries. Accounting forms. The accounting forms and records may vary by entity, being designed to address the general as well as the unique accounting requirements of the entity. The purpose of the documentation, however, is uniform throughout the government: to provide for full disclosure of activities. The accounting records used will include subsidiary accounts, general ledger accounts, and provisions for accrual, adjusting, and closing entries. Subsidiary accounts. As part of the responsibility to maintain an adequate system of accounting and controls, agencies must design and utilize an integrated account structure to permit full accounting for resources consumed and cost of performance. This requires the coding, accounting, and reporting of travel and trans-

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portation transactions by appropriation, organization, budget activity, program structure, operating unit, and cost center. General ledger accounts. Each agency is required to design a general ledger account structure that best controls and accounts for all resources for which it has stewardship responsibility. Ideally, the account structure is in sufficient detail to permit the preparation of all required reports from control or subsidiary account balances without the need for further analysis or allocation of data. Accrual, adjusting, and closing entries. Standard or predetermined journal entries are often required to permit the accurate reflection of cost in the accounting records, in addition to cash disbursements, at the end of period. Typically, the end of the period accrual, adjustment, or closing entries exist in a standard form or, in the case of computerized systems, a preprogrammed form. In these instances, only the calculation of the dollar value is required in order to post the accrual entry to appropriate preidentified accounts. Office of Management and Budget Obligation, Accrual, and Costing Criteria The OMB prescribes the criteria for the obligation, accrued expenditure, and applied cost concepts for reporting transactions relating to travel and transportation. Except where precluded by law, agencies are required to report obligations and applied costs in accordance with the concepts set forth in OMB Circular A-34, the government-wide guidelines for budget execution. Obligations incurred. Obligations incurred for travel and transportation include all transactions related to transportation requisitions and government bills of lading issued to commercial carriers; commercial contracts; and intragovernmental orders for specific transportation services. Also included are travel orders for employees, per diem allowances, incidental travel expenses, and expenses for use of motor vehicles. The entry for obligations must be recorded on the basis of individual travel orders or of the total estimated travel to be performed during the month, provided that such an estimate is recorded at the beginning of the month. When travel obligations cannot be reasonably estimated, the OMB permits amounts to be reported on the basis of reimbursements earned by the employee. Some specific accounting and reporting procedures relating to the obligation of funds exist with respect to these travel-related transactions: • Obligations for reimbursement to employees for transportation of household effects are based on amounts estimated to be paid under authorized orders issued to employees. • For transportation requests and bills of lading, the estimated amount for travel or transportation not yet commenced shall be eliminated from the reported obligations. • For reimbursements on a commuted basis for movement of household effects, reported obligations at year-end should be reduced for reimbursements not yet earned.

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In the last two cases, the amounts eliminated as obligations of the current year should be recorded as an obligation of the succeeding fiscal year, if the travel, transportation, or reimbursement is still expected to be made. Estimated expenses may be required to be paid to employees for temporary subsistence incident to relocation. In this circumstance, the obligation should be recorded when the individual travel orders are approved since the travel is a bona fide need at the time the travel need is determined and travel request approved. Accrued expenditures and applied costs. With respect to applied costs for travel and transactions, the OMB requires that these reporting criteria be used: • For transportation requests, related expenditures and costs will be reported when earned by the carriers. • For government bills of lading, commercial contracts, and intragovernmental orders for transportation, related expenditures and costs will be reported when earned. • For reimbursements to employees for transportation of household effects, related expenditures and costs will be reported when earned. If the unperformed transportation at the end of the period will not be material in amount, the OMB permits the entire transaction to be reported at the time the transportation commences as both an accrued expenditure and a cost of the current period. The OMB reporting criteria may not be totally consistent with the FASAB’s definitions relating to accrued costs (i.e., services received) or applied costs (i.e., services consumed). However, such disparities, in the case of travel and transportation, are not likely to have a material dollar significance in an entity’s reported data. Accounting Entries The accounting entries relating to payment of personnel services, benefits, and allowances are highlighted in Exhibit 9.5. Exhibit 9.5: Accounting Transactions: Travel and Transportation Expenses Budgetary entries

DR CR

Proprietary entries

DR CR

Travel of Persons Entry 1: Issued Travel Request Allotments available for commitment/obligation Undelivered orders

(None) x x

Entry 2: Advanced Travel Funds (None)

Advances to others—Employees Fund Balance with Treasury

x x

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x x

Program/operating expenses —Travel —Transportation Advances to others— Employees Accounts payable— Employees

x

x x

Entry 4: Payment in Excess of Travel Advance (None)

Accounts payable—Employees Fund Balance with Treasury

x x

Entry 5: Use of Transportation Request by Employee Undelivered orders Expended appropriation— Operating

x x

Program/operating expenses— Transportation Accounts payable—Other

x x

Entry 6: Payment of Carrier Bills (None)

Accounts payable—Other Fund Balance with Treasury

x x

Transportation of Things Issuance of Contract, Bills of Lading Allotments available for commitment/obligation Undelivered orders

(None) x x

Received Transportation Services Undelivered orders Expended appropriation— Operating

x x

Program/operating expenses— Transportation Accounts payable—Others

x x

Entry 7: Paid Carrier for Services (None)

Accounts payable—Others Fund Balance with Treasury

x

Net results of operations Program/operating expenses

x

x

Entry 8: Closing Entries Expended appropriation Appropriations realized

x x

x

For travel and transportation of persons. Typically, a time period elapses between the authorization of travel expenditures, performance of the travel, and the receipt of a voucher accounting for travel expenses. For this reason, the entity must record several entries to properly reflect the status of funds relating to travel and transportation. Obligation of appropriated funds (Exhibit 9.5, Entry 1). The initial accounting entry must restrict a portion of the unobligated allotment balance for the anticipated travel. The dollar amount of this entry is the amount shown on the authorized and approved travel request and authorization submitted by the employee, generally in advance of performing travel or before incurring any transportation costs.

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Travel advances (Exhibit 9.5, Entry 2). At the time of advance, these cash disbursements should be recorded as accounts receivable due from employees, and not be reflected as expenses. The expense entry is made once the travel is completed and an expense voucher is submitted by the traveler. If the authorizing official approves the advance of cash to an employee for the purpose of travel, an entry must be made to record the disbursement of cash and establish an account receivable due from the employee. Note that the advance of cash to the employee is not recorded as either an obligation or an expenditure of agency funds at this time. This entry is supported by an approved request for travel advance, generally for an amount that does not exceed the amount obligated. Liquidation of obligation and advances (Exhibit 9.5, Entries 3 and 4). Upon completion of travel, an employee will complete and submit a full accounting of expenses of travel or transportation. This information is provided on a travel voucher form. The budgetary entry (see Entry 3a) is needed to adjust or liquidate the earlier obligation, settle or adjust the travel advance, record the cost of travel or transportation, and fulfill the requirement that parallel accounting entries be made to record these events in both the budgetary and proprietary accounts. Unless the amount of the travel expense equals the earlier amount obligated, an adjustment will be required to the earlier obligation. A second parallel entry (see Entry 3b) must be made in an entity’s proprietary accounts to record the travel expense, reduce any earlier advances, and record any liability due from the employees. The cost accounting system of the agency provides for a distribution of these travel/transportation expenses to various subsidiary accounts, organizations, activities, and functions. The payable due to the employee is generally equal to the amount claimed on the travel voucher less the amount of the earlier travel advance. For employees in continual travel status, the advance may not be liquidated upon submission of periodic travel vouchers. Rather, the employee may be reimbursed for a part or the full amount claimed on the voucher. This reimbursement replenishes the travel advance. Under such procedures, the traveler must settle the travel advance in total, on a regular basis. Typically, such advances are paid and a new one requested at the end and beginning of a fiscal year. The document supporting this type of travel arrangement is referred to as a blanket travel authorization or order. Entry 4 is required to record payment to the traveler for amounts due for travel expenses in excess of the advance received or to replenish the traveler for the travel advance expended. As described earlier, this disbursement of funds is recorded on the voucher and schedule of payments, which is forwarded to the Treasury for payment. Transportation requests (Exhibit 9.5, Entries 5 and 6). The federal employee may purchase transportation services by using a negotiable transportation request, which is provided to the common carrier by the traveler at the time transportation is provided. A budgetary entry (Entry 5a) is needed to record the estimated obligation

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of common carrier costs, along with other estimates of travel costs. These amounts are typically shown on the travel request and authorization form. This entry reduces the amounts obligated earlier and is supported by submitted copies of public vouchers for transportation of passengers. This is a schedule listing information submitted by the carrier identifying the several transportation requests under which the carrier provided services. Note that when a federal employee uses a SGTR to pay for travel, the later submission of an expense voucher by the traveler does not liquidate the amount obligated for transportation. The elimination or reduction of obligation related to a common carrier is recorded upon receipt of a public voucher for transportation of passengers that must be submitted by common carriers to obtain payment for services provided. Additionally, a parallel proprietary entry (Entry 5b) is needed to record the actual cost of transportation services and related liability to the common carrier. The debit for transportation expenses is distributed to the several cost centers, as appropriate, by an agency’s cost accounting system. The cost accounting system of the entity must provide for a distribution of these travel/transportation expenses to various subsidiary accounts, organizations, activities, and functions. Another proprietary entry (Entry 6) is required to record payment to the common carrier for the services rendered and billed to the federal entity. The amounts to be paid are listed on the schedule of voucher and payments by the entity. This standard form is transmitted to the Treasury, listing those common carriers to which the Treasury is requested to make payment (by check, electronic funds transfers, direct deposits, etc.). For transportation of things. The accounting for the transportation of things requires slightly different entries from those used for the travel/transportation of persons. Obligation of appropriated funds (Exhibit 9.5, Entry 7). The procurement of freight or express transportation services is initiated by an entity with the issuance of a government bill of lading containing an estimate of the cost of services to be provided by the common carrier. This action obligates a portion of an entity’s appropriation balance, requiring an entry (Entry 7) in the budgetary accounts. This budgetary entry reduces the allotment balances and establishes an obligation that remains until the agency obtains notice that the services have been received. Liquidating obligation (Exhibit 9.5, Entry 8). Receipt of services is noted by the appropriate officials evidencing that goods have been received in the quality and quantity stated on the initial bill of lading. If the entity’s system of controls is sufficiently refined to permit this distinction, the accrued expenditure and the cost of services performed should be recorded upon receipt of goods, without waiting for the carrier to render an invoice. A budgetary entry (Entry 8a) is needed to reduce or eliminate the amounts obligated and record the amount of the expended appropriation. At the same time, a parallel, proprietary entry (Entry 8b) is required to record the cost of services and the related liability owed to the common carrier. The public voucher for transportation charges is the document supporting these entries. There

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may be instances in which the bill of lading and the services will be performed within the same accounting period or the time lag between ordering and receiving the transportation services is short. Under these conditions, Entries 6, 7, and 8 are processed almost concurrently. Payment of the liability. Payment for services rendered by common carriers would require the same proprietary disbursement entry as required for other payments. This proprietary entry is supported by amounts listed on the schedule of voucher and payments submitted by the federal entity to the Treasury requesting that payment be made to listed payees. Closing entries. At the end of each fiscal year, certain budgetary and proprietary accounts are closed to provide an accounting for the expended appropriation, the unexpended appropriation, and any outstanding undelivered orders (or unliquidated obligations). Also at the end of the year, amounts earlier recorded as credits to the budgetary expended appropriation account are closed to the budgetary appropriation realized account. Concurrently, a proprietary entry is required to close all program/operating expense accounts to the cost of operations account.

10

CONTRACTS

For many federal entities, expenditures by contracts are minimal; but for other entities, funds spent under contracts to purchase a wide variety of services, equipment, property, and program support greatly exceed all other expenditures in the entity’s budget. Due to the dollar magnitude of contracted monies, Congress monitors these expenditures closely, and many others within and external to the government are also concerned with the manner in which contracts are awarded and contract expenditures are made. DEFINITIONS Contracts are formal, written commitments of the federal government that obligate the government to an expenditure of money upon satisfactory delivery of goods or performance of services. Contracts may be issued by agencies to procure a variety of services or products, such as transportation, printing and reproduction, supplies and materials, equipment, security, consulting, and other services or items. Often contracts are the preferred form to finance services provided to and procurements of goods by the government. There are various contract formats in use. As illustrated in Exhibit 10.1, the contractual format selected for a particular procurement will depend on the scope of work to be performed and the nature of the risk that will be shared between the agency and the contractor. The relative risk is dependent on a variety of factors. Some of these risk factors include • Type and complexity of the service or product being procured • Period of the contract • Location where the services are to be performed • Prior experience with the contractor • Contractor’s financial resources • Extent of subcontracting involved

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Exhibit 10.1: Relative Risks on Government and Contractors by Type of Contracts High Risk on Contractor

High Risk on Government

Firm Fixed Price

Cost Plus Fixed Fee

100% price and performance risk on contractor

100% risk on agency level of effort unknown

Fixed Price Escalation

Cost Plus Incentive

Protection from unstable market or labor conditions

Target cost, min-max fee uncertainties

Fixed Price Incentive

Emphasis to reduce costs

Cost and Cost Sharing

Fixed Price Redetermination

Agency pays only cost—no profit, contractor likely to receive benefit

Adjusted for later periods of performance

Exhibit 10.2 summarizes several types of contracts used by federal agencies. Generally, these contracts fall into two groups: cost-reimbursable contracts and fixed-price contracts. Exhibit 10.2: Types of Federal Contracts Types of contracts

Descriptions

Cost-reimbursable contracts Cost plus fixed fee

Reimburses contractor for allowable costs, plus negotiated fee. Maximum cost risk for agency; scope of work difficult to define.

Cost plus incentive fee

Reimburses contractor for allowable costs, plus variable fee if contract is completed for various target costs levels. Scope of work is uncertain at time of negotiation.

Cost and cost sharing

Reimburses contractor for allowable costs. No fee or profit, since contractor anticipated a mutual benefit from performing scope of work.

Time and materials

Reimburses contractor for labor and cost of materials in form of a negotiated rate for each hour of labor; rate must include direct cost labor, overhead, and profit factors.

Labor-hour

Similar to time and materials types of contracts. Reimbursement is made to the contractor on the basis of a fixed labor rate, which includes a factor for cost of labor, overhead, and profit. The only variable is the number of hours provided under contract.

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Fixed-price contracts Firm fixedprice

Reimburses contractor for full amount of contract for completion of scope of work. Contractor assumes the risk for price and performance.

Fixed-price incentive

An alternative to a firm fixed-price contract when parties agree on scope of work but cannot agree on specific price. Contractor and agency share in cost savings or underruns and overruns.

Fixed-price escalation

Reimburses contractor for full amount of contract and effect of certain financial risks beyond the contractor’s control. Escalation clauses generally are based on a predetermined price or cost index, providing for the adjustment of material and labor costs.

Purchase orders Purchase orders

For fixed price, made effective by the vendor, or the supplier’s acceptance or performance. For amounts not in excess of $25,000 when (1) supplies are readily available in local area, (2) one delivery and one payment will be made, and (3) this form is more economical and efficient than other methods.

SOURCE: Cornelius E. Tierney and Robert D. Hoffman, Federal Financial Management: Accounting and Auditing Practices (New York: American Institute of Certified Public Accountants, 1973).

Cost-reimbursable contracts are used when the agency and the contractor are not able to define the required scope of work in definitive terms or when there is no valid basis for predicting results or performance. Under such circumstances, the contractor is reimbursed for allowable costs and a fixed or incentive fee. Thus, under cost-reimbursable-type contracts, the financial risks are primarily borne by the governmental entity. Conversely, when desired results of performance can be predicted and a definite price can be negotiated for the services, a fixed-price contract will be awarded. Costs incurred in excess of the fixed price must be borne by the contractor, provided the scope of work has remained as defined in the contract. However, if performance is rendered for less cost than the fixed price, the contractor is entitled to the full contract amount. Federal Entities with Responsibilities for Contracts Within the federal government, several organizations share responsibility for the negotiation, award, administration, and settlement of federal contracts. The paragraphs that follow outline the nature of guidance or control exercised by the various entities with respect to government contracts. Congress. Through its authorization and appropriation committees, Congress has the ultimate authority and responsibility for overall federal procurement policy, exercised in separate legislation that has government-wide applicability to all federal entities and in agency-specific legislation where Congress deems it necessary to provide guidance to individual federal entities. In these instances, the legislation

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applicable to the separate entities could contain detailed directions concerning the contractor selection, contract award, and administration of contracts by that entity. Government Accountability Office. Under various legislation, the Government Accountability Office is required or authorized to audit the expenditures of federal monies spent under contracts and other instruments. In the exercise of this responsibility, the GAO will review federal entities’ systems of accounting and internal controls related to the award and administration of contracts and other procurements. These reviews are made both at the federal entity level and at contractor locations. Additionally, the GAO renders advance decisions (known as Comptroller General [C.G.] Decisions), which are binding on federal entities, relating to the propriety of a prospective procurement action. Federal entities and private organizations may solicit the GAO to review decisions relating to procurement actions and contract awards. GAO decisions are fully binding on federal entities, but contractors have the option to further pursue a remedy in the courts. General Services Administration. For many years, the General Services Administration was responsible for publishing and overseeing the federal procurement regulations that applied to all but exempt entities, including the Department of Defense and the National Aeronautics and Space Administration (NASA), which issued its own procurement regulations that paralleled and duplicated those of the GSA in many ways. In March 2005, the GSA completed the reissuance of the Federal Acquisition Regulation (FAR), which today exceeds 1,130 pages in length. The FAR is now the primary regulation for use by all federal executive branch agencies in their acquisition of supplies and services with appropriated funds. The FAR was issued within the applicable laws under the joint authorities of GSA, the Department of Defense, NASA, and the Office of Management and Budget (OMB). Office of Management and Budget. The OMB and its predecessor, the Bureau of Budget, have issued important regulations relating to government procurements. Most notable are those regulations outlining federal policy relative to allowable costs, unallowable costs, and indirect costs chargeable and not chargeable under government contracts. These policies appear in the form of OMB Circulars. These include • OMB Circular A-21, Cost Principles for Educational Institutions, setting forth the allowable, unallowable, and indirect cost principles for contracts with educational institutions • OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments, setting forth the allowable, unallowable, and indirect cost principles applicable to state and local governments • OMB Circular A-122, Cost Principles for Non-Profit Organizations, setting forth the allowable, unallowable, and indirect cost principles for nonprofit organizations Additionally, by the Federal Procurement Policy Act (PL 93-400), an Office of Federal Procurement Policy was established within the OMB to provide

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government-wide procurement policy for federal entities. It was also responsible for establishing a system of uniform procurement regulations, monitoring and revising policies relating to reliance on either the private or public sector to furnish property or services, and establishing a government-wide procurement data system. The OMB is officially prohibited from interfering with the determination of need for contracted property or services of individual federal entities. Nevertheless, the OMB exerts control over an entity’s contracts through the exercise of its budget responsibilities and its apportionment actions, which regulate the rates and purposes at which an entity can spend its budget. The OMB’s budget policies also dictate, to a significant degree, the nature of the accounting being applied by every federal agency for many fiscal and financial activities, and the contract and procurement areas are no exception. In OMB Circular A-11, Preparation, Submission and Execution of the Budget, agencies are reminded that amounts of contracts must be reflected in the accounts of the agency as formal obligations (usually when the contract is signed). The maximum financial liability is normally limited by the contract terms. There are, however, some nuances that the OMB highlights. Exhibit 10.3 summarizes the requirements and certain special considerations in connection with contractual services and supplies. Exhibit 10.3: Summary of Requirements and Special Considerations Contracts with…

Amount obligated is…

At the time…

The maximum price

The contract is signed

Amount downward adjustments (i.e., deobligation, if any)

There is documentary evidence that the price is reduced

Letters of intent and letter contracts

Normally, no amount is obligated

The letter is signed

However, if the letters constitute binding agreements under which the contractor is authorized to proceed

The maximum amount indicated in the letter that the contractor is authorized to incur to cover expenses prior to the execution of a definitive contract

Contracts for variable quantities

Normally, no amount is obligated

The contract is signed

The contracts are usually followed by “purchase orders” that do obligate the government

The amount of actual orders

The order is issued

Orders where a law “requires” one to place orders with another federal government account

The amount of the order

The order is issued

Voluntary orders with other federal government account

The amount of the order

A maximum price

If the order is for common-use standard stock item the supplier has on hand or on order at published prices

That one issues the order to the supplier

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Contracts with…

Amount obligated is…

At the time…

If the order is for stock items other than the above

One receives a formal notification that the items are on hand or on order

If the order involves execution of a specific contract

The supplying agency notifies one that it has entered into the contract

SOURCE: Office of Management and Budget Publication, OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget, revised November 2, 2005.

In Circular A-11, the OMB warns agencies that doing business with other federal agencies is different, with different accounting rules. For example, with respect to intragovernmental services and supplies, the obligations for such services and supplies are incurred when these supplies are delivered or services received, whether a bill has been rendered by the providing agency or not. Also, obligations for the GSA for space rental payments are incurred in the year in which the premises are occupied, regardless of whether a bill has been rendered by the GSA. For intraagency services and supplies, obligations are incurred and must be recorded when an agency places the order for supplies, which is in advance of receipt of the supplies and in advance of any billings. Individual federal entities. The Budget and Accounting Procedures Act of 1950 required the head of each federal entity to establish and maintain an adequate system of accounting and internal controls. Pursuant to that Act and other legislation, federal entities have designed procedures relating to the solicitation and evaluation of proposals; negotiation, award, and administration of contracts; and the accounting for all phases of contract performance. It is critical that the accounting system of the agency be sufficiently precise to be used to monitor contract obligations, liquidation of obligations, and the costing and paying of funds relating to performance or services received under a contract. Contracts Controls and Procedures The controls relating to procurements made by contracts generally require the coordination and execution of numerous functional organizations of the federal entity. Federal organizations external to individual agencies have authority and responsibility to issue and require agency adherence to these externally imposed policies and regulations relating to contracts. The design of a system of controls to meet the criteria of these agencies and to protect the government adequately in procurements is the responsibility of the individual agency heads and the agency’s functional organizations. For an overview of the involved functional organizations, see Exhibit 10.4. While the specific steps or details vary, most federal entities have established procedures and practices requiring • The preparation of a procurement request or authorization approved by the responsible program official, and annotated to show that unobligated funds exist to meet the estimated amount of the intended procurement

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• Procurements that must be competitively awarded, whether the contract is ultimately awarded through advertising or negotiation. (Competition may be obtained by the government-directed solicitations of more than one source or by publication in the Commerce Business Daily, listing agency requests for proposals and notifications of earlier contract awards.) • A formal review process for objectively evaluating all solicited and unsolicited sealed bids and proposals received by the agency • Adherence to prescribed negotiation practices that must precede the execution and award of a contract • Conducting a survey or review of the contractor’s accounting and management control systems by conducting on-site examinations and consulting with other federal entities with which the recipient has done business in the past • Specific conditions governing bank accounts and contributions of any required matching or cost-sharing contributions by the recipients • Evaluation of the contractor’s management personnel, personnel practices, and intent to comply with various federal laws • The execution and issuance of the contract, with timely notification to the fiscal function for the prompt obligation of funds in an amount equal to the funded value of the contract • Reporting, on a periodic basis, of the rate of expenditures by the contractor as well as performance or deliveries being provided • Positive assertion of the receipt and satisfaction of service or performance received by the agency • Conduct of a prepayment audit of all invoices received to ensure that amounts, deliveries, and compliance with contract terms are consistent with those negotiated between the agency and contractor • Prompt and accurate payment of all invoices rendered by the contractor and the timely processing of all accounting entries • Settlement of any advances of money and inventories of property in a manner consistent with agency policy or contract conditions • Assessing the extent to which the purpose or objective of the contract is being or has been achieved • Timely settlement of contract debts and prompt closeout and final accounting and reporting at the conclusion of the contract • A final audit of the contractor, with the federal agency retaining the right to recover appropriate amounts after fully considering audit recommendations and any disallowed costs identified during the audit

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Exhibit 10.4: Organizational Relationships Required to Contract in a Federal Agency Agency Program Office • Determine need • Estimate cost • Identify sources of supply • Prepare procurement request

• Accepts performance • Acknowledges receipt per contract • Recommends payment

Agency Finance Office

• Confirms funds available • Commits funds • Obligates funds

Agency Contracts Office

• Identifies suppliers • Conducts negotiations • Awards contract

• Monitors contract • Examines invoices • Confirms invoice amount to contract • Schedules request for payment by Treasury • Performs accounting for contract

Contractor

• Accepts contract • Performs service or delivers supplies • Requests payment by invoice

• Closes out contract at completion

SOURCE: Cornelius E. Tierney and Robert D. Hoffman, Federal Financial Management: Accounting and Auditing Practices (New York: American Institute of Certified Public Accountants, 1973), p. 105.

Procurement forms. Several forms are required within a federal entity to fully document and account for a valid contract action. These generally include • Procurement request or authorization—prepared by entity operating managers • Request for proposal—prepared by entity procurement personnel • Proposal—submitted by interested, prospective contractors • Contract document—executed only by authorized entity procurement personnel • Financial expenditure reports and invoices—submitted by the contractors • Capital–Cash advances, repayment, and settlement Procurement request or authorization. The procurement request (PR) or authorization represents the initiating document for procurement. This record is completed by the program office after determining that a need exists that cannot be met with the federal entity’s existing resources. The form should provide for • A description of the services desired, the time period during which the services will be provided, and, often, an estimate of the amount of the budget that the program official is willing to spend for the services • An approval of the described services, time period, and funding by the responsible program official • A certification by the program allottee or certifying officer that sufficient, unobligated funds exist to meet the estimated cost of the anticipated procurement

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• A recording of the amount on the PR as a commitment or preliminary reservation of the agency’s unobligated funds to avoid a duplication or overobligation of funds The last step is often required when there is a long delay between the commitment of funds and the actual negotiation and award of the contract. Some federal entities will formalize the commitment by an accounting entry. The procurement request is an internal document and generally is not made available to persons external to the agency. Also, a PR does not meet the legal criteria for a valid federal obligation. Request for proposal. An agency’s request for proposal (RFP) or invitation for bid (IFB) will specify the scope of work desired by the procuring program office. 1 The form and content will vary among agencies but, at a minimum, the RFP or IFB should contain (1) scope of work; (2) period of performance; (3) estimated level of resources required to conduct or perform the scope of work; (4) type of contract to be awarded; (5) special and general conditions applicable to the contract; and (6) on some occasions, the estimated amount budgeted by the entity for the specific contract action. The RFP or IFB is then distributed to interested organizations believed to have the skills required to perform the work. (Numerous RFPs or IFBs or procurement invitations of the federal government are published in the Commerce Business Daily, issued by the Department of Commerce.) No accounting entry results from the preparation or issuance of an RFP or IFB. During the development of the RFP/IFB, the scope of work may be better defined causing a reevaluation of the amount estimated earlier on the PR. Any variance should be reflected by modifying the amount of funds committed. Contractor-submitted proposals or bids. Interested organizations respond to the RFP or IFB by submitting proposals or bids describing how they would undertake to solve the problem or perform the scope of work, the type of resources that would be required to complete the work satisfactorily in the desired time period, and the amount of money for which services will be rendered. Through a review and evaluation process, one firm will emerge as the winner or contractor. No accounting entry results from this phase of the contractual process. Contract document. The execution and award of the contract is the legal obligation of the federal entity. The contract, signed by the contractor and entity executives, contains the scope of work, time period, description of special and general terms and conditions, the amount of the contract, and the amount funded, which may be less than the amount of the contract. The amount of the contract could be significantly in excess of the amount funded or obligated by the agency. In such instances, the contract is said to be incrementally funded; the government agency may limit its liability to the amount funded by stating in the contract terms that full funding is conditional upon later additional funding. The accounting entry to record the obligation related to the contract 1

RFPs are typically associated with negotiated-type procurements; IFBs are used for contemplated advertised contracts, generally awarded on a fixed-price basis to the lowest responsive bidder.

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is for the amount cited in the contract as being funded. As the federal entity increases the funded amount of a contract, the accounting must reflect this action and the increased financial obligation must be recorded in the formal accounting records. Financial expenditure reports and invoices. Most federal entities provide for progressive or partial payments through the duration of the contract, unless the contract is small. The amount of the payment could depend on expenditures shown on periodic financial reports submitted by the contractor. Additionally, invoices for work performed or costs incurred are submitted by the contractor to the entity for payment. Where such a condition exists, the contractor is said to be on a reimbursement basis because costs and expenses have been incurred before any reporting, invoicing, or billing is made to the government. These documents are generally subject to a prepayment audit and are the basis of support for an accounting entry to liquidate the earlier obligation and record the accrued expenses or actual costs. Cash advances. Certain contractor organizations (usually nonprofit organizations and nonfederal government entities) receive an advance of funds by which the government finances the work of the contract. Advances can be in one of two forms: (1) a lump-sum advance may be given to the contractor to cover operations for a specified time period, such as 30 or 60 days; or (2) a letter-of-credit drawdown can be used. The lump-sum advance is often provided to the contractor at the time of contract award. Throughout the period of performance, the advance is replenished as financial reports or invoices are submitted, and the advance is liquidated or eliminated at the conclusion of the contract. The letter-of-credit process requires the existence of certain forms, such as • An authorized signature card identifying the contractor’s certifying officer, which is placed on file with the Treasury and the contractor’s commercial bank or other designated disbursing organization • A letter of credit completed by the government entity and forwarded to the Treasury identifying the Federal Reserve Bank or the Treasury disbursing agent and the contractor; establishing the total amount of the letter of credit and the periodic withdrawal limits; and defining the time period for which the letter of credit will be available • A request for payment on the letter of credit, prepared by the contractor and consistent with the letter of credit, to withdraw funds to finance the contract scope of work. The form requires the reconciliation of balances, withdrawals, and other letter-of-credit transactions, as well as an identification of the program or contract for which funds are being withdrawn. The issuance of an advance at the time of contract award or the release of funds on a letter of credit constitutes a disbursement of funds that is an advance which must be posted as an accounts receivable due to the federal entity. These advances are a reduction in the agency’s Fund Balance with Treasury. Voucher and schedule of payments. The voucher and schedule of payments is the formal request by an entity to the Treasury to make payment (by check, electronic funds transfer, or direct deposit) for specific amounts to an identified payee.

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The Treasury makes no distinction between payments made for services or for advances. This accounting is the responsibility of the individual agency. The voucher and schedule of payments now represents the documentation in support of an entity’s cash disbursements. Accounting forms. The accounting forms and records vary somewhat by federal entity. The forms are designed to address the general as well as the unique accounting requirements of a particular entity. Overall, however, the purpose of the documentation is uniform—to provide for full financial disclosure of activities. The forms used in practice include subsidiary accounts, general ledger accounts, and documents for accrual, adjusting, and closing entries. Subsidiary accounts. As part of the responsibility to maintain an adequate system of accounting and controls, entities must design and use an integrated account structure to permit full accounting for resources consumed and cost of performance for each awarded contract. This requires the coding, accounting, and reporting of contract transactions by appropriation, organization, budget activity, program structure, operating unit, cost center, and object classification. General ledger accounts. Each entity is required to design the general ledger account structure that best controls and accounts for all contracted resources for which it has stewardship responsibility. Ideally, the account structure is sufficiently detailed to permit the preparation of all required reports from control or subsidiary account balances without the need for further analysis or allocation of data. Accrual, adjusting, and closing entries. Standard or preprogrammed journal entries are often made to reflect contract-related costs in the records and cash disbursements at the end of the period. Typically, the end-of-period accruals, adjustments, or closing entries exist as preprogrammed entries. In these instances, only the calculation of the dollar value is required to complete the accounting. OMB Obligation, Accrual, and Costing Criteria The OMB has prescribed certain criteria for the obligation, accrued expenditure, and applied cost of contract transactions relating to the acquisition of services such as printing and reproduction, supplies and materials, and equipment, as well as other contractual services. Except when precluded by law, federal entities are required to report obligations, expenditures, and applied costs in accordance with these concepts, which are set forth in OMB Circular A-11. Obligations incurred. The reporting of obligations incurred for printing, reproduction, and other contractual services, supplies and materials, and equipment must include all orders placed and contracts awarded. Section 1311 of the Supplemental Appropriation Act defines the documents required to prove the existence of a valid obligation. For all contract transactions, Section 1311 requires evidence of binding agreements, orders, or other legal liabilities prior to the recording and reporting of an obligation. The OMB, in its Circular A-11, has established other criteria for recognizing obligations by specific types of contracts and orders, for example

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• For cost-plus-fixed-fee and other contracts without a fixed price, include as obligations the total estimated costs of contracts (including fixed fee); this amount is to be reported for the month during which the contract is awarded • For fixed-price contracts with escalation, price predetermination, and incentive provisions, include as obligations an amount equal to the fixed price stated in the contract, or the target or billing price in the case of an incentive contract, or any subsequent adjustment in the estimated cost of a contract in the month in which the adjustment is made • For continuing contracts, subject to availability of appropriations, include as an obligation the appropriation amount made known to the contractor • For letters of intent, include as an obligation the maximum liability indicated in the letters • For contracts for variable quantity, include as an obligation only the amounts for the quantity specified for delivery, exclusive of permitted variations • For purchase orders, include as obligations those orders under which the government assumes a specific obligation for materials or services • For orders required by law to be placed with another agency, include as obligations the amount of such an order at the time the order is issued • For standard stock items, which the supplying activity has on hand or on order for prompt delivery at published prices, the obligation is incurred at the time the order is placed by the requisitioning activity. For stock items other than those just mentioned, the obligation is incurred at the time of issuance of the formal notification from the supplying activity that the items are on hand or on order and will be released for prompt delivery • For other intragovernmental orders, include as obligations amounts withdrawn and credited (pursuant to Section 601 of the Economy Act) that are available for obligation only for the same period as the account from which the amounts are withdrawn With respect to the last point, no federal entity can change congressional restrictions over its monies through the medium or guise of placing orders or issuing contracts to other agencies. With respect to an entity’s internal administrative commitments of funds (i.e., requisitions within the entity, issuance of invitations to bids to prospective contractors, or any action short of binding contract, order, or agreement), the OMB has stated that these actions must not be included in amounts reported as obligations. These internal activities fail to meet the criteria of Section 1311 for valid obligations permitted to be reflected in the accounting records of a federal entity. Accrued expenditures. Expenditures for printing and reproduction, contractual services, supplies and materials, and equipment will accrue when a contractor, vendor, or other party performs the service or incurs costs. The tests of performance may be physical receipt, passing of title, or constructive delivery, when the accounts of the entity provide such information. The constructive receipt criterion would apply when (1) products or services are being provided according to the federal entity’s specifications, and (2) the product or service is a nonstock item.

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Costs. The reporting of accrued or applied costs related to contracts, orders, and agreements is similar to the reporting of accrued expenditures, with some exceptions. For instance, according to the OMB • Applied costs include depreciation and unfunded liabilities when such amounts are provided in the accounts of the agency. • A net increase in inventories is an accrued expenditure, but would not be an applied cost until that inventory is used. Conversely, a net decrease in inventories is an applied cost, but not an accrued expenditure. • For operating programs, a change in capital assets is not an applied cost, even though it is an accrued expenditure; the use of consumption (e.g., by depreciation) is the cost of a capital asset. Note that, within a federal entity, not all of the foregoing controls are resident within a single functional organization. For example, the completion of procurement requires coordination between the program office desiring the services, the fiscal function having current knowledge of the status of unobligated funds, and the procurement personnel having information about sources that might be solicited for the services. Procurement personnel attend to the administrative compliance with contract conditions (reporting, delivery, submission of invoices, etc.). Program officials must provide the information concerning the acceptability of the quantity and quality of service or performance rendered. The financial personnel must ensure that any advance payments, government-furnished inventories or properties, and payment of submitted invoices be properly recorded and that the accounts of the entity provide for a full accounting of all financial transactions related to each contract. Exhibit 10.5 illustrates, in summary form, the involved functions and associated responsibilities, the nature of the procurement process, and the forms required to contract, control, and account for the contracts within a federal agency.

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Exhibit 10.5: Overview of Procurement Process FEDERAL AGENCY FUNCTIONS PROGRAM OFFICE OR ALLOTTEE

PROCUREMENT • Determines need for contractor services ACTIVITIES

• Prepares preliminary estimate of cost • Identifies sources of supply • Prepares procurement request • Monitors performance and accepts delivery • Recommends payment

ACCOUNTING PROCESS

CONTRACTS OR PROCUREMENT SECTION • Identifies contractors • Issues requests for proposals, bids, and quotes • Conducts negotiations with prospective contractors • Awards contracts • Administers contracts • Closes out contracts upon completion

Procurement request _______________ _______________ _______________ _______________ ________________ ________________ ________________

CONTRACTOR OR VENDOR

ACCOUNTING SECTION • Confirms funds available for contract • Commits funds • Obligates funds • Examines invoices related to contract terms • Conducts prepayment audit invoices • Records payments • Completes internal and external reports • Prepares schedule for issuance of check by Treasury function • Performs fiscal accounting for contract

• Submits proposal, bid, and quote • Negotiates contract terms and price • Accepts contract • Performs service • Requests payment, submits invoice

Procurement request • Services, goods • Amount • Delivery due • Authorizing official Request for proposal, bid, and quotes

Contract

• • • •

• Scope • Contract terms • Time period

Scope Amount Time Terms

1

Record commitment

2

Record obligation for contract

3

4

• • • • •

Scope Approach Qualifications Time Price

2

3 KEY Required Accounting Process

• Issues check to make payment for services • Reports checks issued to agency

1

Proposal, bid, and quote

_______________ _______________ _______________ _______________ ________________ ________________ ________________

TREASURY DEPARTMENT

Receiving report

4

_______________ _______________ _______________ _______________ ________________ ________________ ________________

Progress report _______________ _______________ _______________ _______________ ________________ ________________ ________________

Invoice

5

_______ _______ _______

Record partial accrued expenditure Liquidate obligation and accrue expenditure

5

Record cost, expense, and payable

6

Reduce payable and record payment

Payment schedule _______________ _______________ _______________ _______________ ________________ ________________ ________________

• Payee • Amount

6

$

Electronic funds transfer or check

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Accounting for Contracts The accounting for a contract requires the processing of several transactions to reflect the progress or performance of the contractor throughout the contract period. These transactions have been highlighted in Exhibit 10.6. The events that must be identified, documented, and recorded in the accounting records are discussed in the following sections. Exhibit 10.6: Accounting Transactions: Government Contracts Budgetary Entry 1: Award of Contract Allotment available for commitment/obligation Undelivered orders

DR CR

Proprietary (None)

CR

x x

Entry 2: Advance of Funds (None)

Advances to others— Contractors Fund Balance with Treasury

Entry 3: Receipt of Expenditure Report or Invoice Undelivered orders x Asset accounts Expended appropriation—Capital x Program/operating Expended appropriation— expense Operating x Accounts payable— Contractors Entry 4: Letter-of-Credit Withdrawals (None)

Advances outstanding— Letter-of-credit withdrawals Fund Balance with Treasury

Entry 5: Payment or Reimbursement of Contractor (None) Account payable— Contractors Fund Balance with Treasury Entry 6: Closing Entries Expended appropriation Appropriations realized

DR

x x

Net results of operations Program/operating expenses

x x x x x

x x x x x x

Commitment of funds. All agencies keep memorandum registers or files on the dollar value of PRs or authorizations approved in various stages of the contracting process. But most agencies do not record a formal accounting entry for these PRs in their financial records. At times, particularly when there is a long delay between the issuance of the PR and the award of the contract, a formal entry may be made. However, it should be noted that the PR does not conform to or meet the criteria for the documents that constitute an obligation, as defined by the Supplemental Appropriation Act of 1955.

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Obligation of funds (Exhibit 10.6, Entry 1). The awarding of a contract constitutes a legal obligation of the government; it is also an economic event that must be formally recorded in the accounts. A budgetary entry is necessary to reduce the unobligated allotment balance and establish an obligation for undelivered orders that will be liquidated in the future by the delivery of goods or performance of services. If the contract has been incrementally funded, the amount of this entry will be less than the full amount of the contract. Later, as additional funds are allocated to the contract, the same entry must be made again for the additional obligated funds. No proprietary entry is necessary at this time, as no performance has been received under the contract. Advance of funds (Exhibit 10.6, Entry 2). Should the contractor qualify for an advance of funds and the advance is made, a proprietary accounting entry is required to establish an accounts receivable from the contractor and to record the disbursement of cash. However, no entry is made to the budgetary accounts at this time because no funds have been legally committed. In effect, the advance constitutes an interest-free loan to the contractor, which must be repaid if the contracted services are not performed. Expenditure report or invoice (Exhibit 10.6, Entry 3). The receipt of an expenditure report, an invoice, or other information that recognizes that goods have been delivered or that services have been performed under the contract constitutes the basis to liquidate part or the entire earlier obligation, regardless of whether payment has been made. Depending on the terms of the contract, advances may be reduced by reimbursing the contractor for less than the full amounts reported on the submitted expenditure reports, or final settlement of advances could be made at the end of the contract. Two entries must be made to reflect this event. An entry (Entry 3a) must be made to the budgetary accounts to reduce or liquidate the earlier obligation equal to the amount of performance and to recognize the expenditure of funds. At the same time, another entry (Entry 3b) is required to record the assets received or expenses incurred and the accounts payable due to the contractor. Letter-of-credit withdrawals (Exhibit 10.6, Entry 4). As information is received concerning withdrawals under letters of credit, an account receivable must be established and a proprietary accounting entry made by the entity to reflect the disbursement of cash. As in the case of the direct advance of funds by an entity, no budgetary accounts have been affected because the agency has not legally committed any funds; it has merely advanced money for which the entity could, if it so desired, demand a full refund prior to the time services have been rendered. Payments to the contractor (Exhibit 10.6, Entry 5). A proprietary accounting entry is needed to record payments to contractors. This entry reduces the accounts payable amount due to the contractor, as well as the Fund Balance with Treasury (i.e., the cash account) of the entity. This entry is supported by amounts listed on the schedule of voucher and payments submitted by the contracting agency to the Treasury requesting that payment be made to the listed contractors (assuming the contractor has not previously received an advance or made withdrawals under a letter-of-credit financing).

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Accrual of expenses or costs. At the end of the reporting period or a fiscal year, an agency must calculate the amounts of expenditures that have accrued but that have not been reflected in the form of documentation. Such a condition would exist when the end of the period occurred between reporting and invoicing dates. In this event, an estimate of contract performance is required. These general guides are appropriate for estimating accruals for federal contracts: • For fixed-price contracts extending beyond one accounting period and covering goods manufactured to government specifications, a statement from the contractor estimating the percentage of completion, including work performed by subcontractors, could be used to determine the accrued amount • For cost contracts, monthly reports from the contractors showing the unbilled portion of performance to the end of the accounting period, including any unbilled performance of subcontractors, could be used to determine the accrued amount • Estimates by government project officers or operating officials familiar with progress under the contracts may be used in lieu of or as a check on information received from a contractor • In some instances in which the obligation covers the expenditures accrued in the accounting period, the obligation itself may be the best estimate of the expenditure. Accounting for the end-of-period accrual requires that two entries be made. A budgetary entry is necessary to record the liquidated or reduced obligation that has now, by performance, been transformed into an expended appropriation. In the proprietary accounts, it is necessary to show concurrently the partial or incremental ownership in an asset or record the cost of services performed and the amount due to but not yet billed by the contractor. Closing entries (Exhibit 10.6, Entry 6). At the end of each fiscal year, certain budgetary and proprietary accounts should be closed to provide an end-of-period accounting for the expended appropriation, the unexpended appropriation, and any outstanding undelivered orders (or unliquidated obligations). Two groups of entries are required to close the books. At the end of the year, a budgetary entry (Entry 6a) is required for amounts earlier recorded as credits to the expended appropriation account that are now closed to the appropriation realized account. A proprietary entry (Entry 6b) is required to close program/operating expenses accounts to permit the determination of the net cost/results of operations for the appropriated activities. Reversal entries. Once the necessary end-of-period reporting has been completed, the accounts must be returned to the status prior to the entering of the accrual information. This procedure will minimize the risk of duplicating transactions and amounts when the formal documentation is later received or the precise amounts of expenditures become known in the later accounting period. Without the reversal entry, there is a risk that the partial liquidation of obligations for the end-of-period accrual will not be properly treated in the accounting records and/or that information on the documentation submitted by the contractor will be processed for the full amounts reported. Should this happen, the balance in the accounts would be overstated by the amount of the earlier accrual.

11

INTERAGENCY AND OTHER EXPENDITURES, AND RECEIPTS, TRANSFERS, REIMBURSEMENTS, AND REFUNDS

By law or for other reasons, some federal entities may obtain goods and services from other federal entities. Additionally, all federal entities incur costs for housekeeping expenditures, such as rent, communications, and utilities, which may require a prescribed accounting rather than an accounting in accord with generally accepted principles. A variety of earned revenues, cash receipts, transfers between federal entities and others, and reimbursements of cost for provided services are used to pay for the government’s operating expenses. INTERAGENCY AND OTHER EXPENDITURES A federal entity incurs several types of housekeeping expenditures to support its programs. Such expenditures may be payable to commercial organizations, public utilities, or other agencies, depending on the services. The more common housekeeping expenditures have been defined by the Office of Management and Budget and include rent, communications, utilities (which include the standard-level user charges assessed by the General Services Administration), other services, and other rent for land, structures, or equipment. Printing and reproduction costs could also be included in this general housekeeping category. Furthermore, depending on an agency’s mission or purpose, other obligations and expenditures might be incurred for which specific accounting is prescribed. Some of these expenditures, discussed later in this chapter, include disbursements for pensions, interest and dividends, investments, loans, and governmental guarantees. Often the goods or services provided by another agency could be provided directly from a commercial source. At the federal level, however, laws require that needs for certain goods or services be met by procurement from another government agency. Payment for the goods or services provided by another agency may be by a cash disbursement or by an interagency transfer of funds, in much the same manner as payment is made to a commercial supplier. The agreement into which two or more federal entities enter and that requires one entity to obtain goods and services from the other is called an interagency order or contract.

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Federal Entities with Responsibilities for Interagency Expenditures As mentioned, several public laws direct that certain goods and services be procured by government entities from other government entities. Examples of some of the legally mandated government sources and the related legislation follow. General Services Administration. The General Services Administration is the housekeeping agency of the federal government. The Federal Property and Administrative Services Act of 1949, as amended, governs the procurement, rental, and management of federal properties. The Act also established the GSA to provide many of these services, plus the procurement and supply of personal property and nonpersonal services (e.g., motor pool transportation, public utility services, procurement of goods, repair and maintenance, and establishment of government-wide standard forms and procedures). The GSA also monitors the utilization and preservation of available government property, the disposal of surplus property, and the management of records, as well as other supportive activities. Government Printing Office. The expenditure for printing and reproduction by federal entities is under continual surveillance by Congress. In fact, the Joint Committee on Printing, one of the oldest committees of Congress, was established in 1846 to monitor these types of expenditures. Pursuant to law, the primary source of printing and reproduction services for federal entities is the Government Printing Office (GPO). With certain exceptions, all printing, binding, and reproduction must be conducted by the GPO. In practice, however, because of the limited capacity of the GPO, these types of services are performed by commercial sources approved by the GPO (63 Stat. 405; 44 USC 111). Federal Prison Industries. Some limited manufacturing, repair, and maintenance services are performed by the Federal Prison Industries (FPI). Government agencies are legally directed to consider the FPI as a preferred source of supply for the level and nature of supplies it can provide (18 USC. 4124). Other agencies. The degree of direction and monitoring provided by the OMB and the Government Accountability Office with respect to interagency services is somewhat less than the surveillance given to procurement from nongovernment sources. The primary concern of interagency procurements is to ensure that agencies are procuring from the preferred source, if one has been designated. Procedures and Controls for Interagency Expenditures Controls. A federal entity must establish procedures to control interagency and housekeeping expenditures in much the same manner as it establishes procedures to control other types of expenditures. In some instances, unique controls will be required. For example, in some cases, the prescribed accounting may dictate that the buying entity’s fund balance is obligated, expended, and possibly “disbursed” at the time an order is placed with another agency, rather than upon performance or delivery of services. The control procedures relating to interagency transactions and housekeeping expenditures often include such procedures and practices as

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• The entities involved enter into a written agreement, properly authorized, approved, and executed, specifying the legal and fiscal liabilities of the entities and the appropriations from which the expenditure will be made. • Executing, monitoring, and controlling the performance required under the interagency agreement is performed in the same manner as for other procurements. • A system of prepayment or prefunds transfer audit is performed (to the extent possible) to determine the reasonableness of the requested payment or fund transfer in relation to the performance rendered or goods received. • Housekeeping expenditure (rent, utility, communication) documents are formally processed and the receipt of services is monitored, where appropriate. • Assets and any inventories are protected and regularly accounted for. • The accuracy and completeness of records are ensured to support the full transaction accounting cycle from the initial obligation through the accrual of expenditure, the recording of assets or expenses, and the ultimate payment or fund transfer. The control procedures for interagency transactions cannot be any less than those exercised for nongovernmental expenditures. Often increased care must be exercised because the value of individual transactions may be considerably greater. To be unaware of the intragovernmental controls and accounting procedures could subject a federal entity to the possible overobligation or overexpenditure of its appropriation in violation of law. In practice, the obligations and liabilities for interagency transactions may not be fully or currently recorded or reported, nor as closely controlled as transactions with nonfederal organizations. These relaxed conditions are possibly due to the inherent belief that transactions between federal entities are not subject to the same risk as those with nongovernment, third-party organizations. There is a real possibility that interagency transactions and liabilities will be overlooked by a buying or debtor entity until a bill is rendered for the services by the selling entity. However, because federal interagency billing procedures could permit billing and immediate payment through automatic interagency fund transfer, the buying entity may find itself in an overobligated or overexpended condition and yet have received no interagency bill for services. The overobligation or overexpenditure of an OMB apportionment or congressional appropriation for an interagency item carries the same reporting and personal responsibilities as a violation related to any other transaction. Accounting forms. Standard forms exist to permit the uniform, governmentwide accounting of some interagency transactions. Other significant services may be provided to individual federal entities under specifically negotiated, written agreements. The standard form or negotiated agreement forms the basis for recording an accounting entry to obligate a portion of the entity’s appropriation balance. The forms used to record obligations, expenditures, disbursement, and fund transfers for certain interagency and housekeeping transactions might vary, but the types that follow would be typical of those used by federal entities for intragovernmental transactions.

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• Federal entities often require that a letter of agreement be executed with contractor agencies for each contract entered into. There may be instances in which a standard form will suffice for the contractual letter of agreement. Implicit in such agreements is the requirement to account for billings and payments between agencies. • An alternative to the simplified intragovernmental billing and collection system (which provides for checkless, simultaneous billing and collection of funds transferred from one entity to another) is one in which payments between entities could be made on the basis of billing documents issued by the contractor entity providing the goods or services. • For those entities for which the Treasury does the disbursing, the billing and paying entity may settle amounts due by using the federal government’s standard payment schedule, that is, the voucher and schedule of withdrawals and credits. Other entities do their own disbursing and report to the Treasury on different forms. In these instances, interentity billings might be made on a voucher for transfers between appropriations and/or funds. • Depending on the method selected or mandated, the Treasury disbursing center might prompt settlement of interentity charges through a simultaneous charge and credit to the accounts of the entities involved or by a check actually being issued by the paying entity’s disbursing office. The billing entity is responsible for initiating the appropriate settlement forms. The paying entity is responsible for certifying the appropriateness of the amounts appearing on the forms and forwarding the billing forms to the Treasury disbursing center, where (1) an interagency debit and credit entry is made to the involved agencies’ accounts, or (2) a check is issued in settlement of the obligations. • The billing by the GSA could be made on a schedule of withdrawals and credits form (i.e., no check need be issued), which is forwarded directly to the Treasury. Because the form is a payment schedule, the receipt of the billing from the GSA constitutes a binding obligation as well as the accrual of expenditures for communications service. The forwarding of the GSA invoice or schedule of withdrawals and credits constitutes an automatic disbursement or transfer of funds. The fact that certain transactions are made between federal entities does not relieve the buying entity of the responsibility for examining billings for propriety of amounts, quantities, delivery sites, quality, and so forth, prior to processing for payment. Office of Management and Budget Criteria for Selective Interagency Expenditure Rent, communications, and utilities transactions. The Office of Management and Budget has prescribed obligation, accrued expenditure, and applied cost concepts for reporting interagency and housekeeping transactions such as communications, utility services, and rent. Except when prescribed by law, agencies are also required to report obligations and applied costs in accordance with these concepts.

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Reporting obligations. The criteria for accounting and reporting interentity federal transactions for communications, utility services, rents, and other expenditures have been established by the OMB in Circular A-11: • The reported obligation by the buying federal entity to the OMB shall include amounts for services received or amounts owed for use of property during the period. • When bills are rendered for a period that begins in one month and ends in another, the services received after the latest billing date need not be included. (Such a practice would omit the cost accrued at the end of the reporting period.) • If the accrued liability for communications and utility services, performed for the portion of the month between the end of the billing period and the end of the month, is material, provision should be made for recording the obligation. • Money spent for postage, stamps, and franked mail dispatched during the reporting period should be reported as obligations. (Agencies often refer to franked mail as “penalty mail.”) • For contracts within or beyond the fiscal year for recurring services, the amounts for services not yet performed will be excluded from the reported obligations even though the contract is definite. (Such a practice will result in an understatement of the obligation balance.) • There are two exceptions to the rule for contracts: 1. For GSA rental space, obligations reported will include the amount of the Standard Level User Charges. 2. With respect to leasing of computers and related equipment on a contractual basis without a purchase option, obligations are incurred when contracts are consummated and not as services are rendered. • For fixed-term contracts, the total amount of the contract is to be included as an obligation. For contracts with renewal options, the amount to be reported as the obligation to the OMB includes the amount required for the base period and any penalty charges for failure to exercise options. Accrued expenditures and applied costs. The reporting of accrued expenditures and applied costs of federal entities related to communications, utility services, and rents is the same as for obligations incurred, with these exceptions: • Agencies will generally be assigned space by the GSA. Periodically (usually quarterly), the GSA will present the benefiting entity with an invoice for rent, along with a voucher for transfer between appropriations and/or funds that initiates a disbursement or transfer of funds from the benefiting entity to the GSA. If an earlier obligation has not been established, the entity’s unobligated appropriation balance is automatically and directly reduced and an accrued expenditure must be recorded for the rental costs billed. • Amounts earned under contracts and recorded by the buying entity accounts for rental of computer equipment, and rental space furnished by the GSA will be based on amounts automatically billed to buying entities, pursuant to fed-

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eral regulations. For postage, federal entities may rely on any practical modification of the accrual concept; those using a consumption method are encouraged to continue such an approach. Other transactions. The OMB has also prescribed specific accounting and reporting procedures for obligations, accrued expenditures, and applied costs for certain other federal transactions. Some of these transactions for which the accounting is specifically prescribed include pensions and annuities, loans and loan guarantee programs, insurance claims, printing, postage, and telephone. Except when precluded by law, agencies are required to report obligations and applied costs in accordance with the concepts outlined in the paragraphs that follow. These criteria are set forth in OMB Circular A-11. The reported obligations for transactions of these types will include an amount determined administratively or judicially to be due and payable when no further action is required by Congress to authorize payment. It should be noted that many agencies will not be involved with these activities. Pensions and annuities. The Federal Accounting Standards Advisory Board, in its overview of federal accounting concepts and standards, recommended that federal entities recognize the expense of pensions and other retirement benefits at the time the employee’s services are rendered. Postemployment benefit expense should be recognized by the employing federal entity when a future outflow or other sacrifice of resources is probable and measurable on the basis of events occurring on or before the reporting date. Accounting for federal pensions requires consideration of costs incurred by or funded through both individual federal employer entities and the federal administrative entity (i.e., the Federal Office of Personnel Administration), the latter of which is the recipient of congressional appropriations to fund or pay the liabilities due to retired or disabled federal employees. The employer entity should recognize pension expenses in its financial report equal to the service cost (i.e., the actuarial present value of benefits attributed by the pension plan’s benefit formula to services rendered by employees during the accounting period) for its employees, less any employee contributions. The employer entity’s pension expense is to be balanced by decreases to its Fund Balance with Treasury for amounts contributed to the pension plan and increased by intragovermental imputed financing sources or by amounts that are financed directly by the pension plan’s administrative agency. The federal administrative entity should report a pension expense for the net of these cost components: (1) normal cost; (2) interest on the pension liability during the period; (3) prior and past service cost from plan amendments during the period; and (4) actuarial gains or losses during the period. The administrative entity should report revenues for total amounts received from employer entities that are contributions from both the employer entities (as intragovernmental revenues) and their employees. Loans and loan guarantees. Prior to 1990, expenditures and costs reported by federal entities for authorized loan programs included the amount of cash outlays for loans made in the reporting period. In the case of loan guarantees, no formal entry

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was made to recognize the potential guarantee liabilities. The primary accounting was concerned with cash disbursed for federal loans, often treated as expenditures and not loan receivables, or cash disbursed to settle debts for defaults under guarantee programs where the government was liable for defaulted amounts. The Federal Credit Reform Act of 1990 changed the historical method of accounting for loans and loan guarantee programs. Under the Act, the expected budgetary costs of loans or loan guarantees must be recognized in the budget when direct loans are made or federal loan guarantees are issued. Thus, the cost of loan defaults and interest subsidies must now be estimated and recorded on a present value basis when loans are made or loan guarantees are issued. The initial estimates must be adjusted, based on collection and risk experience, throughout the life of the loan or the loan guarantee. The FASAB, in its overview of federal accounting concepts and standards, makes these recommendations: • Direct loans disbursed and outstanding should be recognized as assets at the present value of their estimated net cash inflows. The difference between the outstanding principal of the loans and the present value of their net cash inflows should be recognized as a subsidy cost allowance. • For guaranteed loans outstanding, the present value of estimated net cash outflows of the loan guarantees should be recognized as a liability. Disclosure should be made of the face value of guaranteed loans outstanding and the amount guaranteed. • Upon foreclosure of direct or guaranteed loans, the acquired property should be recognized as an asset at the present value of its estimated future net cash flows. With few exceptions, the designated constituency for federal loan and loan guarantee programs are high-risk borrowers, with a fairly predictable and high default rate. Further, with few exceptions, the interest rates related to federal loan and loan guarantee programs are considerably below market interest rates. Thus, when the federal government borrows at the market interest rate and is repaid at a lesser rate, there is a built-in interest subsidy expense or cost, which, prior to the Federal Credit Reform Act, was not recognized by the federal government. Cash accounting failed to recognize the current status of loans receivable due to the government, the full extent of the government’s liability under guarantee programs, and the total cost of loan and loan guarantees that now must also include the inherent subsidy costs of these programs. The accountability throughout the period of the government’s risk was neither correct nor timely. One final note remains to be made regarding federal loans and loan guarantees: funds, principal repayments, and interest costs collected by an agency on outstanding loans are not available to the federal entity for making additional loans or operations, unless specific budget and expenditure authority has been given by Congress. Insurance claims. For all federal insurance and guarantee programs (except social insurance and loan guarantee programs), the FASAB, in its overview of federal accounting concepts and standards, recommends that federal entities recognize a

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liability for unpaid claims incurred resulting from insured events that have happened as of the reporting date, including insurance claims not yet reported. Printing. An example of an interagency transaction is the receipt of printing services from the General Services Administration or the Government Printing Office. An agency desiring such services should requisition services from the GSA or the GPO, and the requisition should be recognized as the incurrence of the obligation. If the printing services were received through the GSA, the GSA might render a billing—GSA schedule of withdrawals and credits—which is an order upon the Treasury to withdraw funds from the buying entity’s fund balance and credit the billed amount to the GSA. If services are provided by the GPO, an invoice could be forwarded to the benefiting entity. If the invoice is examined and found to be accurate, the approved invoice becomes the basis for liquidating any earlier obligation and recording the accrued expenditure. Payment might then be made to the GPO by listing the GPO invoice and pertinent data on a voucher and schedule of payments, to be forwarded to the Treasury for payment. Postage. Accounting for postage costs differs from accounting for printing costs. A federal entity might require that the obligation for postage be recorded monthly on the basis of the estimated billing received from the U.S. Postal Service (USPS). Adjustments for the costs of actual services rendered would be made at a later date. When an advance payment is required by the USPS for franked or penalty mail, the federal entity could record the amount of the advance payment as the obligated amount. This is more an accounting of convenience rather than sound theory, since postage costs are not often material and the transaction is among federal entities, probably minimizing any distortion in financial reporting. Telephone. The accounting for commercial telephone bills follows a pattern similar to that of accounting for postage. As individual federal entities incur costs for the base service or make long-distance calls, records of services provided are maintained by the GSA. Periodically (generally monthly), a billing is made to benefiting entities on which the GSA provides details of telephone-related services provided and the cost of services. Accounting Entries for Interagency Transactions The accounting for federal interentity and housekeeping transactions is generally similar to that for other expenditures of a government entity: • Obligations must be established as soon as known. • Expenditures must be accrued upon evidence of delivery of goods or performance of services. • Disbursements or transfers of funds from an entity’s appropriation balance must be promptly recorded. With respect to the disbursement or direct transfer of entity funds, controls are essential to ensure that an entity’s appropriation is not overobligated or overexpended because of its failure to recognize certain peculiarities of interagency transactions. Managers of individual federal entities must have controls in place to an-

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ticipate the GSA’s or the GPO’s direct billing to the Treasury. At times, the reduction in an entity’s Fund Balance with Treasury account (the buying agency’s “cash” account) is the first notice that an entity receives of a billing for services provided by these federal support entities. Interagency cash transactions. It is important to distinguish between the types of disbursements that can be made with respect to federal interagency transactions— cash disbursements or automatic and immediate transfers of funds to the agency providing the service. An interagency cash transaction would be identified by the necessity to prepare a voucher and schedule of payments requesting that the Treasury actually issue a check to another entity for services rendered. The general sequence of this accounting process would be comprised of entries similar to those that follow. Obligation of funds. For many types of services, an entity would execute an interagency letter of agreement setting forth the performance required, the period of performance, and the rate or amount of funds that will be required to pay for the services. Payment typically is then made by the benefiting entity to the performing entity. The performing entity generally is reimbursed for the services of its personnel or for the cost of services or goods that it may have contracted to perform for the benefiting entity. This entry is required in the budgetary accounts to reflect an interentity agreement: DEBIT: Allotments available for commitment/obligation CREDIT: Undelivered orders

This entry records the obligation of agency funds pursuant to the letter of agreement. The funds obligated should be equal to the anticipated, ultimate liability that will be owed to the performing agency. However, like other procurements, the transaction might be only partially or incrementally funded. Unless the level of funding is specifically mentioned in the letter of agreement, the performing agency has a reasonable basis for assuming that funds sufficient to cover the full scope of services have been obligated. An incrementally funded agreement should never be recorded by the buying entity without providing formal notification to the contractor entity. Interentity billings for services. In many instances, the first notification of the interagency services rendered might be the receipt of a voucher and schedule of withdrawals and credits, which is a payment schedule. However, the buying entity’s appropriation fund balance may have been reduced days earlier by a direct withdrawal charge. In this case, there is no need to prepare and submit the voucher and schedule of payments to the Treasury, an action that would be required if a check were to be issued to identified payees. If a letter of agreement exists, an earlier obligation entry would be recorded in the manner just mentioned. If an earlier obligation was not established, such an omission must be rectified and the available allotment account balance must be reduced by the amount of the obligation for services performed. In this latter condition, at the time the billing or credit notice was received, the entries would be

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Wiley Federal Accounting Handbook For budgetary accounts DEBIT: Undelivered orders CREDIT: Expended appropriation—Operating

For proprietary accounts DEBIT: Program/operating expenses—Reimbursable service CREDIT: Fund Balance with Treasury

The first entry reduces the available allotment balance and recognizes the accrued expenditures for services performed by the contractor entity. The second entry is necessary to record the costs of assistance and services furnished by contractor entity, as well as payment by transfer of funds pursuant to the schedules of withdrawals and credits. Advance funding of interagency transactions. Certain entities—for example, the GSA and the GPO—may have the funding to provide services and might then bill benefiting entities. Other federal entities could have no such authority or excess funding to finance the services provided. Their appropriations may be sufficient only to support their own programs. In the latter instance, the benefiting entity must advance funds to the performing entity. These advances are accounted for as appropriation transfers by the next entries, which would precede any of the entries above relating to service performed. DEBIT: Apportionments available for distribution CREDIT: Fund allocation—Other agencies (investment account)

This entry records the allocation of funds apportioned by the OMB to provide an advance of funds to another entity for services to be performed pursuant to the letter of agreement. If a cash advance was provided to the performing entity, an accounts receivable due for advanced funds would be shown. The disbursement of appropriated entity funds, relating to the allocation of apportioned funds to contractor agencies, must also be reflected in this way: DEBIT: Advances to other government agencies (receivable account) CREDIT: Fund Balance with Treasury

Performance of services. When services are performed, the contractor entity will bill for its costs, pursuant to the conditions outlined in the letter of agreement. A billing requiring settlement may be made by rendering the voucher for transfers between appropriations and/or funds to the customer agency. Upon receipt by the benefiting agency, the information on these documents is audited in much the same manner as an invoice received from a nongovernmental source is audited. The required entries are DEBIT: Undelivered orders CREDIT: Expended appropriation—Operating

plus: DEBIT: Program/operating expense—Reimbursable detail CREDIT: Accounts payable—Other government agencies

The first entry, a budgetary entry, liquidates the earlier obligation and recognizes the expenditures for services performed by the contractor entity. A parallel proprietary

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entry is then necessary to record the costs of services received or goods furnished by the contractor entity and reflect the liability due to that entity. Payment for services. In some instances, a cash payment will actually be made by the Treasury to settle the amounts owed between federal entities. The amount due is listed on a voucher and schedule of payments, which constitutes the formal request to the Treasury to issue a check to the identified payees. The cash payment entry would be DEBIT: Accounts payable—Other government agencies CREDIT: Fund Balance with Treasury

This entry records a cash payment of interagency services, which would be listed on the accompanying voucher and schedule of payments. If funds were advanced, these entries would be required by the customer entity when notified of services performed: DEBIT: Fund allocation—Other agencies (investment account) CREDIT: Expended appropriation—Operating

plus: DEBIT: Program/operating expense—Reimbursable detail CREDIT: Advances to other government agencies (receivable account)

The first entry, to the budgetary accounts, records the expenditures for services received pursuant to the letter of agreement and reduces the earlier allocation of funds. The second entry, to the proprietary accounts, records the cost of work performed by another agency and reduces the amount of the earlier advance to the contractor agency. The contractor entity receiving the advance would have an increase in its cash resources and a liability to the ordering agency until the advance is earned or liquidated. The contractor entity would be required to treat the advance allocation of funds in a manner similar to an appropriation or other restricted fund, which cannot be exceeded or used for other purposes. The cost of the services performed by the contractor entity would be subjected to the same accounting and other controls as exist for its own activities. Interagency transactions of the credit type. Another category of interagency transactions requires the simultaneous billing and payment of services provided by one entity to another. In this instance, the interagency billing system results in a withdrawal or credit of one entity’s funds for the benefit of the entity performing the services. These types of transactions can be identified by the existence of a withdrawal and credit form received from the performing entity. Examples of services billed and paid under the no-cash transfer of funds might include printing and telephone services received through the GSA. The risk to a customer entity is that there may not always be timely notification by the performing entity that the customer entity’s appropriation is being reduced for the amount of billed services. Further, with respect to interagency services, the practice requires that these billings be paid by the customer entity before it conducts a prepayment audit to determine that the billed services have been received in the stated quality and quantity.

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Under these conditions, it is possible that the customer entity did not anticipate the funding necessary to pay for these interagency services and, to that extent, the obligations of the customer agency are understated. Also, if services result in a higher-than-budgeted cost, the customer entity may have unknowingly committed to an overexpenditure of its appropriation equal to the difference between the budgeted amount and the amount ultimately billed by the performing entity. RECEIPTS, TRANSFERS, REIMBURSEMENTS, AND REFUNDS By the authority of Congress, certain federal entities have the responsibility for collecting receipts on behalf of the federal government, but may not have the authority to spend these receipts for their own operations. Other collecting entities may use a portion of collected receipts for financing their operations. In still other instances, the operations of entities could be financed by a level of funding for operations that is greater than the congressionally appropriated funds. The additional financing could result from the advance, allocation, or transfers of funds from other federal entities for which services must be performed. Reimbursements and refunds have the effect of reinstating or replenishing agency funds. That is, reimbursements and refunds become available for reobligation and expenditure, provided that a current appropriation continues to exist. However, agencies must be authorized by specific legislation to use receipts as appropriations available for agency expenditures. Receipts of an agency may be unavailable for expenditure by the collecting agency for several reasons: (1) Congress has provided no authorization or appropriation related to the receipts; (2) additional action may be required by Congress prior to funds being available for obligation and expenditure; or (3) the receipts have been earmarked or dedicated to activities other than those of the collecting agency. For example, taxes, penalties, and interest collected by the IRS and duties collected by the U.S. Customs and Border Protection constitute the predominant sources and amounts of receipts of the federal government. These receipts are generally not available for obligation and expenditure by these entities to support their operations, but must be deposited in the central Treasury accounts for governmentwide financing. The freedom of agencies to use receipts will vary by the congressional authorization of the entity’s activities. Receipts will also include proceeds from the sale of property, fees, rents, royalties, fines and penalties, interest, and gifts and donations. Definitions The terms “receipts,” “transfers,” “reimbursements,” “refunds,” and “revenues” have distinct, individual connotations in federal financial management and should not be viewed as interchangeable or synonymous. The definitions that follow, established by the GAO, are used by federal entities and the OMB for budgetary purposes. Receipts. Receipts are collections by government entities, including gifts and donations, which may or may not, depending on enabling legislation by Congress, be available for general or specific use by the collecting entity. If made available by

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Congress, receipts are immediately usable, in whole or part, as appropriations for the agency to expend without further congressional action. Exhibit 11.1 provides examples of receipts accounts. When collections by government agencies are either appropriated or made available for appropriation for specific purposes, the receipts are generally credited to special or trust fund accounts. Again, in some instances, receipts may be used for supporting fund or agency activities; but in each such instance, there must be prior existing legislation. Exhibit 11.1: Examples of Federal Receipts Accounts Receipts account Special and Trust Fund Accounts General Fund Receipt Accounts Special Fund Receipt and Appropriation Expenditure Trust Fund Receipt and Expenditure Fund Accounts Trust Revolving Accounts Deposit Fund Accounts

Revolving Fund Accounts Receipt Clearing Accounts

Purpose For recording only those receipts that are required to be deposited in the Treasury and that are available for appropriations, or equal amounts that will be appropriated for specific purposes For recording receipts not dedicated to specific purposes Separate receipt and appropriation expenditure accounts to record receipts and later disbursement equivalents; amounts are earmarked by law for specific purposes For recording receipts held in trust to carry out specific purposes and programs according to statute or agreement; generally consist of separate receipt and expenditure accounts For recording a trust fund balance when the trust’s corpus is dedicated to a business type of operation that uses combined receipt and expenditure accounts For recording receipts temporarily held in suspense pending payment for refund or payment to another government account, or for receipts held by custodian or trustee, pending payment at the direction of the depositor Authorized by law for recording transactions of a continuing cycle of operations; receipts available in entirety for use by the fund For recording general, special, or trust fund receipts, pending credit to applicable receipt accounts

SOURCE: U.S. Government Accountability Office, Manual for Guidance of Federal Agencies, Title 7, “Standardized Fiscal Procedures” (Washington, D.C.: GAO), May 2000.

Transfers. A transfer is the allocation of an appropriation, in whole or in part, pursuant to Section 601 of the Economy Act, between government entities. The OMB, in its Circular A-11, further defines a transfer between appropriation accounts as [a] transaction that, pursuant to law, withdraws budget authority or balances from one appropriation account for credit to another. Payments to other accounts for goods or services received or to be received are not transfers but rather are outlay transactions of the paying appropriation.

Thus, the OMB has defined a transfer appropriation account as a separate account established to receive and subsequently obligate and expend allocations from an appropriation of another organization; carry symbols identified with the original appropriation; and identify allocations that are neither outlays of the parent account, nor receipts in the transfer appropriation account. When funds are allocated to transfer appropriation accounts, the allocation transaction creates neither an expenditure, nor a reimbursement to the receiving entity. The effect of the transfer merely conveys authority to the receiving entity to obligate and expend the funds transferred for the purposes stated in the original ap-

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propriation. Ultimately, all assets or expenses must be reflected on the books of the parent entity from whose appropriation the transfer was made. This is referred to as the parent account. Reimbursements. Reimbursements are defined by the OMB, in its Circular A-11, as • Amounts earned for which payments are required to be credited to an appropriation or fund account for commodities, work, or services furnished to an individual, firm, corporation, state or local government, or another account of the federal government • Orders accepted from another account of the government for which an obligation is reportable by that account and the collection is creditable to an appropriation or fund, including amounts advanced or collected from the public that are not yet earned by the account or fund Reimbursements are not corrections or adjustments to earlier expenditures. Instead, a reimbursement is a restoration of the appropriation. Appropriation reimbursements do not automatically become available to the agency for reobligation or expenditure. Such funds must be apportioned anew by the OMB. Appropriation reimbursements to be realized may be estimated at the outset of the year and become available for obligation, expenditure, and disbursement. However, entities must monitor such practices closely since the entity is required to maintain its obligations below amounts realized or apportioned, whichever is lower. Overly optimistic estimates of reimbursements or a rate of obligation in excess of reimbursements from customer entities could force the appropriation of the supplying entity into a deficit position. Refunds. A reimbursement and a refund are not the same thing. The OMB, in Circular A-11, defines a refund as a recovery of excess payments credited to an appropriation or fund account. Refunds are not to be accounted for as reimbursements to appropriations or funds; rather, a refund is to be reflected in the accounts as a reduction of an earlier outlay. The OMB also provides that refunds could include credits to an appropriation or fund account resulting from accounting adjustments related to obligations or outlays where such procedures are permissible by laws or regulations. A refund is a collection by a federal entity of an amount paid in error or a recovery of an advance. Refunds must be accounted for as a reduction of an earlier disbursement and must be related to the earlier asset or expense transaction. A refund is viewed as a reinstatement of part of the entity’s appropriation balance and need not be reapportioned. Revenues. The FASAB’s recommended standards for accounting and reporting on revenues and other financing sources describe inflows of federal resources as being from revenues and other financing sources. Revenues are defined by the FASAB as inflows of resources that the federal government demands, earns, or receives by donation. Revenues are viewed as coming from two sources: (1) exchange transactions, and (2) nonexchange transactions.

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• Exchange revenues, or earned revenues, arise when a federal entity provides goods or services to the public or to another government entity for a price. • Nonexchange revenues arise primarily from the exercise of the government’s power to demand payments from the public (e.g., taxes, duties, fines, penalties) and include donations. This distinction in revenue types permits federal entities to report the net cost of operations and provides an accounting basis for reporting the unit cost of output measures for performance evaluations. The accounting for earned exchange revenues is comparable to the private sector’s accrual accounting for its earned revenues. Nonexchange revenues are recognized at the time a specifically identifiable, legally enforceable claim to cash or other assets is established and is accounted and reported on to the extent that (1) the collection is probable (i.e., more likely than not), and (2) the amount is measurable (i.e., reasonably estimable). Revenues, as defined by the FASAB, do not include all financing sources available to individual federal entities. In fact, most federal entities neither collect, nor earn revenues, exchange, nonexchange, or otherwise. For most federal entities, the primary or only financing source for operations is the appropriation or other budgetary authority annually or periodically approved by Congress. Federal Entities with Responsibilities for Receipts, Revenues, and Finances Congress, the central agencies (the Treasury, the OMB, and the GAO), and the individual federal operating entities have varying responsibilities for the collection, reporting, and accounting for the several types of funds and financings that might be available to a federal entity. Congress. The responsibility for all collections by any entity of the federal government must be prescribed by Congress. Additionally, the use of monies collected by individual federal entities must be in accordance with appropriations and other legislation of Congress. By authority under the Constitution, which states that no money can be drawn from the Treasury except pursuant to an appropriation made by law, Congress sets the overall policy governing receipts and subsequent use of funds collected by government agencies. This includes the authorization of interentity financial transactions. For example, by Section 601 of the Economy Act, Congress has authorized reimbursements to be made between appropriations of two or more agencies, thus increasing the efficiency of accounting for interagency transactions. Department of the Treasury. As a part of its central accounting responsibilities, the Treasury issues regulations and guidance to federal entities to account for collections made on behalf of the government. By law, the Treasury must issue documents, referred to as warrants, which establish the amount of money agencies are authorized to withdraw by entities from the central accounts of the Treasury. The Treasury has prescribed receipts, appropriations, and other fund account symbols and has defined groups of receipts by federal fund type, including several subsidiary receipt classifications. The total number of federal receipt accounts ex-

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ceeds 1,000 government-wide, but the principal classifications of receipts are grouped under these fund categories. Federal funds. This group is comprised of all of the expenditures, receipts, and fund accounts that are not designated by law as trust funds: • General fund expenditure accounts (0000–3899) primarily record appropriations and expenditures of general fund receipts. • General fund receipt accounts (0000–3800) record collections not earmarked by laws for a specific purpose, such as income and corporate taxes, customs duties, and miscellaneous receipts. • Special fund expenditure accounts (5000–5999) record appropriations and expenditures of special fund receipts. • Special fund receipt accounts (5000–5999) record collections that are earmarked by law for a specific purpose and are not designated as trust fund receipts, such as the Land and Water Conservation Fund. • Public enterprise revolving fund accounts (4000–4999) record the permanent appropriations and expenditures of collections, primarily from outside of the federal government, that are earmarked to finance a continuing cycle of business-type operations. • Intragovernmental revolving fund accounts (4500–4999) record the permanent appropriations and expenditures of collections, primarily from other agencies and accounts, that are earmarked to finance a continuing cycle of businesstype operations, such as working capital funds, industrial funds, stock funds, and supply funds. • Management fund accounts (3900–3999) record the permanent appropriations and expenditures of collections from two or more appropriations to carry out a common purpose or project not involving a continuing cycle of business-type operations. These accounts facilitate the administration and accounting for intragovernmental activities. Trust funds. This group is comprised of all of the expenditures, receipts, and fund accounts that are designated by law as trust funds. • Trust fund expenditure accounts (8000–8399 and 8500–8999) record appropriations and expenditures of trust fund receipts. • Trust fund receipt accounts (8000–8999) record receipts earmarked for specific purposes in accordance with a statute that designates the funds as a trust fund, such as the Highway Trust Fund. • Trust fund revolving accounts (8400–8499) record the permanent appropriation and expenditure of collections used to carry out a cycle of business-type operations in accordance with a statute that designates the fund as a trust fund, such as the Employees Health Benefits Fund. In addition to classifying receipts by type of fund, the Treasury has also classified them according to the nature and sources of receipts. These categories are not mutually exclusive, and all are used in practice. Categories referred to by the nature of the receipt will include

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• Governmental receipts result from the sovereign rights of government to levy and collect various taxes and duties. • Proprietary receipts result from the businesslike operations of agencies, such as sales of publications or licenses, or the charging of fees. • Intrabudgetary receipts of various classes result from activity between federal accounts or agencies. Categories referred to by sources of receipts include (1) internal revenue receipts, (2) alcohol and tobacco taxes, (3) custom receipts, and (4) miscellaneous receipts. The internal revenue receipts, alcohol and tobacco taxes, and customs duties are collected by organizations of the Treasury. Miscellaneous receipts are often collected by the federal entity most closely associated with the revenue or services performed. Office of Management and Budget. The OMB is legally and administratively responsible for the review and monitoring of receipts and expenditures of the federal government. The OMB takes a particular interest in the collections of the government and the allocation of budgetary authority among government agencies. Close control is maintained throughout the apportionment process since receipts, transfers, and reimbursements do not automatically become financing resources that a collecting entity may use to fund its activities and programs. In Circular A-11, the OMB provides guidelines to agencies concerning the collection, accounting, and reporting of cash receipts. Procedures and Controls for Receipts, Transfers, Reimbursements, and Refunds The responsibilities of each federal operating entity to establish and maintain an adequate system of accounting and internal controls apply equally to expenditures, collections, and other sources of funding that may become available or be collected by an agency. Collections by agencies are subject to the same congressional authorization and appropriation approval requirements, as well as the same OMB apportionment requirements, that apply to other types of funds and budgetary authority. The purpose of internal controls is to ensure that funds, property, assets, and other resources of an entity are properly used and safeguarded to prohibit waste, destruction, misuse, or misappropriation. Like other types of financial transactions, those related to receipts, transfers, reimbursements, and refunds (although some of these transactions are internal to the federal government) require perpetual diligence to ensure that financial management is consistent with applicable laws and governmental regulations. Controls. Receipt controls. Federal entities with collection responsibilities must establish and maintain internal controls to identify conditions that require the collection of revenues, monitoring of collections, and continual assessment of the reasonableness of rates and fees charged.

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Generally, these procedures will be designed to include controls and checks on practices, such as • Periodic monitoring of the nature of services, commodities, or property being provided to the public to determine whether a special benefit for which a charge would be appropriate is being conferred upon recipients • Determination of the charge, rate, fee, or other price to be levied for the services, commodities, or property being furnished • Continual monitoring of the charge to ensure that it is reasonable in relation to the benefits received • Prevention of the delivery of services and goods without charge or for a charge below cost • Verification that billings are rendered on time and to all users or recipients of the services or goods • Provision of an internal check on adherence to prescribed policies and procedures and for possible detection of any irregular practices • Segregation of the warehousing or storing function from the billing and collection functions, although the procedures of each should be designed to form a system of checks and balances over the entire operation • Use of prenumbered, serially controlled forms, with accountability for the entire sequence of forms used for the various functions • Assurance of timely collection, accurate recording, and immediate deposit of all monies • Periodic verification of sales to collections to any physical inventories • Monitoring of billing and accounts receivable functions The control procedures will necessarily vary depending on the reasons for which collections are being made. The conditions surrounding these collections will dictate the types of controls needed. For example, revenues may originate from sales of commodities and property, fees for services, rents, royalties, fines, penalties, and interest. Transfers controls. The controls relating to transfers of appropriations do not have to be as stringent as those related to receipts, since transfers are transactions wholly within the federal government. With respect to transfers, the benefiting entity is liable for monitoring the available budget authority and meeting other legal and fiscal requirements. The entity responsible for the parent or paying account or appropriation is responsible for providing the overall reporting of the stewardship, including the reporting required of the entity to whom funds were transferred. Reimbursement controls. Reimbursements to appropriation accounts must be closely monitored. Should one agency pay from its appropriation for services performed for another agency, the failure to obtain a reimbursement to its appropriation for the services performed could constitute a diversion of its appropriated funds for the benefit of another agency. Such a transaction, without the approval of Congress or apportionment by the OMB, is illegal. Further, although the performing agency may incur obligations on the basis of anticipated reimbursements, the agency is liable for any obligation in excess of the actual reimbursements realized. While

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reimbursement transactions are internal to the federal government, procedures should nevertheless be established to include controls or checks. Reimbursement transactions must be monitored in much the same manner as other contractual arrangements of a federal entity. The receiving or benefiting entity may modify its intention with a resultant change in its rate of reimbursement to the performing agency; such a change could put the performing agency at risk unless its rate of obligation and expenditure can also be modified accordingly. Refund controls. Refunds represent recoveries of payments made in error or of advances made to various parties. Although the applicable controls relate to the expenditure transaction itself, the accounting for refunds as such must still be carefully monitored. Unless the earlier expenditure is reduced, the reobligation and expenditure of the refunded amounts will be reflected in the account as duplicated transactions, possibly giving the appearance of an overobligation or an overexpenditure violation if the total exceeds the amount of the original appropriation account. Accounting forms. The accounting for receipts among federal entities varies by types of receipts. Although procedures and some standard forms exist to account for transfers and reimbursements to entity appropriations, the underlying conditions for such transactions must be set forth in specific legislation and must be subjected to review and approval by the OMB. These conditions would then dictate the specific form and process to be followed. Receipts and revenues. Federal monies are collected through diverse processes, each established for the type of receipt and revenue being sought. For example, collections under internal revenue laws are based on tax returns (for income taxes, estate taxes, admissions taxes) filed by taxpayers or through the sale of stamps. Receipts are deposited by collection officers with Federal Reserve Banks or, in general, designated depositories for the account of the United States. (Typically, commercial banks are the designated depositories for the Federal Reserve System.) In the cases of income and Social Security taxes on wages, the withheld amounts are deposited by employers with depositories for the Treasury’s account. The depositories credit the Treasury’s tax and loan account and report collections to the Federal Reserve Bank. For the most part, each type of revenue has its own prescribed set of forms and processing procedures. Miscellaneous receipts—miscellaneous taxes, fees for permits and licenses, proceeds from sales of property, rents, royalties, gifts, and contributions—are collected by the federal entity most closely associated with the source of revenue. Collections must be delivered in a timely manner to a designated depository for the credit of the Treasury. Trust receipts, like miscellaneous receipts, could be collected by several federal entities. Transfers. When a federal entity receives an allocation or appropriation transfer from another entity, the reporting for such budgetary authority is much the same as that which would exist for appropriations received directly from Congress. The forms to document the operating transactions related to an appropriation transfer are the same as those used for the expenditures described in earlier chapters. Although the performing or receiving agency must maintain the records required for obligations, accruing expenses, and disbursements, the final accounting for assets acquired

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or expenses incurred is reflected on the books of the transferring agency, otherwise known as the parent account or appropriation. Reimbursements. Collections that constitute reimbursements to appropriations are generally documented in compliance with an entity’s existing system of controls. The forms must include a record for listing and summarizing collections; deposit slips; statements of transactions; reports to and from the Treasury or its designated depository; and reports to the OMB. Note that reimbursements to an appropriation do not become available automatically for reobligation and expenditure by the collecting agency, but must be subjected to the OMB’s apportionment process like any other budgetary or appropriation authority. Refunds. Refunds are collections or adjustments for errors or other circumstances and are typically shown as an offset or reduction to the earlier related expenditure. The refund could take the form of a personal check (in the case of an individual), a credit on an invoice to the government, or some other form of reduction of cost to the government. The forms that document a refund are not standard. Accounting Entries for Receipts, Transfers, Reimbursements, Refunds, and Revenues Receipts. As mentioned earlier, the significant receipts of the government are collected by organizations within the Treasury—the Internal Revenue Service, the Bureau of Alcohol, Tobacco, and Firearms, and the U.S. Customs and Border Protection (within the Department of Homeland Security). Each of these organizations has prescribed forms for recording collections, making deposits, and summarizing and reporting transactions related to the receipts on a monthly, quarterly, and annual basis. For the most part, other government entities have their operations financed through expenditure appropriations. However, if authorized in law by Congress, an entity may have additional reobligational authority resulting from such sources as appropriation reimbursements, transfers, and appropriation refunds. Available receipts. Generally, the collected receipts of most federal entities that are available for obligation relate to specific purposes previously identified by Congress. Although collections might be available for operations, these receipts would still be subject to the apportionment process of the OMB. If the receipts are deemed available for operations, an entity may obligate and expend for authorized purposes. The accounting for an available receipt would require that the entity establish an estimate of the receipt with a corresponding anticipated increase in the investment accounts of the entity. The entry in the budgetary accounts for such a transaction might be DEBIT: Estimated appropriation receipts (receivable) CREDIT: Authority available for apportionment

Like estimated appropriation reimbursements, estimated receipts are not considered realized until actually collected. The rate of obligations and expenditures must therefore be monitored closely to ensure that these transactions do not exceed

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the amounts appropriated or apportioned. When collections occur, the entry in the budgetary accounts would be similar to DEBIT: Fund Balance with Treasury CREDIT: Estimated appropriation receipts (receivable)

A separate account should be maintained for receipts estimated to be realized during the current year; unrealized balances should be reversed at the close of the fiscal year. The availability of estimated receipts must be determined anew for each fiscal year. When the receipts are available to an entity for its operations as collected, the detailed accounting for obligation, expenditure, and disbursement accounting would be the same as that performed for all other types of transactions. Unavailable receipts. Unavailable receipts, at the time of collection, are those receipts that are not available to the collecting entity for obligation or expenditure. Congressional action is required before an entity can use the collected receipts for operations. If the receipts are unavailable, generally Congress has imposed limitations on the use of funds. Until appropriated or apportioned by Congress, the collected receipts may not be used by the agency. The entry in the budgetary accounts for estimated unavailable receipts might be DEBIT: Estimated appropriation receipts CREDIT: Unappropriated funds

The preceding entry records the estimate of receipts and the fact that such funds, if collected, are not yet appropriated. In other words, the funds are not available to the collecting entity for further new obligation or expenditure. Collections that do occur could be reflected by this entry: DEBIT: Fund Balance with Treasury CREDIT: Estimated appropriation receipts

If Congress were to provide an appropriation permitting the collecting federal entity to obligate and expend the collected receipts, that event could be accounted for as DEBIT: Unappropriated funds CREDIT: Authority available for apportionment

This entry supports the availability of an appropriation; however, the funds have yet to be apportioned by the OMB, so the collecting entity may not incur obligations against this appropriation. At the end of the fiscal period, the continued availability of the collected receipts would be dependent on the conditions in the appropriation law. Transfers. The accounting for an appropriation transfer can best be understood by comparing the accountings of both the transferring and the receiving agency. Exhibit 11.2 highlights the entries that would be made by the individual entities.

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For receiving agency DR

To Record Transfer Unallotted apportionments Appropriation allocated to other agencies Advances to other agencies Fund Balance with Treasury

CR Fund Balance with Treasury Advances from others

x

x

x Appropriations allocated by others Unallotted apportionments

To Record Obligation (None) To Record Cost of Work Performed (None) To Liquidate Obligation (None) To Record Payment of Liabilities (None)

*

x

x

To Record OMB Apportionment (None)

To Record Expenditures and Reimbursement Appropriation allocated to others Expended appropriation— * Operating or capital

CR

x

To Record Budget Authority (None)

To Record Cost of Work Reported by Others Expenses of assets Advances to other agencies

DR

x x

x x

x x

Unallotted apportionments Unobligated allotments

x

Unobligated allotments Unliquidated obligations

x

Work in process—Others Accounts payable

x

Unliquidated obligations Expended appropriations— Operating

x

Accounts payable Fund Balance with Treasury

x

Advances from others Work in process—Others

x

Invested capital Appropriation allocated by others

x

x x

x x

x

x

x

Closed out to invested capital account at end of fiscal period.

As outlined earlier in this chapter, the document to support interentity transactions, including the initial transfer of appropriated funds, is often a letter of agreement setting out particulars to be met by the contractor agency. The detailed accounting is performed on the books of the contractor agency, although the ultimate asset or expense is shown against the parent (or customer’s) appropriation on the books of the benefiting agency. Payments or funds transfers may be supported by the submission of invoices or, if two government agencies are involved, by the transmittal of withdrawal and credit

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notices. At the end of an accounting period, appropriate accrual adjustments should be made for work performed but not shipped or reported to the parent agency at that time. The accrual entries are necessary to reflect the proper status of completion on the records of the transferring and the receiving agency. Appropriation reimbursements. The collections comprised of appropriation reimbursements from the sale of services or goods are generally credited to an appropriation account. At the beginning of the fiscal period, the OMB will require the agency to prepare and formally account for the estimated appropriation reimbursements that are to be available for obligation and expenditure. The estimated appropriation reimbursements are considered realized when the services or goods have been furnished. When collections are made, the funds are credited to the appropriation financing the cost of the services or goods delivered. Reimbursements may be received from either government or nongovernment sources, or both, and must be segregated in the accounting records. To record the estimated appropriations, the parent entity (or customer) must establish an asset account, thus recognizing the additional unapportioned appropriation authority, for example DEBIT: Estimated appropriation reimbursements (an asset) CREDIT: Authority available for apportionment Purpose: To record the estimated reimbursements and the related unapportioned appropriation or budget authority

An entity must closely monitor actual reimbursements to be sure to maintain the level of actual obligations below either the amount collected or the amount apportioned, whichever is lower. As sales are made, the estimated reimbursements are adjusted in the budgetary accounts to reflect the actual reimbursements that could be collected, for example DEBIT: Reimbursements to appropriations (an investment account) CREDIT: Estimated appropriations reimbursements Purpose: To recognize reimbursements realized through sales and to adjust earlier estimates

Additionally, the companion entry that follows would be required to the proprietary accounts to reflect the revenue from the sale. As billings are made for the services rendered or goods provided, and funds are collected to reimburse the agency, the appropriate entry would be DEBIT: Accounts receivable CREDIT: Revenues Purpose: To record the accounts receivable due from billings made for services or goods delivered and the related revenues realized from sale

The actual collections would be recorded in the same manner as other cash receipts. DEBIT: Fund Balance with Treasury CREDIT: Accounts receivable Purpose: To record collection of cash and reduction of accounts receivable due to the agency

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The collections would be formally recorded and reported to the Treasury and deposits made with the designated depository. The realized reimbursements, which must ultimately be transferred to the appropriation realized account, must be reflected in the reporting to the OMB. Refunds. A refund is either a collection of an amount paid in error or the recovery of an advance. Entries are made to reflect the amount to be refunded for the error, the adjustment to the unobligated allotment balance of the agency, and the receipt of cash or other credit. These transactions are highlighted in the paragraphs that follow. To reflect the amount due and to reduce the expense or asset account earlier charged in error, the entry would be DEBIT: Accounts receivable—Appropriation refund due CREDIT: Program/operating expenses—Reimbursable Purpose: To record receivables due for erroneous payment and to reduce the amounts recorded in either the expense or asset accounts

Because monies have been refunded, the benefiting agency must also increase or restore the amount available for commitment or obligation. In this instance, the entry would be DEBIT: Expended appropriation—Operating (or capital) CREDIT: Allotments available for commitment/obligation Purpose: To reduce amounts erroneously accrued for expenditures and to restore the refunded amounts to the unobligated allotment balance

Neither of these entries reflects the actual receipt of monies due for the refund. That entry would be recorded in this manner: DEBIT: Fund Balance with Treasury CREDIT: Accounts receivable—Appropriation refund due Purpose: To record cash refund and eliminate accounts receivable due from another agency for refund

Exchange revenues. Revenues from exchange transactions must be recognized when goods or services are provided. The accounting recognition of exchange revenues might vary for specific transactions. Exchange revenues, if available for the entity’s operations, should be recognized in determining the net cost of an entity’s operations. However, an accounting and reporting of exchange revenues must be made regardless of whether the entity retains the exchange revenues for its own use or transfers the revenues to other entities. When collections are permitted to be retained by an entity as a reimbursement of the cost of collection, the collecting entity would recognize the receipts as an exchange revenue to be deducted in determining the collecting entity’s net cost of operations. Nonexchange revenues. Nonexchange revenues are inflows of resources that the federal government demands or receives by donation. The FASAB recommends that nonexchange revenues be accounted for and reported (1) when the revenues are specifically identifiable; (2) when a legally enforceable claim to the resources arises; (3) to the extent that collection is probable (i.e., more likely than not); and (4) when the amount is reasonably estimable.

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The FASAB notes that nonexchange revenues should be measured by the collecting entity, but the nonexchange should be recognized only by entities legally entitled to the revenues. For example, taxes and duties are to be measured on a cash receipts basis, but the cash receipts should be reported in conjunction with accrual amounts recognized. (In contrast, amounts payable for refunds should be recognized when measurable and legally payable under established processes of the collecting entities.) With respect to federally imposed fines and penalties, the measurement and recognition of such an item will depend on the nature of the fine and the administrative processes. Conditions that could establish a legally enforceable and measurable claim for fines and penalties include (1) the date by which an individual may contest a court summons expires; (2) the offender pays the fine before a court date; or (3) the court imposes the fine.

12

ASSETS, LIABILITIES, AND NET ENTITY POSITION

The placement of this discussion of accounting for an entity’s assets, liabilities, and net position does not mean that it is less important to account for them than for various expenditures and receipts—although that is probably in the perspective of federal financial executives and managers. Discussions overheard at the federal entity level could lead one to think that the cash balance and the rate of obligation and expenditures are the only accounting and reporting concerns. By law, however, federal entities must properly reflect the application or consumption of assets, fairly 1 present program liabilities, and show the cumulative investment of the government. Unlike the accounting and reporting in the private sector, the segregation of a federal entity’s assets and liabilities by current and long term, as an assessment of solvency, is of minimal reporting significance. More important to the federal government is the distinction between entity and nonentity assets and liabilities and, in the case of liabilities, the separate reporting of those funded and unfunded. In governmental accounting, the concern with liabilities has historically been connected with the government’s unrecorded liabilities, particularly contingent liabilities. The term “net entity position” represents the cumulative investment of public monies in the operations of the various federal entities—essentially, the residual amounts of assets minus liabilities. Before 1990, this accounting and reporting went hand-in-hand with congressional appropriations or approved budgetary authority. Today, a periodic reporting of net entity position must be made not only for individual appropriations (as in the past), but also for each federal entity (for the cumulative balance of all appropriations entrusted to it) and for the federal government as a whole (primarily the responsibility of the Treasury and the Office of Management and Budget). FEDERAL ENTITIES WITH RELEVANT ACCOUNTING RESPONSIBILITIES As mentioned in previous chapters, several organizations, in addition to the operating entity itself, have responsibilities for assets acquired with governmental funds. Key examples are Congress, the OMB, the Treasury, the Government Accountability Office, and the scores of individual federal operating entities. 1

The descriptions of accounting standards and reporting practices in this chapter for a governmental entity’s assets, liabilities, and net equity position are illustrative and not intended to be all-inclusive. For a more detailed description, readers must consult the several separate accounting and reporting standards published by the Federal Accounting Standards Advisory Board and promulgated by the OMB. Separate FASAB standards, with extensive discussion and research data, exist for selected assets and liabilities; inventory and related property, plant, and equipment; direct loans and loan guarantees; and so forth.

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Congress By several laws, Congress has set accounting and financial reporting policy and mandated the installation of systems of controls and internal checks with respect to the acquisition, accounting, and safeguarding of assets, and the incurrence and settlement of governmental liabilities. The promulgations of entities such as the OMB, the Treasury, the GAO, and the Federal Accounting Standards Advisory Board are explanatory guidance and implementing regulations; they cannot supplant any law of Congress. In the same laws that delegate authority and responsibility for federal accounting and financial reporting to these central agencies, Congress requires the heads of the individual entities to establish systems of accounting, reporting, and controls for their respective operations so that they may properly acquire, manage, preserve, and protect all resources that involve the federal government’s money. Office of Management and Budget The legal responsibilities of the OMB require that all federal entities continually account for and report to it the resources consumed or possessed. Guidance for the accounting and reporting of fund assets, liabilities, obligations, property, and other assets under the stewardship of an individual federal entity have been detailed in several OMB publications. A partial listing of the more commonly cited includes • OMB Circular A-11, Preparation, Submission, and Execution of the Budget • OMB Circular A-34, Instructions on Budget Execution • OMB Circular A-102, Grants and Cooperative Agreements with State and Local Governments • OMB Circular A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations • OMB Circular A-123, Management’s Responsibility for Internal Control • OMB Circular A-127, Financial Management Systems • OMB Circular A-134, Financial Accounting Principles and Standards • OMB Bulletin 01-09, Form and Content of Agency Financial Statements These statutory and other requirements are supplemented by numerous executive orders issued by the President requiring the OMB to exercise additional authority and assume responsibilities with respect to the overall accounting for the assets of the government. Government Accountability Office The GAO, under several of the same laws, has been given responsibility by Congress with respect to certain accounting, financial reporting, and auditing policies, procedures, and practices. A major responsibility of the GAO is to oversee activities of federal entities and to assess the quality of their stewardship and management of government assets or properties. Guidance by the GAO has related to the accounting for, management of, and reporting on the expenditures and resources of the federal government. Over the years, a principal promulgation of the GAO was its Policy and Procedures Manual for

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Guidance of Federal Agencies. Numerous other GAO publications exist in the areas of auditing governmental assets and properties; detecting fraud; systems of internal controls; legal decisions relating to the appropriateness of disbursements of agency funds; procedures and criteria for claims settlement and debt collection; records management; and accounting for the assets of an agency. Department of the Treasury The Treasury has been legally vested with the responsibility for estimating funding needs and the receiving, keeping, and disbursing of funds to meet these needs. The Treasury has also issued guidelines to operating entities prescribing the uniform reporting of the funds available to them for obligation and expenditure. Additionally, the Treasury manages the establishment and use of imprest and cashier’s funds throughout the government and has imposed detailed reporting procedures affecting the balances with the Treasury, which are required of every entity in the federal government. A principal Treasury regulation is the Treasury Fiscal Requirement Manual, which contains procedures, imposed on all federal entities, relating to fiscal matters such as central accounting requirements, disbursing procedures, accounting for advances, and other requirements. More recently, the Treasury has been responsible for the custody and currency of the federal government’s Standard General Ledger, which individual entities are required to implement at the transaction level. Federal Accounting Standards Advisory Board The FASAB was established in 1990 pursuant to a joint agreement between the Secretary of the Treasury, the Director of the OMB, and the Comptroller General of the United States to develop accounting and financial reporting standards that address the uniqueness of the federal government. These standards were to demonstrate accountability and provide useful information to internal and external users of federal financial reports and to help internal users of financial information improve the federal government’s management. Laws of Congress and the implementation regulations of the OMB and the Treasury require compliance with the FASAB’s standards. Individual Entities The head of each federal entity is legally responsible for establishing and maintaining a system of accounting and controls adequate to safeguard government assets against waste, loss, or improper or unwarranted use. The operating agency must implement, incorporate, and comply with the accounting and reporting and control systems prescribed by Congress and the previously mentioned central agencies.

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ASSETS Controls and Procedures for Assets The head of each federal operating entity is responsible for establishing and maintaining control systems related to the accounting and safeguarding of assets and to the timely payment of the government’s debts. As noted in earlier chapters, the recommended controls of federal entities are similar to those exercised by concerned and responsible managers in the private sector. Cash. In its Title 2, Accounting Principles and Standards for Federal Agencies, the GAO has prescribed several procedures related to accounting for and controlling the cash resources of federal entities: • The accounting for cash receipts, disbursements, and balances on hand shall be complete, accurate, and honest, and, in many instances, will be performed by bonded federal personnel. • Receipts must be deposited promptly and recorded immediately after they are received and not deferred until transmission to a depository or until they have been audited. • Disbursements shall be promptly recorded on the basis of paid vouchers or other methods of settlement, such as an interentity withdrawal and transfer of funds. • Cash transactions shall be closed monthly, with a prompt reporting of transactions consummated (to include the cash transactions consummated in that reporting period only). • Separate cash accounts shall be maintained for major categories of cash resources (e.g., cash on deposit in banks, Fund Balance with Treasury, imprest funds, etc.), with subdivisions provided to facilitate the monitoring of restrictions on availability and reporting. • Cash resources must be handled in strict accordance with requirements of the law, executive orders, central agencies’ guidance, and other requirements. • Responsibilities for handling, accounting, reporting, disbursing, and other cash resource–related activities shall be divided among several officials and employees. • Each agency must establish an effective prepayment audit and voucher approval system (sampling techniques may be used under certain conditions) as a prerequisite to the disbursement of agency funds. • Controls must exist to prevent duplicate payments. • Internal, independent audit reviews shall be made of controls relating to cash resources. Receivables. An integral part of an accrual system is the timely and accurate accounting, recording, and reporting of receivables. The GAO, in Title 2, has stated that receivables accounting is an important form of control over agency resources and must include a systematic record of accounting for and reporting amounts due the government. The GAO-recommended controls relating to receivables require that

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• Receivables must be recorded accurately and promptly on completion of acts entitling an agency to collect amounts owed to it. • Recorded receivables shall consist of amounts actually due under contractual or other arrangements that govern transactions resulting in the receivables due to the government. • Separate accounts must be maintained for major categories of receivables to facilitate clear and full disclosure. • Loans and advances to others shall be accounted for as receivables only after funds have been disbursed; approved but undisbursed loans should not be reported concurrently as assets with related liabilities. • Regular, periodic estimates must be made of amounts that may not be collectible; these estimates must be recorded separately in the accounts and closely monitored. • Receivables collectible in foreign currency that are not freely convertible into U.S. currency are subject to the same reporting standards as restricted foreign currency. Inventories. Several laws require federal operating entities to establish and maintain inventory controls and accountability systems. By law, entity heads are directed to have an accounting system that contains adequate property accounting records. Property accounting procedures must provide both financial and quantitative information about these assets. The property control procedures and concerns identified by the GAO include • All acquisitions (by purchase, transfer, donation, or other means) must be recorded on the date that custody is obtained. • The accounting and reporting of inventories must recognize the assets’ use, application, consumption (through expensing for supplies and materials), and disposal. • Records of physical assets must identify costs, quantities, and condition of the property by location, use, and all transfers and disposals. • Periodic confirmation of inventory by physical verification must be made to confirm quantities, weight, quality, and controls, with differences between the records and physical verifications being investigated and the variances recorded in the accounts. Fixed assets. GSA fixed asset responsibilities. The General Services Administration, established by the Federal Property and Administrative Act of 1949, exercises government-wide responsibilities relating to fixed assets, property management, and the procurement of these resources. Among the several GSA responsibilities affecting or relating to the accounting for properties by an operating agency are • Planning, acquisition, custody, and leasing of space, facilities, buildings, furnishings, and equipment • Design, construction, alteration, remodeling, repair, and general preservation of government assets • Inventory management, including agency supply operations

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• Management, operation, and use of federal data processing centers providing services to other departments and agencies • Promotion and coordination of the purchase, lease, maintenance, operation, and use of computers and related equipment Many of the GSA’s operations are financed by direct congressional appropriations. Advances from and user charges to customers operating government agencies; rental proceeds; and sales to other agencies are further methods of interentity payments for assets acquired by the GSA for federal entities. Entity responsibilities. Under various laws, the individual federal entity must establish, implement, and maintain those policies, procedures, and practices to account for and safeguard the fixed assets for which it is responsible. The designed controls must be adequate to assure management that • Only needed property is acquired in the quantity, of the quality, and for the price that is most advantageous to the government. • Physical property records are maintained for all acquired property, whether it is obtained by purchase, construction, transfer, donation, or in other ways; asset records should show cost or value, quantity, quality, condition, and location of property. • Accounting records are established and kept current to show the cost of acquisition, use, application or consumption, or ultimate disposal of all property. • Periodic checks, inventory, or other confirmation should be made of properties, and a comparison for consistency is to be made between the physical and the financial accounting records. • Accounting for additions, betterments, repair, and maintenance must be consistent with government-wide and individual entity policies. • Property in possession of contractors and grantees (e.g., government furnished property and equipment) of a federal entity should be regularly reported and physically verified periodically to ensure its continued existence, condition, and proper use. • Sufficient subsidiary financial accounts exist to permit the ready identification of fixed assets, which are in turn supported by subsidiary ledgers and property records providing detailed information for asset categories and groups of items within a category. Often the subsidiary fixed asset and property records will contain such detailed identifying information as • Description or code number, part number • Identification or code number • Source/method by or from which acquired • Purchase price or other value • Date acquired • Present location • Current condition/quality • Responsible organization or custodian • Date of inventory • Information on betterment or improvements

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• • • • •

261

Data on needed but deferred maintenance Information to permit computation of depreciation Estimates of residual values Quantity, periodically verified Quality, periodically verified

Accounting Entries for Assets With respect to the federal government, the FASAB has defined assets as tangible or intangible items owned by the federal government that would have probable 2 economic benefits that can be obtained or controlled by the federal entity. These assets include cash; Fund Balances with Treasury; investments; and real and personal properties, as well as claims of the federal entity against nonfederal entities or parties (e.g., accounts receivable, interest receivable) and amounts due from advances or prepayments to these nonfederal entities or parties. With some exceptions, assets are to be initially recorded at purchased costs or donated values. Cash-type resources. Congress appropriates funds for agencies to operate programs in the manner outlined in authorization and appropriation legislation. For most federal entities, the appropriated funds comprise the entity’s total financial resources. Few federal entities are required or even permitted to handle significant amounts of cash, although most entities do have imprest funds requiring close control. Imprest funds. Imprest funds (at times inaccurately referred to as petty cash funds) are used by entities to provide cash to expeditiously meet smaller, incidental expenditure needs. Typical imprest fund transactions include reimbursements to employees for taxi fares, nominal travel advances, purchase of office supplies, and other minor expenses. The cash corpus of an imprest fund, which is advanced from the Treasury, must be periodically accounted for to the entity. As cash is disbursed from an imprest fund, entries must be made in the entity’s records for both the cash expenditure and the reimbursement to the imprest fund. The reimbursement payment returns the imprest fund balance to the original amount of the funds advanced by the Treasury. (Should the imprest fund be dissolved, the full corpus, as an advance from the Treasury, must be returned to the Treasury.) It is important to note that imprest fund cashiers, while employed by the federal entity, act as agents of the Treasury and must comply with the Treasury’s requirements. The accounting for receipt of the fund corpus and the replenishment of expended amounts would be done in this manner: DEBIT: Imprest fund—cash CREDIT: Imprest fund advance (liability account—owed to the Treasury Purpose: To record the advance of funds from the Treasury and establish the imprest fund

2

Federal Accounting Standards Advisory Board, FASAB Original Statements, Volume I, Consolidated Glossary, March 1997.

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With the preceding replenishment entry, a disbursement has been made from the entity’s appropriated fund balance. At this point, no adjustment has been made to those budgetary accounts. The additional required entry would be: DEBIT: Allotments available for commitment/obligation CREDIT: Expended Appropriation—Operating Purpose: To reduce the available allotments for imprest cash disbursed for supplies and materials

This entry is necessary because no obligation had been previously recorded. In effect, the obligation, the liquidation of the obligation, and the accrual of the expenditure are simultaneous events at the time the imprest fund is replenished. Fund Balance with Treasury. The Fund Balance with Treasury is an asset account of individual federal entities representing the entity’s claim to congressionally approved federal resources. From a government-wide perspective, this account is not an asset but merely reflects the congressional commitment to make spending resources available to a federal entity. In the federal government, the Fund Balance with Treasury account operates much like a corporate cash account. In fact, federal executives will refer to this balance as the “cash” account or “cash in bank.” Both references are misnomers. Few federal entities truly have cash accounts, and even fewer have the cash in a bank. The Fund Balance with Treasury account represents the undisbursed balance of an agency’s appropriation, which is in possession of the Treasury. The FASAB notes that the entity’s Fund Balance with Treasury is the aggregate amount of funds in the entity’s accounts with the Treasury, for which the entity is authorized to make expenditures and pay liabilities. The balance of this account is increased by appropriations and other budgetary resources; it is reduced by disbursements and transfers to other federal entities. For example, an increase in the account due to the passage of or increase in appropriated funds for the entity would be recorded by an entry similar to DEBIT: Fund Balance with Treasury CREDIT: Appropriated capital

A decrease in the account related to the payment of certain liabilities of the entity would be accounted for as DEBIT: Accounts payable—Vendors CREDIT: Fund Balance with Treasury

Other transactions also will affect the Fund Balance with Treasury account, such as: • Reimbursement by an operating agency to the Treasury for payments made by the Treasury under letter-of-credit drawdowns • Nonexpenditure or interentity types of financing transfers of funds to another federal entity • Formal allocation of part of an entity’s appropriated funds to another entity

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• Transfer of funds to another entity upon the other entity’s processing of a withdrawal or credit notice in payment for services rendered With the exception of the last transfer, which would be payment for services or goods obtained, the other transfers require agreement with the Treasury and congressional recognition. Other cash receipts and disbursements. In some instances an entity could be 3 authorized to collect receipts or other funds. The collected monies may or may not have been apportioned by the OMB. If no apportionment was made, the collected monies are not available to the collecting entity to support its operations and are not available to that entity for obligation and expenditure. Specific legislation is needed to permit the use of receipts by collecting entities. The entry needed to account for the collections only would be DEBIT: Fund Balance with Treasury CREDIT: Accounts receivable (or revenue) Purpose: To record receipt of cash

Disbursements are generally made by the Treasury upon written direction by an operating entity. The operating entity forwards a schedule listing payees on whose behalf payments are to be issued. Depending on the purpose of the cash disbursement the entry to record disbursements might involve DEBIT: Advances DEBIT: Accounts payable DEBIT: Assets DEBIT: Operating/program expenses CREDIT: Fund Balance with Treasury Purpose: To record the transmittal of vouchers and schedule of payments to the Treasury for issuance of checks to designated payees

Federal Receivables Federal receivables can arise from a variety of sources and purposes and must be recognized when the entity establishes a claim to cash or other assets (1) based on legal or contractual provisions; (2) as a result of tax, fee, or penalty assessment; or (3) as a result of delivery of goods, service, or performance that is binding on the federal entity. Major categories include accounts receivable, interest receivables, and credit program receivables. Accounts receivables of federal entities must be classified as either entity receivables (amounts claimed as due from other federal entities that may be included in the reporting entity’s obligational authority) or nonentity receivables (amounts to be collected on behalf of the U.S. government, but which the federal entity is not authorized to spend). An allowance for estimated uncollectible receivables is recognized to reduce outstanding receivables to the net realizable value.

3

Details concerning the accounting for other cash receipts and disbursements (e.g., receipts, transfers, reimbursements, refunds, and disbursements of appropriated funds) are discussed in earlier chapters.

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Interest receivables are amounts of earned interest income that have not been received at the reporting date. By various laws, interest must be recognized on outstanding accounts receivable and other U.S. government claims against persons and nonfederal entities. Credit program receivables are the loan receivables due to the federal government from nonfederal entities under congressionally authorized federal direct loan programs and loan guarantee programs. Authorizing congressional legislation defines whether such receivables may or may not bear interest. By the Federal Credit Reform Act of 1990, subsidies and losses of federal direct loan and loan guarantee programs must be accounted for by Congress in budgeting for the responsible federal entity before direct loans are obligated and loan guarantees are committed. To achieve this accounting and reporting, the budgeting for federal loan and loan guarantee programs requires that the President’s budget request reflect all of the long-term costs to the government of subsidies associated with direct loans and loan guarantees for each fiscal year in which direct loans or loan guarantees are to be obligated, committed, or disbursed. In addition to representing amounts due to an entity for services rendered, general federal receivables could include overpayments to various parties (contractors, grantees, employees, etc.) and other amounts due. More common types of such receivables include • Repayments to appropriations due for services or for overpayments made to other agencies, and refunds arising from erroneous payments or adjustments of amounts previously disbursed • Amounts due to a federal entity from a governmental revolving fund or from business-type operations operated by another federal entity • Amounts due to a federal entity from other parties, such as an entity’s contractors or grantees or other recipients of federal assistance Advances due from others are yet another example of federal receivables. Advances are amounts paid to others prior to the receipt of services, the performance of an activity, or the delivery of goods. The more common types of advances include travel advances to employees (see Chapter 9), advances to other entities under agreements or contracts (see Chapter 10), and advances of cash and letter-of-credit drawdowns by nonfederal organizations (also Chapter 10). There will be instances in which a receivable is later determined to be uncollectible, a condition no different from that occurring in the private sector. The accurate estimating of uncollectible receivables and the continual accounting of receivables are important aspects of accrual accounting in government. An allowance for uncollectible receivables should be made during each fiscal period. The allowance for uncollectible accounts would be shown as a deduction from the receivable balance in the financial statement. The net amount would be the estimate of collectible balances.

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Federal Inventories Federal inventories, to be valued at historical cost or latest acquisition cost, are tangible personal property of a federal entity that is (1) held for sale, (2) in the process of production for sale, or (3) to be consumed in the production of goods for sale or in the provision of services for a fee. “Held for sale” includes items for sale or transfer either to entities outside of the federal government or to other federal entities. Valuation of federal inventories. The FASAB recommends that federal inventories are to be valued at either their historical cost or latest acquisition cost. Historical costs include all appropriate purchase, transportation, and production costs incurred to bring the item to its current condition and location. Donated inventory is valued at fair value at the time of donation. Standard costs, adjusted periodically to reflect actual costs, would also be acceptable. Latest acquisition cost is the last invoice price that is applied to all like units held, including those units acquired through donation or nonmonetary exchange; the 4 inventory must be periodically revalued, at least at the end of the year. Operating materials and supplies. Operating materials and supplies are tangible personal property to be consumed in normal operations and are categorized as (1) inventory held for sale; (2) inventory held in reserve for future sale; (3) inventory that is excess, obsolete, and unserviceable; or (4) inventory held for repair. For federal entities’ accounting, the consumption method of recognizing inventory expenses or costs is applied. Operating materials and supplies are accounted for and reported as assets when produced or purchased. The costs of inventories are removed from the inventory account (i.e., the asset account) and reported as operating expenses in the period in which they are issued to an end user for consumption in normal operations. The consumption method is in contrast to the purchase method, by which operating materials and supplies are reported as operating expenses immediately upon purchase. Accounting entries for inventories. In practice, federal entities may not maintain asset accounting for inventories. It is not uncommon to charge such amounts directly to expenses or operations as incurred, under the purchase method previously described. This is an appropriate accounting for the supplies and materials ordinarily included in such expense accounts when the amounts are relatively insignificant in comparison to other expenditures of the agency, or when the supplies and materials are consumed during the period of purchase. When the consumption method of accounting is used, however, inventories are normally recorded (1) when the balance of such items is significant, (2) when work in process accounts are maintained for current agency projects, or (3) when agency operations involve the production of finished goods awaiting distribution to users. Under these conditions, several events must be recorded: 4

This is a method of inventory valuation used by Department of Defense executives and presented, in hearings before the FASAB, as the most appropriate for military inventories.

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1. Obligations, for purchased materials and supplies, must be formally recorded. 2. Cost of work performed must be recorded. 3. Obligations must be liquidated or reduced for accrued expenditures. 4. Liabilities must be paid. 5. Cost of resources consumed must be charged to operations. These events are reflected by their accounting entries, numbered correspondingly as shown next. 1. 2.

3. 4. 5.

DEBIT: Allotments available for commitment/obligation CREDIT: Undelivered orders DEBIT: Work in process inventory DEBIT: Finished goods inventory DEBIT: Inventory—Other CREDIT: Accounts payable DEBIT: Undelivered orders CREDIT: Expended appropriation—Operating DEBIT: Accounts payable CREDIT: Fund Balance with Treasury DEBIT: Program/operating expenses CREDIT: Work in process inventory CREDIT: Finished goods inventory CREDIT: Inventory—Other

Federal entities whose operations are supported by a general fund–type of appropriation usually value inventories at their cost of acquisition. Other entities (e.g., those involved in the manufacturing of finished goods or those operating businesstype activities) must make the same accounting and valuation decisions as financial managers in the private sector, within the constraints described above. Excluded inventory-type items. The FASAB excludes from its definition of inventory other types of inventoriable properties that are significant to selected federal entities and are reportable on their financial statements. Some of these properties include stockpile materials, seized and forfeited property, foreclosed property, and goods held under price support and stabilization programs. Stockpile materials. Stockpile materials are strategic and critical materials held due to statutory requirements for use in national defense, conservation, or national emergencies, with no intention that they will be sold in the ordinary course of business. These materials are recorded and reported on the consumption method of accounting and valued at historical costs. Foreclosed, seized, and forfeited properties. By law, the operations of selected federal entities will create, for indefinite periods of time, a custodial relationship between the entity and nonfederal parties for certain types of monetary instruments, real property, and tangible personal property. Federal entities may acquire properties through foreclosure or forfeiture (e.g., for tax liability and other penalties and foreclosure proceedings) and seizure (e.g., for relation to illegal drugs, contraband, and counterfeit items). These properties shall be recorded at their net values, and a liability must be reported in an amount equal to the seized asset value of properties.

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Foreclosed properties. Foreclosed properties are any assets received in satisfaction of a loan receivable or as a result of payment or a claim under a guaranteed or insured loan program. All properties included in foreclosed property are assumed to be held for sale. These properties are valued at the net present value of the projected future cash flows associated with the property; this valuation requires projection of future cash flows by estimating sales proceeds, rents, and management and repair expenses during the holding periods and selling expenses, then discounting these cash flows to their present value. Where properties are taken subject to claims of lenders, debtors, or others, these claims are accounted for in a valuation allowance account and are held in the form of a lien or residual interest. Upon sale, any difference between the net carrying amount of the foreclosed property and the net proceeds of the sale shall be recognized as a component of operating results. Goods held under price support and stabilization programs. Goods held under price support and stabilization programs are commodities or items of commerce or trade that have an exchange value and that are acquired, held, sold, or disposed of to satisfy or help satisfy economic goals. Such properties have unique legal status. For example, under price support operations, money is frequently disbursed in the form of nonrecourse loans. Recipients of such loans pledge specific farm commodities as collateral for the loans and have the option of redeeming the loans (repaying with interest) or surrendering the commodities in exchange for the outstanding loan balance. The FASAB has determined that for these properties three components of the price support program must be addressed: 1. Nonrecourse loans shall be recognized as assets when the loan principal is disbursed to borrowers by the federal entity and recorded at the amount of the loan principal. Interest income to the federal government is to be recognized as it is earned and an interest receivable established. 2. Purchase agreement settlements are accepted at the option of the producer, creating an uncertainty regarding losses to be incurred. The loss must be recognized at financial statement date if information indicates a probable loss has been incurred on the agreements outstanding and the amount of the loss can be reasonably measured. 3. Commodities are recognized as assets and reported on the face of the financial statements upon surrender by the producer to satisfy a nonrecourse loan or upon purchase by the agency. Revenues should be recognized upon the sale of commodities, the carrying amount of the commodities removed from the commodities (asset) account, and the amount of the sale reported as the cost of goods sold. However, the carrying amount of commodities held for other purposes would be removed from the commodities asset account and reported as an expense upon transfer of the commodity.

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Fixed Assets Federal property, plant, and equipment. The cumulative investment in federal property, plant, and equipment (PP&E) includes many forms of properties with a total value of at least $1,017,000,000,000 ($1.017 trillion). The diversity of properties, their intended uses, and their related useful or service life required the FASAB to research and then recommend accounting standards somewhat different from those applied generally in the corporate sector. For these and other reasons, the FASAB did not establish a dollar threshold for capitalization purposes, but opted to rely on entity management to establish its own dollar threshold and fixed asset capitalization policies. The sections that follow describe a few of these properties and some of their unique accounting and reporting characteristics. General property, plant, and equipment. General PP&E of the federal government must meet three criteria: (1) they have estimated useful lives of two or more years; (2) they are not intended for sale in the ordinary course of operations; and (3) they have been acquired or constructed with the intention of being used. Federal PP&E also includes (1) assets acquired through capital leases including leasehold improvements; (2) property owned by the reporting entity in the hands of others (e.g., with state and local governments, colleges and universities, federal contractors and grantees); and (3) land rights. The value of such property equals their cost or donated value. The OMB requires that property should be capitalized at the time of receipt or acceptance by the government, rather than at the time payment is made or when title passes to the government. Costs of constructed facilities should include all material elements of cost, such as engineering, architectural, and other services for designs, plans, and specifications; acquisition cost; labor, materials, supplies, and other direct charges; shares of cost of equipment and facilities used in construction; applicable indirect costs; fixed and severable equipment and cost of installation; inspection, supervision, and administration of construction contracts and work; legal fees and damage claims; and fair value of donated property. For property produced by federal entities for use within the government, neither the inclusion of interest in accounts nor disclosure as a cost is essential. However, interest must be disclosed when comparisons are required or if the omission would result in incomplete disclosures. Costs of property acquired by trading in other property shall be at the lesser of (1) the cash paid or payable, plus amounts allowed by seller on traded property, or (2) the purchase price, had there been no trade-in. Unique federal property, plant, and equipment. There exist, for the federal government, unique groupings of PP&E. Three in particular include federal heritage assets, federal mission assets, and stewardship lands. With one exception, these assets are not reported on a federal entity’s balance sheet, but rather on the federal stewardship statement of assets. Heritage assets—the monuments and many public buildings owned by the federal government—are a form of PP&E unique to the federal government for one or more of these reasons: (1) historical or natural significance; (2) cultural, educational,

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or artistic (i.e., aesthetic) importance; or (3) significant architectural characteristics. Examples of these assets include the Lincoln Memorial, the Washington Monument, the Jefferson Memorial, and others. With one exception, heritage assets are not on an entity’s balance sheet. The exception is multiuse heritage assets that are not only monumental but are also used in government operations (e.g., buildings like the Library of Congress). The cost of multiuse heritage assets is divided somewhat arbitrarily between heritage assets and the reported general PP&E. Mission assets are also unique to the federal government and are not recorded in a federal entity’s balance sheet as part of its general PP&E. A federal mission asset is defined as specific PP&E used as an integral part of the output of a federal entity’s mission and that possesses two characteristics, one related to its classification as mission PP&E, the other related to its useful life. With respect to the characteristics of mission assets, these assets have no expected nongovernmental alternative use(s); they are held for use in the event of emergency, war, or natural disaster; or they are specifically designed for use in a program for which there is no other program or entity (federal or nonfederal) using similar PP&E with which to compare costs. With respect to useful life, mission assets have an indeterminate or unpredictable useful life due either to the unusual manner in which they are used, improved upon, retired, modified, or maintained, or to the fact that they have a very high risk of being destroyed during use or of becoming prematurely obsolete. Federal PP&E meeting these criteria include weapons systems (e.g., submarines, aircraft, and tracked combat vehicles) and space exploration equipment (e.g., launch, tracking, and recovery facilities, and space hardware). Stewardship assets are defined as the “solid part of the surface of the earth,” and include the surface of public lands such as national forests, parks, and historic sites. Excluded from this definition are the natural resources (i.e., exhaustible resources such as mineral deposits, petroleum, timber, etc.) related to or underneath the stewardship lands. Land and land rights for or in connection with the general PP&E, which must be reported on the balance sheet in this general category, are also excluded from the definition of stewardship lands. Depreciation of federal fixed assets. Depreciation is the estimated cost of a long-lived capital asset that may be consumed, used, or rendered obsolete, and which benefits or supports operations or performance during its estimated useful life. Depreciation is the periodic accounting cost to the entity. The FASAB recommends that the depreciation expense be calculated by a systematic and rational allocation of general PP&E costs, less its estimated salvage/residual value, over the estimated useful life of the general PP&E. The depreciation expense should then be accumulated in an allowance account—for accumulated depreciation. At disposal date, the general PP&E amount and related accumulated depreciation are removed from the account balance. Knowledge of depreciation costs is essential to a federal entity under a number of circumstances:

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• When financial results of operations, in terms of cost of performance in relation to revenue earned, are to be fully disclosed in financial reports • When amounts to be collected as reimbursement for services performed are determined on a full-cost basis, pursuant to legal or administrative policy • When investment in fixed property assets used is substantial and there is a need for total cost for comparisons, evaluations, and planning purposes • When the cost of property constructed by an agency is needed to determine the amounts to be capitalized The depreciation accounting practices are not uniform among the federal entities. Generally, entities with activities that are supported by “selling” services to other organizations in the agency or to other agencies will carefully calculate depreciation and ensure that the “selling price” to others provides for a full return of total cost, including depreciation. Several procedures prescribed by the GAO (in Title 2) have been implemented by entities where the need exists to perform and use depreciation accounting: • The cost of capital assets to be depreciated shall be reduced by the estimate of realizable salvage value, as in the case of land. • The estimate of useful life of the asset must consider the effects of technological and economical use on the physical life of the facility. (The difficulty in estimating useful life is not considered a valid reason for not accounting for depreciation.) • The maximum useful life for a federal asset is 100 years. • Undue precision and detail should be avoided in depreciation account. The dollar amount to be recorded for the periodic depreciation expense is determined by allocating (or dividing) the net depreciable capital asset value by the units of service life (called the straight-line method of depreciation). The undepreciated net capital asset value, plus the value of betterments or additions, should be depreciated over the extended useful life of the property or the enlarged capacity of the facility. In the case of leasehold improvements, these costs should be depreciated over either the period of occupancy or the life of the improvement, whichever is less. Because public entities are not concerned with income tax liability, federal entities do not use the accelerated methods of depreciation associated with income tax determination (i.e., double-declining balance or sum-of-the-years’ digits). However, an increased rate of consumption or acceleration in the use of the capital asset should still be reflected in the selection of the appropriate unit or rate of depreciation. For capital assets placed in service, the periodic accounting entry for depreciation is DEBIT: Depreciation CREDIT: Accumulated depreciation Purpose: To record depreciation of capital assets consumed during this accounting period

Note that no entry is required to adjust the commitment/obligation accounts or to record an accrued expenditure. The entries for these events were made during an

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earlier period when the capital asset was acquired or constructed. For this reason, the depreciation is referred to as an unfunded cost and must be separately identified in the entity’s financial reports as not affecting the current period’s appropriated fund balances. Accounting entries for fixed assets. As mentioned previously, acquisition of fixed assets by a government entity may be by one of several methods: (1) purchase from a nongovernmental source; (2) construction by the entity; (3) transfer from another entity; or (4) donation. The value to be recorded will vary under each of these conditions and will accordingly affect depreciation accounting. Assets purchased from a nongovernmental source. A capital asset may be purchased directly from a nonfederal organization under a contract or other form of agreement (as discussed in Chapter 10). The value of the capital asset so acquired should be Purchase price in cash, or reasonable estimate if cost is not measurable or is not known Plus: Transportation-in, installation cost, and interest expense Less: Value of land and purchase discounts Once the value of the capitalized asset is determined, the accounting includes: (1) a recognition of the formal obligation, (2) an accounting for the expended appropriation, (3) a recording of the asset acquired, (4) reflecting the liability, and (5) a provision for an estimate of depreciation or cost consumed. The required specific transactions include all of the following: 1.

DEBIT: Allotments available for commitment obligation CREDIT: Undelivered orders Purpose: To reduce the previously unobligated allotment balance and record the obligation related to the execution of a contract or agreement to acquire a capital asset

2.

DEBIT: Undelivered orders CREDIT: Expended appropriation—Capital Purpose: To record the liquidation obligation and the expended funds related to the acquisition of a capital asset

3.

DEBIT: Fixed asset CREDIT: Accounts payable Purpose: To record the capital asset in the accounts and the liability owed

4.

DEBIT: Accounts payable CREDIT: Fund Balance with Treasury

5.

DEBIT: Depreciation CREDIT: Accumulated depreciation

Purpose: To record payment of the liability and the reduction of balance with Treasury

Purpose: To record estimated depreciation as an expense of the current period and accumulated depreciation as a reduction in the value of the capital asset consumed.

When other costs may be included in the capitalized cost of an asset, these costs (e.g., transportation, installation, or other preparation costs, or interest costs) would be recorded (possibly in subsidiary capital asset accounts, to permit the ready dis-

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tinction between original purchase price and other costs and to avoid timeconsuming analyses concerning the value of recorded assets). These additional related costs must nonetheless be accounted for in the same manner as the initial cost of the asset. The obligation and later accrued expenditure must be recorded as well as the accounting for the increase in the value of the capital asset. Constructed assets. The capitalized value of constructed assets should include all material elements of cost, such as • Engineering, architectural, and outside services for designs, plans, specifications, and surveys • Acquisition of land, buildings, and other facilities • Labor, materials, and supplies, and other direct charges • An appropriate share of equipment and facilities used in construction • Applicable indirect cost • Fixed and severable collateral equipment and its installation to complete the facility for its intended use • Inspection, supervision, construction work, and administration of construction contracts • Legal fees and damage claims • Fair value of contributed or donated land, facilities, utilities, labor, materials, supplies, services, and equipment • Interest costs incurred during construction For constructed assets, the accounting is performed through accumulating the costs of construction in suspense or inventory series of accounts. Typically, agencies will use an asset account such as “construction work-in-progress.” The total value of the capital asset should be accumulated without regard to the financing or other resource. The sources of expenses and costs recorded in this account could be varied, having their origin in inventory drawdowns, agency labor, purchased materials, allocated overhead and indirect costs, contracted services and other work, use of equipment, and interest expenses. These various charges are accounted for in a manner similar to that used in accounting for all other expenditures of a federal agency. Each must initially have been the result of an obligation, and the accounting records must show the accrued expenditure. As funds are consumed by the asset being constructed, the costs are transferred from the accounts initially charged to the construction work-in-progress account. Other expenditures may be incurred related to the asset being constructed. These expenditures are also charged directly to the work-in-progress account. As the constructed assets are completed and placed in service, the work-in-progress account is reduced or relieved of the costs of assets placed into operation or service. Agencies with construction activities have usually established a work order, job order, or project-cost accounting system. All costs related to the construction effort are charged to a specific work order, job, or project. The required several accounting entries, in summary form, are

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DEBIT: Unobligated allotments CREDIT: Undelivered orders Purpose: To reduce the balance of the unobligated allotment balance and record obligations for contract, orders, and agreements related to the acquisition of services, goods, materials, and equipment to be used in constructing a capital asset

2.

DEBIT: Undelivered orders CREDIT: Expended appropriation—Capital CREDIT: Expended appropriation—Operating Purpose: To record the liquidation of obligations and the recognition of various appropriation expenditures

3.

DEBIT: Inventory (asset) CREDIT: Construction work-in-progress expenses Purpose: To record expenditures for future consumption (inventory), to direct charges to the construction work-in-progress account, and other expenses of the period

4.

DEBIT: Accounts payable CREDIT: Fund Balance with Treasury Purpose: To record payment of liabilities and the reduction of available funds in the Treasury

5.

DEBIT: Construction work-in-progress CREDIT: Accumulated depreciation inventory CREDIT: Equipment CREDIT: Expense Purpose: To record resources consumed through the use of other depreciable assets; to record withdrawn inventory; to reclassify equipment as a direct cost of the construction project; and to reallocate expenses (possibly indirect or overhead) to the construction project

6.

DEBIT: Building CREDIT: Construction work-in-progress Purpose: To record the completion of the construction project and the placement of the asset in service

Entries to the construction work-in-progress account are supported by the costs accumulated on the various work or job orders identifying the specific project(s) charged. These records are the supporting documents for any subsidiary accounts as well. While the asset is under construction, no depreciation for the asset itself is recorded. The reason is that no service is available from the asset under construction. Depreciation will be recorded from the date the asset is placed in service and formally recognized as a fixed and operating asset of the organization. It is proper, of course, to record the depreciation of equipment and other facilities used in construction as charges to the construction work-in-progress account. Assets transferred from another agency. The value of capital assets received from another agency depends on the nature of the interagency agreement and on the asset’s useful or residual value. Historically, the GAO has recommended that the value of a transferred capital asset be determined in this way: • If the capital assets are acquired on a reimbursable basis, the value to be recorded by the receiving entity is based on the agreement, applicable statute, or

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regulation, but is not to be less than the estimated useful value (presumably fair market value). • If the capital assets are acquired on a nonreimbursable basis, the amount to be recorded is estimated by the receiving agency, considering condition, use, and market value. The entity transferring capital assets on a nonreimbursable basis shall record the book value of the transferred assets as a reduction in the government’s investment in that entity’s assets. If the receiving agency’s estimated amount differs from the depreciated value of the asset as reflected on the transferring agency’s records, the transferring agency is notified and the reasons for the discrepancy are documented in the records. Transportation and installation costs would be appropriate additions to the capital asset account balance. The accounting for an asset acquired on a reimbursable basis could vary, depending on whether (1) the receiving agency had earlier transferred or allocated a portion of its appropriation to another agency for the purpose of acquiring the capital asset, or (2) the receiving agency is merely reimbursing another agency for a capital asset acquired or constructed by the other agency in the course of its normal business. In both instances, the receiving agency ultimately must use some of its appropriation balance to pay for the asset(s) received. With respect to an asset received on a nonreimbursable basis, the receiving agency must reflect both an increase in the asset balance for which it is accountable and a corresponding increase in the account disclosing the investment of the government. The transaction does not affect the appropriation or budgetary accounts or the fund balances of the receiving agency. In this case, the effect on the accounts would be similar to that of the receipt of a donated or contributed asset. Other Assets While much attention is given to the accounting for current and fixed assets, considerable efforts are also required of the government agencies to reflect properly the many transactions that are categorized as the other asset accounts. While other assets may be generally defined as all assets other than current and fixed, this description does not disclose the nature of these balances. Within this category are, to mention a few, suspense accounts awaiting distribution to other accounts, prepaid supplies and materials, security deposits, and the reciprocal accounts required for controlling retirement deductions. Suspense accounts. Suspense accounts may be established by entities initially to record expenses and costs until final allocation or distribution is determined. Such transactions must be processed through the same obligations and expenditure processes required of all other governmental transactions. Prepaid supplies and materials. On occasion, significant dollar amounts of supplies and materials may be prepaid but not consumed by the end of the accounting period. Such amounts may be established as inventory and will be costed to entity operations during the next fiscal period. At reporting date, however, the resource is considered to be one that will benefit a future period. Unless significant in relation

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to other asset account balances, federal entities would not generally accrue or record these prepaid expenses for supplies and materials. Security deposits. Under certain conditions, entities may require surety deposits as security or partial guarantee of performance. When required, the other asset account, possibly called “securities deposit,” is recorded as a contra account to a liability account reflecting the amount that might be repayable to the depositor at some future date. LIABILITIES Controls and Procedures for Liabilities The FASAB and the OMB define a federal liability to mean a “probable and measurable future outflow of resources arising from past transactions or events.” The liabilities grouping of accounts includes an enormity of transactions and events, such as accounts payable, end-of-period accrual liabilities, federal commitments and guarantees legally assumed or entered into, contingencies, damages from litigious proceeding, and so forth. Liabilities are measured and recorded in a federal entity’s accounts in the period incurred and removed from the accounts in the period liquidated. The FASAB has emphasized that (1) liabilities represent amounts owed and are not dependent on receipt of an invoice or request for payment, and (2) liabilities must be reported regardless of whether federal funds are available or authorized for their payment. These two factors have not been consistently and uniformly applied by federal entities to their liabilities in years past. Liabilities of federal entities can arise for a variety of reasons. Some of those peculiar or unique to the federal government include • Liabilities from exchange transactions (generally for services rendered) arise when each party to the transaction sacrifices value and receives value in return. • Liabilities from nonexchange transactions arise when one party to a transaction receives value without directly giving or promising value in return; these transactions are recognized for any unpaid amounts due at the reporting date. Many grant and certain entitlement programs would be nonexchange transactions in which the payment provisions are determined by federal law, not through an exchange. Nonexchange transactions also include debts and amounts due the sovereign government for taxes and fees. Further, any advance payments and prepayments received by one entity from another for good or services yet to be delivered would also be recorded as other current liabilities for the entity that has not yet received its goods or services. • Liabilities from government-related events are nontransaction events that involve the federal government and its environment. The event may be beyond the control of the individual entity, but the liability is recognized on the same basis as those that arise in exchange transactions. These types of liabilities could include cleanup by federal operations of hazardous waste, accidental

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damage to nonfederal property by federal operations, and other damages to federal property caused by federal operations or natural forces. • Liabilities from government-acknowledged events (i.e., voluntary governmental assumption of debts, risks, or costs of others) are nontransaction events that are of financial consequence to the federal government because it chooses to respond to the events. Costs of these events do not meet the definition of a liability until the government formally acknowledges financial responsibility for the costs. Federal entities would record these types of liabilities only after two criteria are met: (1) Congress has appropriated or authorized resources through legislation, and (2) an exchange occurs (e.g., a contractor makes repairs) or nonexchange amounts (e.g., direct payments to disaster victims) are unpaid as of the reporting date, whichever applies. These various federal liabilities will be classified in a manner different from that used in corporate financial statements. For example, on federal balance sheets, an entity’s liabilities must be classified by two categories: “funded” and “unfunded” liabilities. Federal funded liabilities are those liabilities covered by prior congressionally established appropriation or other budgetary resources. That is, the federal entity has available to it congressionally approved expenditure authority, through an appropriation law or other budgetary or contract authority, that permits the entity to recognize and pay these liabilities. Generally, the operating-type liabilities of federal entities are funded by Congress during the annual appropriation process. In contrast, unfunded liabilities would be those liabilities that must be recognized by a federal entity but that are not covered by congressional budgetary resources, as defined in the preceding paragraph. Examples of federal unfunded liabilities include portions of pensions, retirement benefits, and other postemployment benefits that must be calculated and reported by each federal entity, but for which the federal entity has not been provided financial authorization or appropriation funding by Congress. Within the federal government, Congress funds these types of costs, such as pensions and other postretirement benefits, by providing separate budgetary resources to the OPM to pay these liabilities for the government as a whole. Any payables or liabilities not covered by budgetary resources are unfunded and should be separately disclosed and segregated from payables or liabilities that are covered by budgetary resources. The head of each federal operating entity is responsible for establishing and maintaining control systems related to accounting for, reporting on, and the timely payment of debts of the government. The controls recommended for federal entities are quite similar to those exercised by concerned and responsible managers in the private sector. Prescribed controls notwithstanding, there exist entities that do not maintain a full accrual system with respect to the accounting for liabilities. Often contractor invoices, grantee expenditure reports, and other documents supporting claims against the government are not recorded or recognized in the entity’s accounting

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system until the payment is to be made, essentially conforming to a cash basis rather than accrual basis of accounting. At the end of reporting periods, an inventory of liabilities or amounts owed must be compiled; this estimate of payables reflects the end-of-period balances. Without procedures for the prompt and consistent recording of all claims documents, the endof-period inventory could omit significant payables, thus both understating the amounts owed and misstating the expenditures. Many of the controls exercised by a corporate organization over its accounts payable, accrued liabilities, long-term liabilities, and deferred credits would be equally applicable to a federal entity. Generally, an entity should have similar procedures to ensure that its total liabilities are reflected in its accounts. Some of the procedures an entity should require include • Amounts earned but not yet billed by contractors and grantees should be shown as accrued liabilities. • Obligations to employees, other agencies, and others should be accumulated and reflected in the accounts of the entity. • Costs incurred, but not funded and not yet payable, should be determined and recorded (vacation pay is one example). • Services performed by other agencies and amounts owed to other agencies, but not yet billed, should be determined and reflected in the accounts. • Amounts owed to others, held in trust, or on deposit (as security deposits from contractors) should be immediately recorded in the accounts as owing to these parties. • Advance receipts, which have not been earned by the entity, should be reflected as liabilities until goods or services have been rendered. • Procedures should exist for disclosing all amounts owed, whether funded or unfunded, at reporting dates. • Procedures should exist to provide a current reporting of any contingent liabilities affecting the entity. • Special reporting procedures must exist for entities guaranteeing the indebtedness that others owe. Furthermore, the GAO, in its Title 2, requires that the accounting and reporting controls for liabilities adhere to certain standards and procedures to ensure that • All liabilities are measured and recorded in the period incurred and removed from the accounts in the period liquidated or paid. • Amounts recorded as liabilities represent amounts owed for goods or services furnished under contractual or other arrangements. • Incurred liabilities be accounted for and reported regardless of fund availability or authorization for payment. • Separate accounts are to be maintained for major categories of liabilities to provide full disclosure, clearly distinguishing between funded and unfunded liabilities and governmental and nongovernmental liabilities. • Accounting records shall include all transactions relating to the liabilities of the accounting period.

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• Liabilities requiring measurement on an actuarial basis (federal insurance, pensions, etc.) shall clearly disclose the full current cost and the estimated liability as accrued, regardless of whether funds have been appropriated or otherwise provided to make payment. • Installment purchase payments that, in substance, are lease payments should be recorded as liabilities when the property is received or accepted from the contractor. • Performing or contractor-type entities must record and report payments received in advance of performance as liabilities, until performance occurs. • Contingent liabilities are to be recorded as accruals in the accounting records and disclosed as contingencies in financial statements and reports. Accounting Entries for Selected Liabilities Whether the liabilities are continually accounted for or claims remain unprocessed and are not inventoried until the end of the accounting period, the balance of the liability accounts should reflect the total amounts owed by an entity. The paragraphs that follow illustrate the accounting generally performed for several types of liabilities. Accounts payable. Accounts payable may reflect amounts owed to many organizations, such as • Contractors who may have billed for goods delivered • Grantees who may have amounts owed to them for cost incurred under authorized grant programs • Other government entities to whom amounts may be due for goods and services received The cumulative effect of such transactions would be the result of entries similar to these: DEBIT: Undelivered orders CREDIT: Expended appropriation—Capital CREDIT: Expended appropriation—Operating Purpose: To liquidate previous obligations and record performance and deliveries received as accrued expenditures

Companion entries required to record the actual assets received or expenses incurred and the resulting liabilities would have been DEBIT: Property, plant, and equipment DEBIT: Capital assets, inventories DEBIT: Expenses CREDIT: Accounts payable Purpose: To record goods and services received and resulting amounts owed by agency

Advances from other entities. Certain entities are authorized or required by legislation to furnish personnel, goods, and services to other entities. In these cases, the performing entities may receive advances. Such advances must be shown as liabilities by the performing entity until performance has been completed. The accounting for these events is

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DEBIT: Fund Balance with Treasury CREDIT: Advances from government agencies (Liability) Purpose: To record the transfer of an appropriation allocation for services to be performed

The performing agency, in the course of performing services or delivering goods, records obligations, makes expenditures, incurs costs and expenses, and disburses cash. Often the expenditures related to the other agency will be accumulated in a work in process inventory asset account. The summary accounting could be reflected in this manner: 1.

DEBIT: Undelivered orders CREDIT: Expended appropriations—Capital CREDIT: Expended appropriations—Operating Purpose: To liquidate previous obligations and recognize expenditures for work performed for another agency

plus 2.

DEBIT: Work in Process—Other entities CREDIT: Accounts payable Purpose: To record in the inventory account the costs incurred in performance for another entity and the related liability

also 3.

DEBIT: Advances from government entities CREDIT: Work in process—Other entities Purpose: To reduce the earlier liability for advances received from another entity and reduce the inventory account for work performed or completed for that agency

Accrued leave. Vacation is referred to as annual leave by the federal government. (See Chapter 9 for further details.) The costs and related liability for accrued annual leave should be disclosed in financial reports earned by employees, regardless of whether funds have been made available to pay for such leave or vacation. This following accounting would be required to record such expenses at the time leave is earned: DEBIT: Program/operating expense CREDIT: Liability for annual leave Purpose: To record accrued leave as an expense and record the liability to employees for accumulated annual leave

The “liability for annual leave” account is increased or credited for leave earned. Because unpaid annual leave is an unfunded cost, there is no current appropriation. Thus it would not be appropriate for an entity to restrict or reduce its allotment available for commitment/obligation balance or record an obligation for the accrued leave costs at this time. The obligation would occur in the period during which payment is made for the leave. An inventory of accrued leave is generally maintained by the entity to show the balances of annual leave, sick leave, and other types of leave earned, taken, or still due to the employee. Liabilities relating to salaries. At the end of the period, the accrued but unpaid accounts may reflect several liability balances due to others. Depending on the nature of employment conditions (relating to whether an employee is covered by FICA

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or civil service retirement), an accounting similar to the one that follows is made to record the liabilities related to the earned but unpaid salaries, taxes, and related personnel benefits: DEBIT: Program/operating expenses—Salaries and wages DEBIT: Program/operating expenses—Accrued leave DEBIT: Program/operating expenses—Employer’s share of group insurance DEBIT: Program/operating expenses—Employer’s share of FICA DEBIT: Program/operating expenses—Employer’s share of civil service retirement CREDIT: Accounts payable—Salaries and wages CREDIT: Liability for accrued leave CREDIT: Employee’s bond deductions CREDIT: Employee’s tax withholdings CREDIT: Employee’s FICA withholdings CREDIT: Employee’s retirement deduction CREDIT: Employee’s group insurance deduction CREDIT: Employer’s liability for FICA CREDIT: Employer’s liability for group insurance CREDIT: Employer’s liability for civil service retirement Purpose: To record payrolls and related costs incurred, but still unpaid at the end of the period

As payments are made to settle the various liability accounts, these account balances are reduced (or debited) and the Fund Balance with Treasury is credited to reflect the disbursement made. Because an obligation will not have been made earlier, a companion accounting entry is required to reduce the unobligated allotment balance and recognize the obligation for payroll to the extent appropriate. That accounting might be DEBIT: Undelivered orders CREDIT: Expended appropriations—Operating Purpose: To reduce the balance of allotted and appropriated funds in an amount equal to the accrued payroll for the period and to reflect the accrued expenditures for the period

Other liabilities. Imprest funds and Treasury advances. The accounting for advances from the Treasury is the same as that for imprest fund or cashier fund purposes; however, the Treasury advances must be reflected as outstanding liabilities at the end of the fiscal period by showing, for example DEBIT: Imprest fund balance—Cashier fund balances CREDIT: Liability for imprest fund advances CREDIT: Liability as agent—Cashier fund advance Purpose: To record advances of funds from the Treasury and related liabilities

A liability must be recorded for the initial advance and for any increases in the advanced amount. The liability account is debited only when the fund is returned to the Treasury. Funds on deposit. A fiduciary responsibility will arise in certain instances, such as when an agency accepts funds on deposit for certain purposes. Such a condition could arise when agencies are required to accept deposits from a contractor as a surety for performance. The offsetting balance is another asset account called surety on deposit. For example

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DEBIT: Surety on deposit CREDIT: Liability for securities on deposit Purpose: To record receipt of surety deposit and amount due to contractor

A similar type of liability should be reflected at the end of the accounting period for amounts withheld by an agency from contractor’s earnings or vouchers, pending the completion of the contract. However, few federal agencies record the latter type of liability. Note that the surety deposit does not affect the appropriation accounts of the agency, nor must one be concerned with obligating funds. Surety funds are not normally available to the collecting agency for obligation and expenditure purposes. Bonds and notes payable. Few agencies are authorized to issue stocks, bonds, notes, or other types of financial instruments or to borrow amounts from outside the government. Where such borrowings are required or permitted, the liability must be recorded and amounts shown as due in the formal accounts of the agency. Where the funds borrowed are available to the agency for operations or other uses, the entry to record the liability would be DEBIT: Fund Balance with Treasury CREDIT: Bonds or notes payable Purpose: To record and reflect liability for amounts borrowed or owed

Reporting Liabilities As mentioned earlier in the chapter and elsewhere, the FASAB requires that separate accounts be maintained for major categories of liabilities to provide for full disclosure of all liabilities, both funded and unfunded, and governmental and nongovernmental. Many entities go one step further, using the greatest number of accounts to permit a ready view of the status of various types of liabilities, thus avoiding having to repeatedly analyze the same few accounts to satisfy the inquiries of management and others. With respect to any of the liability accounts, the general ledger of the federal entity would provide considerably more detail than the balance sheet. For example, the amounts due to other agencies relating to deposit liabilities could be an aggregation of several ledger accounts, such as • Employees’ bond deductions • Employees’ tax withholdings • Employees’ FICA withholdings • Employees’ retirement deductions • Employer’s share—FICA • Employer’s share—insurance • Employer’s share—retirement As in the case of assets, a combined balance sheet or composite reporting of the federal entity assumes that the several funds and appropriations for which an agency is responsible have been merged. But within the general and subsidiary ledger accounts structure, the illustrated liability accounts must be maintained separately for each fund and appropriation, pursuant to law or applicable regulations.

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NET EQUITY POSITION Net equity position has been defined by the FASAB as the “unexpended appropriations and the cumulative result or residual balance” resulting from • Unexpended appropriations are appropriations not yet obligated or not yet expended, and undelivered orders. • Cumulative results of operations include amounts accumulated over the years by an entity from its financing sources, less expenses and losses, including donated capital and transfers in the net investment of the government account and the entity’s liabilities (for accrued leave, credit reform, and actuarial liabilities not covered by available budgetary resources). • Residual balance is comprised of appropriated capital provided by Congress; invested capitalized assets or expended appropriations for purchased goods or property; or receivables due for loaned or advanced federal monies. The net position investment could relate to a single appropriation, several appropriations, or other congressional budgetary authority accounts. Thus, a federal entity’s reported net position (or net investment or equity) is comprised of several amounts, including • Additions to an agency’s cumulative investment, including • Congressional appropriations or other budgetary authority • Property and services obtained from other federal agencies without reimbursements • Donations received, if any • Accumulated net income from operations, if any • Deductions from the agency’s cumulative investment, including • Funds returned to the Treasury • Expenditures for operations and other authorized purposes • Property transferred to other federal agencies without reimbursement • Accumulated net loss from operations, if any

13

NONAPPROPRIATED FUND ACTIVITIES

Generally, but not exclusively, the accounting practices and financial statements described in earlier chapters relate to federal entities financed by annual or periodic appropriations of Congress. While appropriation-funded agency operations are in the preponderance, several federal activities that provide intragovernmental services and goods, spending billions of dollars annually, are financed by other than annual appropriations, hence the name “nonappropriated fund” activities. A few of these federal activities, including revolving funds, industrial funds, franchise funds, workingcapital funds, and others, are discussed in this chapter. The specific descriptors are determined by Congress. As a result, the application of definitions is neither consistent, nor mutually exclusive. REVOLVING AND SIMILAR-TYPE FUNDS Definitions A revolving fund is defined in federal practice as a combined receipt and expenditure account established by law to finance a continuing cycle of operations, with the receipts from the operations usually being available in their entirety for use by the fund without further action by Congress. A recent example is a fund authorized by the Government Management Reform Act of 1994, the franchise fund, in which the appropriated monies remain available for the entity’s use until expended. Fees for services are billed by the fund to customers to cover the estimated costs of the fund’s provision of services. Management funds are also combined receipt and expenditure accounts, established by other laws to permit the accounting for and administration of other intragovernmental operations of an agency. The consolidated working fund is similar in operation to a management fund. The distinction is primarily one of congressional definition. Consolidated working funds that were established by Congress by the Economy Act of 1932 are not revolving funds per se. For accounting and reporting purposes, a consolidated working fund consists of an advance of appropriated money by a buying agency to another agency, which is responsible for accounting for the advance in a consolidated working fund account. The fund is established and made available only for the purpose set forth in this law. The account must be maintained by the agency performing the service to differentiate the several appropriations from which funds were received. Thus, symbols and titles assigned to Economy Act funds must be consistent with those assigned by the Treasury for each appropriation. Working-capital funds have been defined by PL 81-216 as revolving funds, consisting of two types: (1) stock funds for financing inventories of consumable materi-

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als, and (2) industrial funds for financing operations of industrial and commercial types of activities within the Department of Defense. These two types of funds will be discussed in greater detail later in this chapter. The distinctions among the funds mentioned thus far in this chapter are due to (1) the nature of the activities financed and (2) the detailed accounting relationships to funding appropriations. For example, working-capital and management funds are financed by the existing appropriations of entities, and permit one entity to perform a service for other entities. The servicing entity is required to distinguish among the sources of funds used to finance its own operations. In contrast, a revolving fund is established to carry out a cycle of business or a commercial type of operation, and the receipts from the “sale” of the products or service of the fund are earmarked by Congress for continued use by fund managers. Financing Nonappropriated Activities The basic concept common to each of the funds just mentioned is that a fixed dollar fund corpus is provided that will remain intact through a series of authorized buying and selling activities. The fixed dollar corpus finances the purchase of the initial supplies, goods, or services. The costs of these procured items are accumulated by fund managers to establish a price to be charged to other government organizations, which will pay for the cost of the ordered items or services. Exhibit 13.1 illustrates the revolving nature of the fund. Note that at any time, the total assets of the fund remain the same (under normal operating conditions); however, the mix of assets, consisting of cash, receivables, inventories, fixed assets, or other assets, may vary. Historically, financing by one method of funding rather than another has been deemed more appropriate for certain activities. It should be noted that no absolute principle exists clearly to identify or establish qualifying criteria for which type of financing to use. However, the two types of working-capital funds mentioned earlier are examples of the appropriateness of certain types of financing for certain types of activities. Stock funds (or “service or supply” funds) are used to finance consumables such as medical and dental supplies, clothing and equipment, petroleum, replacement parts, and numerous other types of stock by the Department of Defense; centralized procurement of supplies, equipment, and nonpersonal services for other federal agencies by the General Services Administration; and payment of salaries and other expenses necessary for central administrative services for all agencies of the Department of Agriculture. Industrial funds are used to finance arsenals and armories, depots, shipyards, printing plants, and other industrial enterprises of the Department of Defense; and operations to produce currency, securities, stamps, and other engraved works by the Bureau of Engraving and Printing. As mentioned earlier, billions of dollars of business are transacted by government entities through revolving funds. Over 100 such funds exist in the federal government. Additionally, each government-owned corporation and governmentsponsored enterprise operates with a revolving fund. These funds are often referred

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to as public enterprise funds because the continuing revenues are from a nongovernmental source; examples of such corporations would include the Federal Deposit Insurance Corporation, Student Loan Marketing Association, Rural Electrification Administration, and Farmers Home Administration. Exhibit 13.1: Revolving Fund Process CONGRESS

AUTHORIZATION

TREASURY

OMB

FUND MANAGER

SUPPLIER VENDOR

BUYER

Law 1

FUND CORPUS

Warrant 2

By time or purpose

APPORTIONS BUDGET 3

Sells OPERATES FUND Buys Contract PROCURES GOODS Invoice Orders BUYS GOODS/PAYS FOR GOODS Pays KEY Required accounting process 1

Passes authorization and appropriation acts

2

Formally finances revolving fund

3

Controls obligational authority limits of fund

REVOLVING FUND

Objectives of Revolving-Type Funds For applicable activities, the financing of operations under a revolving-type fund concept provides unique opportunities to assess the relative economy and efficiency of operating costs, and permits the buyers’ continual evaluation of the reasonableness of the selling price and of the quality of the fund products. Excessive or rising costs are immediately apparent to both fund managers and customers of the fund. Unit costs are tracked, and overhead and indirect costs are typically closely monitored. Revolving fund enterprises have several advantages: • The fund permits a clearer presentation of profitable or loss operations. This same clarity would not exist in an operation funded by an annual appropriation. • The financing structure of a revolving fund is simpler than that of appropriation-funded activities, in which the myriad sources of funds, receipts, or revenues tend to obscure the cost of programs and the financial impacts.

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• Management of the fund has the flexibility, within congressional restraints, to react more effectively and efficiently to changing conditions. Seeking authority to change a level of operations could require months of delay if supplemental requests for additional funding must be made to Congress. • The self-sustaining nature of the fund provides a standard for effective management of income and other fund resources. The income-expense measure is as clear for revolving fund management as it is for commercial executives. From a congressional view, the authorization of revolving-fund operations generally tends to lesson control of and visibility into the activities of the fund. By law, Congress may exercise the same level of control that exists for appropriation operations. However, in practice, many of the fund managers have responded well to the businesslike arrangement, have generated sustaining revenues, and have inherited the responsibility for levels of operations, staffing, and perhaps even the total size of the revolving fund. Establishing a Revolving-Type Fund Congressional approval. Proposals for establishing revolving funds must be submitted to Congress for review and approval. Additionally, established funds must provide full disclosure in each budget for review by congressional appropriation committees. The funds needed to form the corpus or initial capital of a revolving fund are provided through the normal appropriation process. During the enactment process, Congress could impose certain types of restrictions. Some could be directed toward ensuring continual, economical, and efficient operations and continual assessment of fund costs. For example, in the care of an operation funded by an appropriation, Congress could limit the amount of money incurred for indirect or overhead costs and could require fund managers to enlarge the business, hold costs relatively stable, and convince the buyers of the reasonableness of the fund’s selling prices. Further, Congress may desire to control the longer-term planning and outlays of the fund, prohibit the fund from reinvesting receipts into capital equipment, and prohibit the recovery of depreciation costs as part of the reimbursable selling price. The last restriction would eliminate the accumulation of a sinking fund related to the depreciating capital assets. Such receipts, therefore, would go to the Treasury and would be unavailable to the fund for reinvestment. Congressional restrictions might be imposed on the manner in which other entity orders could be construed. For example, a fund that may obligate only after reimbursement from other customers will have considerably less flexibility than another fund that is able to enter into obligations on the basis of orders placed by customer entities. The fund may hold unearned receipts. However, restrictions might be imposed to ensure that such advances are not treated as obligational authority until services have been performed and the advances earned. In practice, the objective is to establish such a fund to increase the economy and effectiveness of operation. Thus a fund probably would not be subject to restrictions like those just outlined unless problems existed or were anticipated.

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Office of Management and Budget Review and Reporting Typically, revolving funds are subject to the same reporting of obligations and apportionments that is required of activities funded by appropriations. For example, revolving funds subject to apportionment will have their obligational authority apportioned by submitting to the OMB the same apportionment and reapportionment schedule required of appropriation-supported activities. All revolving funds, whether they are exempt from apportionment or not, must report to the OMB the status of their budgets in the same report on budget execution required of all agencies. Budgetary authority. The existence of a revolving fund does not relieve the fund managers from fully complying with government-wide legislation concerning fiscal and financial management of government resources. The fund does not provide exemptions from the generally accepted controls of federal financial management. In this regard, the OMB exercises the same responsibility with respect to budgetary or obligational authority that exists for agencies financing their operations through the regular appropriation process. Without careful fund management, overobligation and overexpenditure conditions could result, in violation of the AntiDeficiency Act, with the violators being subject to the same penalties. Unless Congress has provided otherwise, the OMB, by its Circular A-34, Instructions on Budget Execution, provides guidance over the amounts that are apportioned to the fund and thereby governs or limits the obligations that a fund may incur. The objective of the OMB’s definition of budgetary or obligational authority is to limit the liabilities and debts of the fund to those that can be met from its operations. In summary, Circular A-34 limits a fund’s budgetary authority to cash, balances on deposit with the Treasury, accounts receivable, and unfilled customers’ orders, including advances received from others. If a nonappropriated funded activity experiences a shortage of cash, the shortage is viewed as a reportable violation of the Anti-Deficiency Act. Law, OMB regulation, and Government Accountability Office guidance support the position that revolving-type funds risk an anti1 deficiency violation when the activity’s cash balance is low or minimal. Further, if obligations are appropriately incurred, but were in part based on anticipated collections of receivables that failed to materialize, the fund managers might also be held in violation of the Anti-Deficiency Act. That is, the budgetary authority consists only of the unspent, uncommitted, and unobligated resources in the fund’s possession. The OMB states that other assets, whether of a working-capital nature such as inventories, or a long-term nature such as fixed assets, are not considered budgetary resources or obligational authority. Such assets cannot be used in determining the unobligated balance available for obligation. However, obligations for procurement of inventories and acquisition of assets must be included in obligations reported under Circular A-34. Claims against budgetary resources, such as payables and undelivered orders, must be used in determining unobligated balances. Viewed from an1

See US Code, Title 31, Section 1341; OMB Circular A-34, Section 32; and the GAO’s Principles of Federal Appropriation Law, Section 6, April 14, 2003, (Washington, D.C.: GAO).

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other perspective, the OMB has defined obligational authority as being merely the “quick current assets” of the fund. Treatment of accounts receivable. Revolving funds are directed to operate and report the results of their operations on an accrual basis. However, as mentioned, the OMB will not permit the consideration of inventories as part of the funds available to an agency for commitment before the inventories are liquidated into cash. Another deviation from full accrual accounting is the treatment of receivables. OMB Circular A-34, Instructions on Budget Execution, states that some funds treat the write-off of receivables as an expense, which is proper in accrual accounting. For purposes of reporting under Circular A-34, write-offs of receivables will not ordinarily be treated as an obligation or expense, but rather as a reduction in revenues when such write-offs are not chargeable to an allowance for losses. Amounts provided for losses on receivables are treated as a reduction in revenues in the period when the provision is made. Funding Violations Anti-Deficiency Act violations. As with other appropriated funds, the obligations or expenditures of revolving funds cannot be made in excess of amounts appropriated by Congress. Excess transactions are violations of the Anti-Deficiency Act. In Circular A-34, the OMB takes the position that Incurring obligations in excess of appropriated budgetary resources is a violation of the Anti-Deficiency Act and is reportable whether or not the fund has unapportioned resources or nonbudgetary resources or nonbudgetary assets greater than the amount of the deficiency.

The OMB requires each fund manager to assume responsibility for calculating requirements for funds and to request appropriations in a manner that permits funding of outstanding obligations at all times during the year with available budgetary resources. If capital is insufficient, the manager must defer incurring obligations until the budgetary resources are sufficient to fund the obligations. A shortage of cash in a revolving fund has been held to be a violation of the Anti-Deficiency Act on more than one occasion. Anticipated reimbursements and anticipated customers’ orders for the remainder of a year are not considered a budgetary resource by the OMB for the purpose of determining the status of funds on any given day, even though such reimbursements may be anticipated at the time apportionments are made by the OMB. Stated another way, a fund manager may not allow a level of fund/obligations that exceeds the lower of (1) the obligational authority apportioned by the OMB, or (2) the OMB apportionment less the amount by which actual reimbursements fell short of estimated reimbursements. At year-end, it is OMB’s practice to adjust the estimated reimbursements to actual reimbursements, and the latter figure often forms part of the obligational authority for the future. Excess reimbursements received late in a fiscal year and not apportioned by the OMB do not lapse but may be carried forward if apportioned as obligational authority for the next fiscal year.

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Surpluses and deficits. The objective of revolving-fund financing is to ensure to the extent possible that revenues and expenses are equal. Neither Congress nor the OMB expects perfection. With the appropriate working-capital, a fund may operate with a loss one year and a profit the next. Fund management is expected to propose the necessary action to raise or lower selling prices to ensure that the costs are recovered in the next fiscal year or that profits are returned to customers. Reporting by Revolving Funds In some respects, the reporting requirements for revolving funds are similar to those required for appropriation-funded operations. Periodic accounting must be made to both the Treasury and the OMB. Budget statements. Under OMB Circular A-11, Preparation, Submission, and Execution of the Budget, budget statements similar to those made by businesses must be submitted by all government corporations and all other revolving and trust funds. The required statements on the accrual basis will include a condensed statement of revenue and expense and a condensed statement of financial condition and changes in government equity. If the enterprise is engaged in two or more major programs, the OMB requires that these data be segregated for each program: revenues, expenses, and net operating income or loss. Nonoperating income of loss will be shown separately with the figures that comprise the total net income or loss. The financial data submitted by the fund to the OMB must agree with the information provided on the statement of financial condition to the Treasury. Apportionment reports. The OMB requires that revolving funds report on the budgetary authority to be apportioned for a given fiscal year as well as on budget execution. OMB Circulars A-11 and A-34, respectively, provide detailed guidance on these two responsibilities. Certain revolving funds are subject to the apportionment process of the OMB and will be apportioned on an obligation basis on the SF-132, Apportionment and Reapportionment Schedule. Two types of apportionments are provided for on the SF-132: 1. Category A apportionments—the apportionment of budgetary authority by time periods, typically quarterly 2. Category B apportionments—the apportionment of budgetary authority by activities, projects, objects, or a combination of these In the case of no-year and multiple-year funds (funds available for obligation beyond the current fiscal year), apportionments will cover the anticipated financial requirements for the current year. Budget execution reports. Revolving funds, whether apportioned or not, will report information on budget performance on SF-133, Report on Budget Execution. Reporting on the SF-133 is on an obligation basis. The report on budget execution has three principal sections: 1. Budget authority—A statement of the total budgetary resources of the fund or other reporting entity, and the sources and amounts of the authority

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2. Status of budgetary resources—A reporting of obligations incurred, unobligated balances available for obligation, and unobligated balances not available for obligation, and the reasons 3. Relation of obligations to outlays and accrued expenditures—A reconciliation of obligations incurred, net unpaid obligations, outlays, changes in accounts payable, and the accrued expenditures for the end of the reporting period SERVICE OF SUPPLY FUNDS AND INDUSTRIAL FUNDS In practice, revolving funds have been used to finance service or supply activities desired by several government organizations, as with the stock funds of the Department of Defense previously mentioned. Services such as those provided by a computer center could also be operated as a revolving fund. Revolving funds have also been used successfully to finance manufacturing and equipment-overhaul activities; such activities are financed by industrial funds. Specific accounting practices will vary with the nature of services provided. Service of Supply Funds Operation of stock funds. A revolving fund providing services or supplies to its customers is principally concerned with closely monitoring its total costs in much the same manner as any private service or retail organization would be. The purchase price, handling, and other overhead costs are passed along to the fund’s customers, typically on a first-in, first-out basis. The selling price generally equates to total cost or to cost plus a recovery factor to offset a loss of a prior period. Similarly, if a profit was realized during an earlier period, the current year’s services or supplies may be sold to customers for less than current costs. These five steps outline the process for operating a service or supply fund: 1. An agency must receive the approval of Congress through enacted authorization and appropriation acts. 2. The Treasury must provide the initial corpus or capitalization for the fund. 3. Supplies and inventory or services must be procured for resale to fund customers. Payments for these items will decrease the Fund Balance with Treasury. 4. The agency will then sell stock or services to customers, and reduce inventory if applicable, but increase the funds with the Treasury upon payment by the fund customer. 5. Once completed, the cycle is repeated. It is not uncommon for Congress, in authorizing a revolving fund, to provide the capital to fund only current operations and to require the fund management to make a formal request to Congress for monies needed to procure long-term fixed assets. For example, PL 656, establishing the revolving fund of the Bureau of Engraving and Printing, reads in part: …whenever any work or services are requisitioned from the Bureau of Engraving and Printing, Treasury Department, the requisitioning agency shall make payment

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therefore from funds available to it for such purposes at prices deemed by the Secretary of the Treasury to be adequate to recover the amount of direct and indirect costs of the Bureau, including administrative expenses incidental to performing the work or services requisitioned.

Under this legislation, Congress financed the normal operating costs of the bureau. Special appropriations were required by the bureau to cover the cost of extraordinary expenditures relating to buildings and land, expenditures that were specifically excluded by Congress in the initial capitalization of the fund. Accounting procedures for stock funds. The obligation and expenditure of federal funds by a revolving fund must comply with the practices and procedures governing agencies whose activities are supported through appropriations. Thus, a revolving fund providing supplies or services would be required to formally recognize in its financial system these events: • Capitalization of the fund • Estimated reimbursements to the fund • Apportionments received from the OMB • Establishment of a process of fund control, possibly by issuing allotments to various personnel • Orders from customers • Obligations entered into to obtain fixed assets (if permitted), personnel services, supplies, and inventories • Goods and services received • Billing of customers for service rendered • Payments received from customers • Payment for assets, services, and supplies received • Inventory items consumed in operations • Recognition of depreciation on a fixed asset used • Adjustments for any changes in estimated reimbursements Exhibit 13.2 illustrates, with descriptive accounts, the accounting that would record the events just described. Note that this example is a simplistic presentation of supply or service fund accounting. In practice, the annual transaction volume of some funds could easily exceed a quarter million in number and billions of dollars in value. Assuming that the described events constituted the total financed activity for the accounting period, several accounts would be closed to determine the invested capital account balance at the end of the period. When the closing entries are posted to the invested capital account, the ending balance of invested capital comprises the asset investments that will be consumed during future operations.

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Exhibit 13.2: Illustration of Accounting for Service or Supply (Stock) Revolving Fund Fund event Capitalization of fund

Number (1)

Entries Fund Balance with Treasury Unapportioned funds To record fund corpus

Debit

Credit

$10,000 $10,000

Estimated reimbursements to fund

(2)

Estimated reimbursements 20,000 Unapportioned funds 20,000 To record anticipated reimbursements from customers that OMB must apportion

Apportionment by OMB

(3)

Unapportioned funds 30,000 Unallotted apportionments 30,000 To record apportionment by OMB and present unallotted funds

Issuance of allotments

(4)

Unallotted apportionments 30,000 Unobligated allotments 30,000 To record the issuance of obligational authority to fund managers

Receipt of orders and advance payment by customers

(5)

Unfilled customers’ orders 25,000 Advances and reimbursements 25,000 To record orders received that are valid obligations of ordering agency

Placement of orders and other commitments

(6)

Unobligated allotments 27,000 Unliquidated obligations 27,000 To record issuance of formal obligation documents and reduce the unobligated balance

Receipt of assets, incurred expenditures, and expenses

(7)

5,000 Equipment 8,000 Inventory 10,000 Operating expenses Accounts payable 13,000 Accrued liabilities—Payroll 10,000 To record assets and expenses of accounting period

Reduction of previous outstanding obligations

(8)

Billing customers for services performed

(9)

Recording filled customer orders

(10)

—plus— 23,000 Unliquidated obligations 5,000 Expended appropriation— Capital 18,000 Expended appropriation— Operating To reduce outstanding obligations and reflect accrual of expenditures Accounts receivable—Other 22,000 agency 22,000 Earned revenues Billed other agency for performance and recognized revenue —plus— Advances and reimbursements Unfilled customers orders

22,000 22,000

Chapter 13 / Nonappropriated Fund Activities Fund event

Number

Recording deposits by customers and reduction of amount due to fund

(11)

19,000 Fund Balance with Treasury 19,000 Accounts receivable—Other agency To record deposits by customers and reduce receivable outstanding

Recording disbursements

(12)

Accounts payable 10,000 Accrued liabilities—Payroll 9,000 Fund Balance with Treasury 19,000 To record payment of liabilities and reduction in fund balance

Recording inventory issued for operations

(13)

Operating expenses 5,000 Inventory To record inventory consumed during period

Recording consumption of fixed assets

(14)

Operating expenses 1,000 Accumulated depreciation 1,000 To record depreciation for period relating to equipment

Recognition of excess of actual reimbursements overestimated Closing out earlier estimate for reimbursement

(15)

Estimated reimbursements 5,000 5,000 Unallotted apportionments Reimbursement to appropriation 19,000 Estimated reimbursement 19,000 To adjust earlier estimate of customers’ orders for work completed

(16)

Entries

293

TOTALS

Debit

Credit

5,000

$300,000 $300,000

The unexpended balance of the revolving fund will consist of unallotted apportionments, unobligated allotments, and unliquidated obligations. Unless funds have been advanced from customers, the balance of the unfilled customers’ orders account should not be considered as available budget authority when preparing reports at the end of the fiscal year. As mentioned earlier, costs incurred for customers who later fail to reimburse the revolving fund could cause the revolving fund to reflect a deficiency status in violation of the Anti-Deficiency Act. Thus the investment of the government in a service or supply fund at the end of a fiscal period will consist of any balance in the invested capital account plus the unexpended balance of the revolving fund. As mentioned, service or supply funds function much like retail or wholesale organizations. The funds serve as an entity that permits larger, more economical purchases and the development of specialization in the services or supplies provided by the fund to its customers; they also minimize the problems resulting from long lead-time procurements. Services and supplies are sold to customers essentially at cost, plus transportation, handling, and other incidental expenses. Industrial Funds Between the two general types of revolving funds—stock and industrial—there are a number of similarities. Like the stock fund, the industrial fund exists to permit one government entity to service other government entities. And like the stock fund,

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the industrial fund must price its products at such a value as to return the fund’s costs. There are also notable differences between the two types of revolving funds. A stock fund finances consumables; goods and services are supplied by the stock fund. An industrial fund is involved in manufacturing, overhaul, and repair activities; its contributions (enhancements, improvements, alterations) are made, its products built. Industrial fund accounting is quite similar to a manufacturing entity in the corporate world, unlike the accounting for stock funds, which is similar to a retailing entity. In the Department of Defense, as well as in other agencies, Congress, by authorizing and capitalizing industrial funds, was trying to exploit the buyer-seller relationship of the private sector. Under that relationship, contracts or agreements exist to purchase products at a given price, of a specific quality, in a specific number, and by a designated date. In government, analogous quasi contracts are called project orders, work orders, or job orders. These form the “legal” agreement between the manufacturing entity and the fund customer. Such a relationship exists between the arsenals, depots, shipyards, and printing plants of the Department of Defense and its fund customers. A similar relationship is found among the civil agencies, in which the Bureau of Engraving and Printing produces currency, Federal Reserve notes, postage stamps, and other financial instruments for several agencies, including the Treasury, the Federal Reserve Board, and the Postal Service. The customers of a revolving fund need not be only federal organizations. The enabling legislation could permit sales to state and local governments as well as to foreign governments. Charges to customers other than the federal government most often provide for full cost recovery, including any unfunded federal labor costs, depreciation, overhead, and other administrative costs that may not be paid directly by the fund. When such is the case, the receipts relating to the unfunded costs must be accounted for in a manner designated by Congress, the Treasury, or the OMB. While the capitalization of a specific fund will often vary, the budgetary resources available for obligation on a revolving basis will often include, at minimum, the fund balance with the Treasury, accounts receivable for completed orders, and the value of unfilled customer orders formally accepted by the industrial fund. Operations of industrial funds. The operations of an industrial fund are, in concept, similar to those of the stock fund. Because it is a kind of revolving fund, the industrial fund must recover its investments and costs through reimbursement from its customers; the process is the same as that for the supply or stock fund. • Congress must, through authorization and appropriation legislation, give its approval to establish and operate an activity as an industrial fund. • The entity must obtain an initial corpus or capitalization from the Treasury. • Supplies must be procured, labor costs incurred, and other expenses paid to convert, service, or manufacture the products of an industrial fund. Payments of these expenditures will decrease the fund balance with the Treasury.

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• Completed services or products must be “sold” to customer agencies at an established selling or transfer price that is sufficient to recover the costs and expenses incurred by the industrial fund. • Once reimbursement is accomplished, the cycle is repeated. When establishing an industrial fund, Congress may provide funding for the acquisition of capital equipment for only the current period and may require fund managers to make a formal request to Congress for any additional monies needed to procure long-term fixed assets. Thus, reimbursements to the fund for the consumption of fixed assets (as through a depreciation charge) may not be available to the fund for the automatic replacement of capital assets. By this fiscal control, Congress limits the flexibility of managerial decisions to those affecting current operations; no sinking fund or replacement fund is accumulating that might be used for the future acquisition of capital assets without the knowledge of Congress. The reimbursements in excess of current costs would revert to the Treasury unless the fund had specific authority to obligate and expend such funds. Cost accounting considerations. With an industrial fund, the accounting complexities increase severalfold. The conversion cost to mold raw materials into finished goods is one of several factors that do not exist with service or supply fund accounting. Additionally, a distinction must be made between direct and indirect materials and labor; research and development costs and administrative expenses may exist that must also be recovered in the established selling prices. There is no government-wide system prescribed for the accounting of industrial funds, probably because of the great diversity of operations and processes in existence. Elements of costs. Systems for industrial funds must carefully consider the several types of costs required by any conversion process, including the costs for direct and indirect labor and materials; manufacturing overhead; development costs; and other administrative or selling expenses. The applied definitions are similar to those in public-sector industrial practices: • Direct labor costs or productive labor costs refer to payroll costs that result from labor expended in the production or conversion process. • Direct material costs include supplies, components, and other material that either form an integral part of the finished goods or are expended in its conversion or production. • Indirect labor costs include payroll costs necessary to the completion of the conversion or manufacturing process but that do not affect or alter the converted or finished goods. • Indirect material costs are costs of materials necessary to the conversion or manufacturing process but whose application to the product is difficult to cost directly to the product. • Manufacturing overhead costs necessary to the conversion or manufacturing effort could include personnel, material and supplies, equipment, buildings, real estate, and other costs, the benefit or casual relationship of which is not directly related to units produced.

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Fixed and variable expenses. As in commercial enterprises, the manufacturing expenses of an industrial fund might require that manufacturing overhead cost be monitored or accounted for on the basis of whether it is fixed, variable, or semivariable in nature. While it is not possible to give absolute definitions of these terms, there is general agreement on these descriptions, which must be consistently defined and related to the fund’s production activity: • Variable expenses are those manufacturing expenses that can be related to an operating period and that vary directly with the volume of the accounting period. Viewed another way, if there is no production, there are no variable costs. • Fixed costs are manufacturing expenses that do not vary with the production of a single accounting period, but must be assigned to production on some rational basis and will not be absorbed by the production of a single period. Fixed costs will exist regardless of production. Actual and standard cost accounting methods. Depending on the nature of the product of a particular industrial fund, one might find either actual or standard costing principles being applied. If an actual cost accounting system is employed, the supporting records will be designed to collect costs as incurred, that is, on a historical basis. Direct material and labor costs will be recorded as incurred. Indirect material, labor, and overhead costs will generally be assigned on an allocated, predetermined basis, with the predetermined rate adjusted to the actual rate at the end of the accounting period. With a standard cost accounting system, parts, components, operations, or processes have been precosted or predetermined and a standard established for the quantity as well as the dollars required in the manufacturing process. Throughout the accounting period, the production units are costed at that standard cost. Actual costs are accumulated in separate accounts, and a comparison is made to determine variances between the standard and actual costs. The variances (over or under) from standard become an additional cost adjustment that must be applied to adjust standard costs to actual production costs. Overhead variances. Monitoring activities of the commercial type often entails an analysis of the reasons for variance between actual and estimated production levels and costs. Because products must be costed currently and often cannot await the determination of actual expenses, overhead is applied or allocated to the period’s activity on a predetermined basis, with some distinction made for varying levels of capacity or efficiency. The overhead variance analyses would be for (1) volume variance and (2) budget variance. Volume variance relates to the level of efficiency or capacity attained during the accounting period. Budget variance relates to the difference between the actual expenses incurred and the budgeted expenses planned for the capacity or level of efficiency attained in the accounting period. Methods of cost accounting. The use of actual or standard cost principles and the application of overhead on predetermined bases, with end-of-period adjustments

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for variances, could be used with either of the two accepted cost accounting methods: (1) the work order or job cost method and (2) the process cost method. The work order or job cost accounting method determines the cost to produce a specific lot, job, project, contract, or other identifiable item. This method presumes that the cost incurred or charged can be identified with a specific work or job order number. The process cost accounting method determines production cost by department for a specific time period and calculates an average unit cost based on units of production. Typically, the process costing method is required when the products of earlier processes become the raw material for later processes, or the process results in joint products or by-products. A cost accounting system should be viewed as a more precise recording, accumulating, and accounting system for the activities of an entity than the appropriation accounting process described in earlier chapters. The objective of a cost system is to determine the cost of performing a service or function. With respect to industrial funds, cost is required to permit the calculation of the selling or transfer price that will be charged by the manufacturing entity to other entities. The underlying principle of an industrial fund, as mentioned earlier, is that it is a revolving fund—that is, the industrial fund must collect full cost for services or functions performed to maintain the revolving nature of the fund corpus. Work order or job cost accounting. A prerequisite of a work order or job cost accounting system is that the servicing or manufacturing organization be organized in such a manner as to manufacture or work on specific units, lots, jobs, or projects. The functions performed must be identifiable, relatable, and capable of being costed and charged to a specific customer (or work order). Exhibit 13.3 summarizes the major costing considerations of the work order or job cost system. The work order or job cost system (for a manufacturing process that produces units for a finished goods inventory for later sale to customer agencies) is structured so as to support these activities. Elements of the structure include • Allotment of funds, recording of obligations, and accruing of expenditures in the same manner as an agency whose operations are funded by appropriations • Recovery of costs to preserve or revolve the initial capital investment or corpus of the revolving fund • A system of procurement (through contracts and purchase orders) that is in compliance with federal procurement regulations • A system of inventory and stores control and fixed asset accounting providing for the charging of consumed resources at the time of use • A payroll system that: (1) includes detailed labor costing and distribution procedures for charging projects or jobs for labor performed, generally through a system of labor tickets; and (2) permits the accumulation of labor costs by task, groupings of tasks, operations, jobs, and projects, and by work unit, department, and the plant as a whole, for desired time periods (day, week, month, year)

+

Finished goods

+

• Time cards • Deductions • Tax information • Labor tickets

+

–

• WinP—material • Shipped • WinP—labor • WinP— manufacturing expense

–

• To WinP

Work in process— material

–

• To WinP

Payroll account

Inventory account • Contracts • Orders • Receiving reports • Inventory cards • Material requisitions

DIRECT LABOR

DIRECT MATERIAL

Work in process— labor

• Close out

–

+

Cost of goods shipped

Quantity

Summary cost

Applied overhead

Other direct

Direct labor

Direct material

–

• To WinP

Work/job order

+

Contracts Travel Freight Vouchers

• Shipped

• • • •

Various accounts

OTHER DIRECT COSTS

Exhibit 13.3: General Flow of Work Order, Job Order Cost System

+

Labor Material Travel Depreciation Etc.

• Costs

Work in process— manufacturing expense

• • • • •

• Sales

Invested capital

–

• To WinP

Manufacturing expense

MANUFACTURING OVERHEAD

+

• Close out

–

• To WinP

Manufacturing expense applied

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• The predetermination of overhead or burden expenses to be applied to a given level of activity or production, with the variance between the applied and actual expenses determined at least annually and adjustments made to the applied rates • A system of general ledger control accounts for initially recording and managing the overall costs being incurred, supported by detailed cost accounting procedures to permit the further refinement or distribution of material, labor, and overhead costs to the manufacturing process • A system for accumulating the cost of work in process, by major categories of cost (material, labor, overhead) and by individual work order or job order • Transfer of physical units and related costs, upon completion, from the work in process status to the finished goods status, or directly to the customers • Controls over finished goods until shipped to customer agencies, possibly with the cost of goods manufactured being transferred to the cost of goods shipped status • Financial reports that permit the periodic determination of the excess of revenues or expense so that transfer prices may be adjusted to ensure a recovery of the cost incurred Not a part of the work order or job order system, but still a necessary costing component of the selling price, is an accurate assignment of general and administrative expenses to the appropriate accounting period. These nonmanufacturing costs are related to (1) finished goods delivered during the period, (2) finished goods in inventory, and (3) work still in process. When such costs must be allocated, a common allocation basis is that of total cost, because the general and administrative expenses are related to the overall management of the total facility, including the manufacturing activity, although such costs are not controllable by those responsible for production. Accounting procedures. Like all governmental activities, an industrial fund must comply with the general accounting requirements relating to obligations and expenditures and the reporting that is outlined in earlier chapters. Certain transactions are typical of those for an industrial fund’s performing a maintenance, repair, or manufacturing function. An industrial fund performing one of these conversion functions would be required to recognize formally several events in its accounting records: • Initial capitalization of an appropriation and apportionment of those monies to the industrial fund. • Allotment responsibility, within the fund organization, to be distributed to officials designated as authorized to enter into obligations on behalf of the fund. • Orders to manufacture or perform a conversion or other work for customer agencies. An initial control is to authorize a work order or job cost card, assigning a serial number or other unique designator to the order. The work orders may vary in size, shape, and content but often contain information such as • Name of the customer entity

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• • •

• •

•

•

•

•

• Job number assigned • Beginning and ending date for ordered work • Accounts or appropriation numbers to be charged • Estimated costs • Actual costs • Quantity • Description of work to be performed and departments to perform work • Variances between actual and estimated costs Materials consumed and labor performed by the fund employees to be charged to a work order. (Nonproduction labor will be recorded in an idle or unassigned account for later accounting and analysis.) Issuance of contracts, purchase orders, and other agreements to procure materials and supplies, which must comply with government-wide procurement regulations and must be formally recorded. Materials, supplies, equipment, and other acquisitions received, to be recorded in fixed-asset accounts or inventory-asset accounts unless the items are to be used immediately; in that case the cost of the items is charged directly to work in process or other control accounts. Materials released to work in process activities on the basis of formal materials requisitions describing the material desired, identifying numbers and descriptors, costs, accounting nomenclature, and other data. Labor, to be accounted for by parts, components, assemblies, job, and project, permitting summarization by employee, department, and fund on the basis of time recorded on labor tickets. (The labor ticket, or a facsimile, is the basis for distributing labor costs to the various jobs in process. Additionally, overhead and administrative activities require labor costs as well.) Unfunded costs, to be recorded and reported in much the same manner as funded costs are. (Two of the more common unfunded costs are [1] accumulated depreciation related to the use of fixed assets in the industrial activities and [2] the accrued liability for employee’s earned leave. As leave is taken, the debit or charge is made against the accrued liability account.) Overhead or burden costs, to be charged to production activities on the basis of an estimated, applied, or standard rate because the actual level of overhead costs will not be known until after the close of the fiscal period. (At the end of the period, applied estimate of overhead costs is offset against the actual overhead costs.) Variances between the applied and actual amounts are recovered by adjusting the applied rate in the future. Often the overhead is applied on the basis of an activity indicator (such as dollars of labor, hours of labor, machine hours, or other quantitative bases). Cost of completed units transferred from work in process to finished goods, which must match the specific units completed. (The costs accumulated on the work or job orders are summarized and transferred from the work in process accounts to the finished goods inventory account.) Funds provided by customer entities, to be treated as advances (a liability) until earned. (Generally, revenues are earned when the completed goods are

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shipped pursuant to the direction provided by the customer entity. At this time the advance account may be reduced [or a receivable established in the agency is on a reimbursement basis]. A companion entry is required to reduce the furnished goods inventory for the value of the goods shipped.) • Formal orders, constituting obligational authority for the performing agency, to be recorded in the accounting records so that these amounts and other obligational authority are controlled and monitored. Results of operations. Certain conclusions may be reached concerning the adequacy of the pricing of work performed during the fiscal period. For example, the total costs of goods manufactured must incorporate the material, labor, and overhead used, incurred, or applied. However, some of the total costs of manufacturing benefited jobs that were still in process at the end of the period; therefore, based on the work in process inventories, an adjustment of the total costs of manufacturing must be made to reflect the actual cost of manufacturing for the period. Also, because all of the units produced are not necessarily shipped during the period of manufacture, adjustments must be made for the finished goods inventory. While industrial funds may at times show losses, Congress expects that fund managers will monitor activities and adhere to pricing policies that are both competitive with a commercial market and adequate to recover the costs and expenses of operations. When constructing a price, fund managers must prepare reliable estimates of cost of manufacture, predict varying levels of manufacturing volumes, and carefully forecast the administrative expenses of the fiscal period. Invested capital. Industrial funds, like other government entities, must monitor the status of the government’s investment. Earlier chapters indicated that certain accounts are closed at the end of the period to determine the excess revenues earned or the loss incurred. These account closings are also necessary to determine the invested capital of the government. After closing, the balance of invested capital is determined by these conditions. INVESTED CAPITAL ACCOUNT Manufacturing overhead—Actual Administrative expenses—Actual Cost of goods shipped—Actual Total

$ 6,000,000 2,000,000 10,000,000 $18,000,000

Expended funds—Capital Earned revenue Total Invested capital

$ 5,000,000 18,000,000 23,000,000 $ 5,000,000

Obligational status of orders. As mentioned earlier, the receipt of a formal order from another federal entity constitutes an increase in a funding authority and permits the industrial fund to enter into obligations and make expenditures. There is a risk, however. The OMB permits formal orders to be considered as additional obligational authority, but still maintains that obligations and expenditures may not be incurred in excess of revenues from the formal orders actually completed. Thus, unless the industrial fund actually realizes (i.e., collects) revenues equal to the obligations and expenditures incurred from the formal contracts, the fund has exceeded its budgetary authority and the provisions of the Anti-Deficiency Act have been violated. For this reason, industrial fund managers adhere to a conservative forecasting methodology, anticipating few revenues.

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When formal orders constitute additional obligational authority for the performing industrial fund, the value of the order is recorded in the accounting records to ensure that these amounts are monitored and controlled along with other funding authority. Process cost accounting. The costing principles and techniques applicable to the work or job order method are equally appropriate to the process cost method. The distinguishing feature is that under the process cost method, costs must be accumulated by the various processes of production. In practice, these often relate to different departments of the manufacturing entity. Under the process method, it is not possible to retain the identity of a job order. Each job order is only a portion of the continuous manufacturing process. Two federal entities whose operations are conducive to process cost accounting are the United States Mint and the Bureau of Engraving and Printing. The manufacturing effort in each organization is directed to the continuous manufacture of a unit of production requiring the completion of several processes. Under this method, careful definitions must be made in determining the departments or cost centers, the method of accumulating costs throughout the manufacturing process, and the volumes of units produced. Exhibit 13.4 summarizes the extent of cost accounting that must be performed to determine the total product costs and the unit costs at the Bureau of Engraving and Printing. Description of process cost accounting system. A prerequisite to the implementation of a process cost accounting system is the establishment of departments or cost centers responsible for performing specific manufacturing activities. Costs and expenses incurred are either charged directly or allocated to these departments. The input cost, plus additional manufacturing or conversion costs, must be accumulated for the accounting period and allocated to the units produced during the same period. The allocations become more complex if joint products or by-products result from the manufacturing process or if the total production includes both the finished units and units still in process at the end of the period. A process cost accounting system must address several events in the production process: • Several cost centers must be established to be responsible for incurring labor, material, and overhead costs. The centers could perform a single operation or a number of manufacturing operations. • All elements of cost (labor, material, overhead) are recorded initially in the agency’s general ledger control accounts, which in the case of the Bureau of Engraving and Printing include administration, engineering, engraving, technical services, and manufacturing. This recording is not sufficiently precise for costing purposes, however. • After being recorded in the general ledger control accounts, the costs and expenses must be distributed to the responsible individual cost center or department. In this example, the monthly assessment of costs to centers is by OMB object classifications: personnel compensation, benefits, materials, utilities, and so forth.

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Exhibit 13.4 General Flow of Bureau of Engraving and Printing Cost Accounting System Labor

Stores requisition

Salaries and wages; cost of leave; retirement; insurance benefits; etc.

Accounts payable

Direct materials, factory supplies, and administrative supplies.

Depreciation

Steam, electricity, etc.

Monthly schedule of depreciation charges for each cost center based on value of fixed assets assigned to each activity.

GENERAL ACCOUNTS SECTION—SUMMARIZATION OF COST BY MAJOR FUNCTIONAL GROUPINGS

Control account 500 Administrative Offices

Control account 600 Office of Engineering

Office of Engraving

Control account 900

Control account 800

Control account 700

Office of Manufacturing

Technical Services Division (Ink Manufacturing)

COST ACCOUNTS SECTION—ALLOCATION OF COSTS TO EACH COST CENTER RESPONSIBLE FOR INCURRING COST

37 Administrative cost centers C.C. 5300 Financial management C.C. 5400 Industrial relations Etc.

8 Engineering and plant maintenance cost centers

4 Ink manufacturing cost centers

33 Product manufacturing cost centers

C.C. 6140 Machine shop

C.C. 7120 Engraving

C.C. 8120 Testing laboratory

C.C. 9610 Plate printing section

C.C. 6130 Electric shop

C.C. 7130 Photolithography

C.C. 8130 Ink manufacturing

C.C. 9620 Overprinting section

Etc.

Etc.

Etc.

Etc.

• • Statement showing cost center costs by object classification.

4 Engraving cost centers

Distribution of cost center costs to products processed therein Product “A” Product “B,” etc.

Daily production data reports showing labor time, and units processed.

Work in process Current month manufacturing cost is charged into a work in process account by operation for averaging with value of any inventory on hand at beginning of month. An average unit cost rate is determined and used to price work completed during month (finished goods) and any inventory remaining on hand at end of month (work in process). Product “A” Product “B,” etc. GENERAL ACCOUNTS SECTION

Rates per thousand units for products manufactured.

Finished goods Manufacturing cost of goods completed during month is averaged with the value of any finished goods on hand at beginning of month. The average unit cost rate, thus determined, is used to price deliveries made during the month and any inventory remaining on hand at end of month.

Application of cost of office of engineering and administrative offices to manufacturing cost of individual products produced

Total cost of individual products produced

Individual finished unit cost rate (Total product cost divided by units produced)

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• The initial distribution of costs will in some instances be to support offices or organizations, whose costs in turn must be allocated on some beneficial or causal basis to cost centers. Such costs might be referred to as manufacturing overhead. • Once the total costs of manufacturing have been accumulated in the production cost centers, these costs must then be prorated over the units of production of the several cost centers. Typically, cost center reports are compiled daily to show labor, material, and overhead costs. • For direct labor, a daily reporting from data accumulated by various cost centers is generally made of units produced and the hours of work invested by individuals. The direct labor cost is determined by multiplying the reported hours worked times labor rates for each operation or process. Fringe benefit costs associated with the labor are added to the direct labor cost. • With respect to direct materials, production centers are charged based on the requisitions for materials drawn from inventory. If more than one process benefits or uses the same material, allocations or material cost are based on the activity or output of the individual cost centers. • Manufacturing overhead (indirect labor, indirect material, depreciation, etc.) must also be allocated to cost centers. In practice, the more common bases include direct labor hours, direct labor dollars, cost of materials, labor plus material cost, and volume (square footage, cubic contents, space occupied, usage of equipment, etc.). Absolute precision is not critical, but timeliness of reasonably accurate data is important. For this reason, many manufacturing entities adhere to predetermined rates or bases for charging or applying overhead during the period. Adjustments for variances between this predetermined rate and actual levels of overhead costs may have to be made after the end of the period when total costs are known with more precision. • Total manufacturing costs and the units produced are posted to work in process inventory accounts. The costs and units of the current period are accumulated with the units and costs on hand at the beginning of the period to determine an average cost per unit for the purpose of pricing the units transferred to a subsequent process or to finished goods, or goods that remain in process. • One of the last costing efforts is distributing general, administrative, and other costs (engineering, in the case of the Bureau of Engraving and Printing) over the total manufacturing costs of the period. These nonmanufacturing costs are related to (1) finished goods delivered, (2) finished goods in inventory, and (3) work still in the process of manufacture. A common allocation basis is total cost because these administrative costs are related to the overall general administration and management of the manufacturing operations and are not controllable by those responsible for production only. Determining production costs. Exhibit 13.5 illustrates the cost of production using a process cost accounting method. Several differences exist between this accounting and the work order or job cost system described earlier.

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• Costs are charged or applied to a department, not to the work order or job. • Costs are accumulated by the manufacturing department, rather than being identified to a lot, job, or unit. • Costs are transferred to succeeding departments in the process. • Costs for units are determined periodically on an average basis for the equivalent units of production. • The costs charged to earlier manufacturing departments are transferred to succeeding manufacturing departments as units are moved from one department to another. Note that the finished unit of any one department may or may not constitute the finished product ultimately shipped to the customer agency. In fact, in the typical operation, the end product of one department often becomes the raw material for the succeeding departments. Accounting considerations. Like other government entities, an industrial fund, regardless of the method of cost accounting used, must still comply with accounting standards, principles, and procedures for obligation and expenditure accounting and reporting. Although the nature of the transactions that follow may be similar to that of a work order or job cost operation, significant differences exist, particularly with respect to (1) charging costs to departments (rather than to lots, jobs, etc.), (2) transfer of costs from one department to another (as the products of an earlier department become the raw material of a succeeding department), and (3) effect of computing equivalent units of production. Additionally, the example assumes that the customer agency placed a formal order for the units produced. Like other inventories, finished goods must be controlled until shipment to customer agencies. Periodically, generally each month, financial reports and statements are prepared to determine the relationship of revenues earned and billed to costs incurred. The “selling” or transfer pricing formula must be adequate to ensure that the revenues collected are sufficient to cover all costs and expenses. Accounting procedures. The operation of an industrial fund activity, using the process cost accounting method, requires that accounting records formally recognize several events: • The initial capitalization and apportionment of monies authorized and appropriated by Congress and apportioned by the OMB as being available for obligation and expenditure. • The allotment responsibility distributed to officials designated as authorized to enter into obligation on behalf of the fund. • The initiation of work on the basis of a formal order from customer agencies. (These orders should be acknowledged in the accounting records because the unfilled order is considered part of the composite obligational authority of the industrial fund.) • The award of contracts, purchase orders, and other authorized agreements for the acquisition of materials, supplies, equipment, or services. • The receipt and recording of materials, supplies, equipment, and other acquisitions received.

Disposition of Department Costs (1) Transferred to next department (2) Transferred to finished goods (3) In process—end of period (a) From other departments (b) Materials (c) Labor (d) Manufacturing overhead Total in process (4) Total department cost

(1) Cost from other department (2) Cost by department (a) Material (b) Labor (c) Manufacturing overhead Total—this department (3) Total department cost

Cost of Department

Units of Production Units started Units from other department Units transferred to next department Units transferred to finished goods Units in process—end of period

($2.00 × 400) ($2.00 × 400/2) ($2.00 × 400/2)

2.00 2.00 2.00 6.00 6.00

4,000 3,600 3,600 11,200 $11,200

800 400 400 1,600 $11,200

$ 9,600 0

$

For unit $ 0

For department $ 0

2,000 0 1,600 0 400

Department A

($3.00 × 200/2) ($2.00 × 200/2)

($6.00 × 200)

0 4,500 3,000 7,500 $17,100

1,200 0 300 200 1,700 $ 17,100

$15,400 0

$

0 3.00 2.00 5.00 11.00

For unit $ 6.00

0 1,600 1,400 0 200

Department B

For department $ 9,600

Exhibit 13.5: Cost of Production (Illustration of Process Cost Accounting)

($11.00 × 200) ($1.00 × 200) ($2.00 × 200/4) ($2.00 × 200/4)

1,400 2,500 2,500 6,400 $21,800

For department $15,400

2,200 200 100 100 2,600 $ 21,800

0 $19,200

$

1.00 2.00 2.00 5.00 16.00

For unit $ 11.00

1,400 0 1,200 200

Department C

Computation of Unit Cost

Equivalent Units of Production = = =

Material Labor Overhead

=

$3,000 = $2.00 1,500

Overhead

Overhead

$3,600 = $2.00 1,800

$4,500 = $3.00 1,500

Labor

=

Labor

$3,600 = $2.00 1,800

=

=

=

$2,500 = $2.00 1,250

$2,500 = $2.00 1,250

$1,400 = $1.00 1,400

Department C Material = 1,400 units complete Labor = 1,200 + 1/4 of 200 = 1,250 Overhead = 1,200 + 1/4 of 200 = 1,250 Material

Department B Material = 0 Labor = 1,400 + 1/2 of 200 = 1,500 Overhead = 1,400 + 1/2 of 200 = 1,500

$4,000 = $2.00 2,000

Department A Material = 2,000 units complete Labor = 1,600 + 1/2 of 400 = 1,800 Overhead = 1,600 + 1/2 of 400 = 1,800

Exhibit 13.5: Cost of Production (Illustration of Process Cost Accounting) continued

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• The accounting for material consumed or labor costs incurred. (However, unlike the work order system, in which costs are accumulated by specific jobs or lots, costs under a process cost system are charged directly to a department. It is the department, rather than the job, that is significant under a process cost system.) • The recording and reporting of unfunded costs in the same manner as the funded costs. (The more common unfunded costs are accumulated depreciation related to fixed assets and the accrued liability for employees’ earned leave.) • The application or allocation of overhead costs to the departments on the basis of a predetermined rate, because the actual overhead costs will not be known for some time after the close of the accounting period, probably long after the units have been completed and shipped to customers. At the end of the period, the applied estimate of overhead costs is offset against actual overhead costs incurred. The variance between applied and actual costs is recovered from or returned to customers by adjusting the applied rate of future periods. Generally, overhead is applied to the manufacturing departments on some quantitative basis bearing a relationship to dollars of direct labor, hours of labor, machine hours, or some other indicator of activity. • The accounting for goods completed and the related costs, which must be removed from the work in process accounts and transferred to the finished goods account. • In some instances, the customer agency may have provided an advance of funds, which must be treated as a liability owed until earned. Generally, the advance or revenues are earned when goods are completed and shipped pursuant to directions provided by the customer agency. Upon shipment, the completed units and the related cost must be removed from the finished goods inventory. Periodically, usually monthly, a reporting is made of the manufacturing process. Industrial funds prepare a financial statement of revenues, costs, and expenses. This statement provides essentially the same information as the statement of cost of goods manufactured and sold that one would expect to obtain from a commercial manufacturing plant. In practice, control accounts are used to provide a summary of period costs, such as those for personnel, fringe expenses, travel, contracts, and so on. The costs are applied to manufacturing departments and other benefiting activities, such as overhead and administrative cost centers. The cost or expense variance can, pursuant to the guidance provided by the GAO, be shown as either a deferred charge or a credit in the succeeding period, depending on whether there was an overapplication or underapplication of the cost or expense during the preceding period. The preferable treatment, however, is to adjust the costs or expenses for any variance at the end of the fiscal period unless the variance would have a material effect of the financial position of the agency. If the current-period costs or expenses are adjusted for a

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variance, the adjustment should be made to the general overhead or administrative expenses account, as appropriate. Invested capital. The invested capital of the fund is determined by closing several of the cost, expenditure, and revenue accounts (into the invested capital account). After closing, the balance of the invested capital account is determined by the net balance of these entries: INVESTED CAPITAL Cost of goods shipped Manufacturing overhead—Actual Administrative expense—Actual Total

$12,000,000 2,000,000 1,000,000 $13,000,000

Expended funds—Capital Revenues Total Invested capital balance

$ 5,000,000 15,000,000 20,000,000 $ 7,000,000

14

COSTING FEDERAL ENTITIES, PROGRAMS, AND ACTIVITIES BACKGROUND

FASAB Cost Accounting Standards The FASAB issued Statement No. 4, Managerial Cost Accounting Standards and Concepts, in July 1995 and provided for a lead time that was extended to two years to permit orderly agency implementation. Two years later, federal chief financial officers reported that almost no progress had been made toward compliance and requested another two years’ delay. But as of 2006, this essential and longrecognized need for cost accounting, managerial accounting, and activity costing had still not been realized. In the mid-1990s, the FASAB began a project on managerial accounting. Given the meager use of cost accounting within many federal agencies, the FASAB believed that issuance of a general concept statement would suffice. But even the early study of the subject area made it clear that action, not a concept statement, was needed. Cost accounting standards were needed because users of financial information, Congress, government managers, interest groups, and taxpayers were putting more emphasis on the cost of government programs, products, and activities than ever before. Without understanding the true cost of government, efforts to reduce spending, control deficits, raise new taxes, and improve government functions could well be misguided, wrongly focused, and ineffective. Cost defined. After much study, the FASAB concluded, in SFFAS No. 4, that managerial cost accounting should be a fundamental part of any financial management system and be the basis used for accounting, recognition, and measurement of an agency’s operations. Further, all cost information should be developed from a common data source and all output reports should be reconcilable to each other. The FASAB conceded that costs may be accumulated through use of a cost accounting system or through the use of cost-finding techniques and provided these criteria in SFFAS No. 4. Full costs. Federal entities should report the full cost of outputs in their generalpurpose financial statements. That full cost of an output produced by a responsibility segment is the sum of 1. The cost of resources consumed by the segment that directly or indirectly contributed to the output 2. The costs of identifiable supporting services provided by other responsibility segments within the operating entity, and by other reporting entities

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Interentity costs. Each entity’s full cost should incorporate the full cost of goods and services that it receives from other entities. The providing entity has the responsibility to provide the receiving entity with information on full cost of such goods and services either through billing or other advice. Recognition of interentity costs that are not fully reimbursable is limited to material items that 1. Are significant to the receiving entity 2. Form an integral or necessary part of the receiving entity’s part of the receiving entity’s output, and can be identified or matched to the receiving entity with reasonable precision Broad and general support services provided by a federal entity to all or most other entities generally should not be recognized unless such services form a vital and integral part of the operations or output of the receiving entity. Managerial cost accounting. Managerial cost accounting is the process of accumulating, measuring, analyzing, interpreting, and reporting costs information useful to both internal and external groups concerned with the way in which the organization uses, accounts for, safeguards, and controls its resources to meet its objectives. Managerial cost accounting, as described in SFFAS No. 4, is the servant to both budgetary and financial accounting and reporting because it assists those systems in providing information. Additionally, managerial costing provides useful, meaningful information to management. Costing methodology. Outputs produced by responsibility segments should be accumulated and, if practicable, measured in units. The full cost of resources that directly or indirectly contribute to the production of outputs should be assigned to outputs through costing methodologies or cost-finding techniques that are most appropriate to the segment’s operating environment and should be followed consistently. Cost assignments should be performed using these methods, listed in the FASAB’s order of preference: (1) direct tracing of costs wherever feasible and economically practicable; (2) assigning costs on a cause-and-effect basis; or (3) allocating costs on a reasonable and consistent basis. Cash Basis Accounting and Reporting For more than 200 years, as practiced by Congress and in the executive branch, cash basis accounting and reporting has hidden more financial problems than it disclosed. The congressionally prescribed financial management policies and the fiscal practices of executive departments and agencies failed to control expenditures, reflect the true liabilities of the government, and accurately report the financial condition of the government. In the mid-1980s and continuing into fiscal year 1990, informed analysts and news media highlighted the accounting “gimmickry, fiscal hokum, and collective fibbing” that accompanied congressional and presidential discussions and positions concerning the federal deficit and efforts to “fix” the fiscal problems of the federal government. In these years, financial pronouncements concerning the financial stability or instability of the federal government moved from somewhat credible to incredulous. Financial data released by the federal government were challenged repeatedly by the financial news media and others. Reported bud-

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gets and projected deficits were publicly ridiculed as being too low by magnitudes. GAO reports, press releases, and speeches by the Comptroller General also took issue with the quality of the government’s accounting and financial reporting. By different laws, Congress had required that the accrual basis of accounting be used in the federal government, but did not uniformly define the term, never enforced the legislation, and seldom or only reluctantly provided money or people to permit agencies to implement the systems required to implement its laws. Cash was the preferred basis of accounting, and department and agency systems were designed to implement the cash-basis fiscal rules and procedures of the OMB and the Treasury. Congressional Actions Congress, when it passed the Chief Financial Officers Act of 1990, found that the current financial reporting practices of the federal government did not accurately disclose the current and probable future cost of operating and investment decisions and did not permit adequate comparisons among agencies. Later promulgations of the FASAB emphasized that accrual costs was the preferred basis for measuring programs and assessing performance. Excerpts from legislation of the 1980s and 1990s highlight a renewed emphasis given to the reporting of costs by the federal government: • Federal Managers Financial Integrity Act of 1982: “...each executive agency...shall provide reasonable assurances that obligations and costs are in compliance with applicable laws.” • Chief Financial Officers Act of 1990: “...an agency Chief Financial Officer shall...develop and maintain an integrated agency accounting and financial management system...which provides for...the development and reporting of cost information; and...the systematic measurement of performance...[and shall] review...and make recommendations on revising those charges [for services and things] to reflect costs incurred...in providing those services and things of value.” • Government Performance and Results Act of 1993: “...in measuring and reporting program performance...the Office of Management and Budget shall submit a report to the President and Congress which shall...assess the benefits, costs, and usefulness of plans and reports prepared...[and shall include]...an assessment of the benefits, costs, and usefulness of increasing managerial and organizational flexibility, discretion, and authority in exchange for improved performance....” • Federal Financial Management Improvement Act of 1996: “...require[s] Federal financial management systems to support full disclosure of Federal financial data, including the full cost of Federal programs and activities...establish financial management systems to support controlling costs of the Federal Government....”

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FASAB Pronouncements on Cost FASAB issuances in the 1990s recommended that federal financial reporting be based on cost information to evaluate the service efforts, costs, and accomplishments; determine the costs of providing specific programs and activities and the composition of, and changes in, these costs; and report full costs of outputs. The FASAB has consistently considered cost information to be essential in five areas: (1) budgeting and financial planning; (2) performance measurement; (3) determining reimbursements and setting fees and prices; (4) program evaluations; and (5) making economic choice decisions. The FASAB believes that financial reporting on program performance measures should be such that a cost can be defined for each unit of output and outcome and should reflect costs that can be directly traced to the agency’s program, assigned to the program based on cause and effect, or allocated to the program on a reasonable and consistent basis. Historically, the term “cost” has been used loosely and probably even incorrectly with respect to federal operations. For example • Congressional appropriations and other budget authority are not costs. • Contracts issued or orders placed by federal entities are not costs. • Grants awarded by federal program offices are not costs. • Checks issued or cash disbursements are not always costs. Congress, the OMB, the GAO, the FASAB, and citizen reports and studies (dating back to the second Hoover Commission report in the 1950s and earlier) have extensively documented the importance of cost and the essential role in measuring performance. Within the federal community, costs have been defined as the sum of all costs required by a cost object, including the costs of activities performed by other entities regardless of the funding sources. This definition encompasses the application of all funds and reporting of consumption of all resources that benefit activities of the current and future periods. In federal entities, there is a need to determine and assign the costs of an entire department or agency, by reporting entities within a department or large agency and its subordinate responsibility segments, which might themselves be major suborganizations responsible for managing or procuring goods or services. Within these organizational levels, costs must be assigned by one or more cost objects. Cost objects might be comprised of programs, projects, and activities. Additionally or alternatively, costs may have to be accumulated and reported by both congressional budget accounts and expense categories. The FASAB’s position is that cost accumulations are best accomplished by (1) a formal cost accounting system; (2) structured cost finding techniques; or (3) intermittent special cost studies. The resources committed to accumulating costs and the precision of financial reporting vary depending on the methodology used. Cost accounting systems are more expensive, and cost studies are the least expensive. Regardless of the applied methodology, federal entities must ensure that the reported costs are accrued costs, as that basis of accounting is defined for the entity’s financial statements.

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COSTING METHODOLOGIES Cost Accounting System Cost accounting is a formal, continuing, systematic method of accumulating, classifying, summarizing, reporting, and interpreting costs of operations for purposes of planning, budgeting, controlling, decision making, and determining product or services costs, utilizing a full accrual basis of accounting. In a cost accounting system, classification of accounting data of each economic event must be in sufficient detail to permit aggregation of financial results by the program and program subcategory for which budgetary decisions have to be made. Costs by program also may have to be compiled and related to other factors; for example, a specific title or section of a law, expenditures incurred by congressional district, or internal managerial decisionmaking related to program activities, to 1 mention a few of the more common. For the federal government, a cost accounting system must provide for the proper consideration of all sources of resources used or consumed. For example, if an entity’s operations, activity, output, and so on are supported by multiple financing sources, all financing sources must be considered. If an entity’s financing derives from two or ten appropriations, emanates from two or ten budget accounts, or is provided by funds allocated from two or ten different federal entities, the costs of all of these resources consumed or used, regardless of the financing source, must be considered. In years past, a federal agency might report only the funds consumed or used from its own appropriation and make no accounting for any “free” goods, services, facilities, and other support obtained from other federal entities. Under the contemporary definition of full cost, this is no longer acceptable. Cost-Finding Techniques Cost-finding techniques produce cost data by analytical or sampling methods. Cost-finding techniques are appropriate for determining certain kinds of costs, such as indirect costs, common costs, items with costs below set thresholds within programs, or sometimes costs for a program in its entirety. Cost-finding techniques, properly applied, could support the overall managerial cost of accounting processes and can represent nonrecurring analyses for specific cost reporting. The GAO has further described a cost-finding system as one under which unit costs are obtained by analyzing expenditure accounts and making test counts of units at regular or irregular intervals. Cost-finding caveats. In contrast to a formal cost accounting system, costfinding techniques do not provide accounts for accumulating cost data on a continuous basis or for tracing the found costs to accounts in the governmental entity’s general ledger. Cost-finding techniques may lack definitional uniformity among cost elements and among the allocation of indirect and common costs. Costs determined 1

The core federal system requirements dictate that inputted data for each transaction identify these relationships within a program: decision unit, program element, subprogram, subactivity, and subsubactivity, if one exists.

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from this technique may suffer from lack of consistency of cost data accumulation with preceding and succeeding fiscal periods. For these reasons, cost-finding techniques are best applied in instances where detailed financial costs are needed occasionally and for specific purposes. Data resulting from cost-finding techniques are not as precise as those that might be obtained from a cost accounting system. Further, because cost-finding data often cannot be related to the agency’s formal accounting system, the resultant data may not always be as readily accepted as data produced by a formal continual costing system. Activity-based costing. Popular in the private sector, but also used to some degree in government, activity-based costing (ABC) is a cost-finding technique that determines or measures costs and performance of project- and process-related activities and affected cost objects and assigns direct, indirect, and common costs to cost objects such as products and customers based on use of activities. A cost object is an activity, output, or item whose cost is to be measured. A cost object could be an organizational division, function, task, product, service, customer, or other objective. Cost objects will be unique to each federal entity or its programs. For the federal government, the FASAB states that activity-based costing could measure costs and performance of process-related activities and cost objects, such as products or customers, based on their use of activities. The ABC method would recognize the causal or beneficial relationship of cost drivers related to those activities. A cost driver is any factor that causes a change in the cost of an activity or output. ABC is not so much a system or methodology as it is a technique or analytical tool that breaks down a process or product (i.e., a cost object) into the elemental activities that are essential to performance or accomplishment of the cost object. Conceptually, an ABC approach is comprised of several tasks or steps: 1. Establish cost sources. Identify a cost base that will subsequently be used to apply dollar values to activities that comprise or contribute to the cost object. In most instances, financial data from the general ledger, or even an entity’s financial statements, will not be in sufficient detail to be activity specific. Further, these data will be historical, and ABC inevitably requires a combination of historical as well as estimated costs. Additionally, indirect and common costs must also be considered to arrive at full costs, as that term is now used by Congress, the OMB, the FASAB, and others. 2. Define essential core activities. The object to be costed (e.g., program, organization, location, job, product, process, output, outcome, etc.) is comprised of a few or possibly several absolutely essential activities or tasks that must be performed to accomplish the cost objective. These activities might be viewed as the critical success factors that must be done, done right, and, it is hoped, done only once. 3. Determine direct cost of activities. Once core activities are defined, the total direct costs must be determined for each. Often the data sources will be invoices or transactional data from levels below the totals appearing in a general ledger. Also, estimates will have to be made of other direct financial resources consumed or used in the performance or accomplishment of an ac-

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tivity. Some examples might be allocations of appropriations from other entities, financing support received from other budget accounts, assistance from personnel on loan from another entity, and so forth. 4. Assign and allocate common, indirect, support, and general administrative costs. There are other costs necessary to performance of a specific activity or to the cost object as a whole, such as common, indirect, support, and general administrative costs. Terminology concerning these costs is not used in a mutually exclusive manner, and the cost distribution method is not unique to any one of these cost categories. Often it is difficult to determine a clear cause/benefit of these costs to an activity, to several activities, or to a single cost object. Nonetheless, these costs may be roughly defined as follows: • Costs common to two or more activities. Common costs would be resources employed jointly in the performance or accomplishment of two or more essential activities that cannot be directly traced to any one activity. These costs might be identifiable and split among benefiting activities or cost objects on a relatively direct tracing method, such as counts, staff hours, gallons consumed, and so forth. • Indirect costs of activities. Indirect costs would be costs related to performing or accomplishing essential activities that cannot be identified specifically with or traced to a given activity or cost object in an economically feasible way. At the federal level, these costs might include entitywide support functions such as automation, communications, postage, purchasing, accounting, and personnel functions. These costs are often accumulated in a cost pool, and the pool is spread to all activities and cost objects on some gross quantitative relationship, such as purchase orders processed, transactions paid, persons hired or terminated, and so on. • Beneficial support costs. Support costs are those resources related to performing or accomplishing essential activities that are not directly associated with the direct activity or cost object. • Headquarters, general administrative costs. General administrative costs would include, for federal entities, the resources consumed by the office of the secretary or other heads of the entity. These entity-wide costs might include space, maintenance, security, and utilities directly associated with headquarters personnel and are often only remotely related to activities or cost objects. Often the only costing possible is a general allocation of these expenses by some gross common denominator, perhaps number of activity employees, relative square footage required to perform or accomplish activities, or more generally, relative total direct costs of activities or the cost object as a whole. 5. Determine activity-based costs. The purpose of an activity-based study is to determine or evaluate performance costs (probably a combination of historical and estimated financial data) or to estimate future costs of performance (probably a blending of historical and estimated financial data).

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Activity-based costing is a tool that will permit cost determinations or cost analyses for use in such analytical exercises as “should cost,” “would cost,” and “did cost” studies. ABC Caveats The purpose of an ABC study is not the full allocation of costs, from all levels of expenses, for whatever or of all the activities or cost objects that may reside within an entity. Rather, an ABC study should identify those direct costs that are absolutely essential and critical to performance and accomplishment. Only direct costs can be directly controlled by managers. Once direct costs are determined, there will be significant costs “left over” that are nondirect (e.g., common, indirect, support, and general administrative); such costs are more remote and have a less certain relationship to activities and cost objects. An ABC task is to assess which of these leftover costs are essential to performance or accomplishments of the activity. Close scrutiny must be given to all allocated and assigned costs, and certain questions must be asked, such as • Are the nondirect costs truly essential and directly relevant to the activity or cost object under study? • Is the cost allocation methodology an attempt to pile indirect cost onto productive activities, and thereby mask the fact that indirect costs are several magnitudes larger than productive costs necessary to perform or accomplish an activity or cost object? • Does the allocation or assignment of costs to activities and cost objects distort true costs and cause managers to be misled when making such cost-based decisions as decisions of make versus buy; decisions to perform by in-house or nongovernmental labor; or decisions of prices to cover true costs? To understand ABC concepts, it is useful to view ABC by levels of responsibilities. For example, ABC is essential information to employees, first-line managers, and immediate supervisors responsible for completing tasks within a budget or accomplishing a defined cost object. Indirect, supporting, and administrative costs may be essential but are typically related to higher levels of management with an oversight role for several activities and cost objects among which these costs are spread. SPECIAL GOVERNMENTAL COST STUDIES: USER CHARGES, USER FEES, AND “MAKE OR BUY” DECISIONS User Charges, User Fees OMB Circular A-25, originally issued in 1959 and amended and updated in succeeding decades, established federal policy relating to services provided by the government or for the sale or use of government goods or resources. In July 1993, by the OMB’s Transmittal Memo No. 1, the 1959 edition of OMB Circular A-25 was rescinded. The long-standing and still current federal policy is that when special federal benefits are conveyed to certain recipients beyond those accruing to the general public, a user charge must be set, the objectives being to

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1. Ensure that each service, sale, or use of government goods or resources provided by an agency to specific recipients be self-sustaining 2. Promote efficient allocation of the nation’s resources by establishing charges for special benefits provided to the recipient that are at least as great as costs to the government of providing the special benefits 3. Allow the private sector to compete with the government without disadvantage in supplying comparable services, resources, or goods where appropriate Special Benefits, Special Beneficiaries Federal entities are required to make determinations as to when a special benefit condition exists. The OMB states that there is a special benefit when a service (or privilege) provides special benefits to an identifiable recipient beyond those that accrue to the general public. In such circumstances, a charge must be imposed to recover either the full cost for providing the special benefit or the market price. For example, a special benefit will be considered to accrue and a user charge will be imposed when a government service • Enables the beneficiary to obtain more immediate or substantial gains or values (which may or may not be measurable in monetary terms) than those that accrue to the general public (e.g., receiving a patent, insurance, or guarantee provision, or a license to carry on a specific activity or business or various kinds of public land use); or • Provides business stability or contributes to public confidence in the business activity of the beneficiary (e.g., insuring deposits in commercial banks); or • Is performed at the request of or for the convenience of the recipient, and is beyond the services regularly received by other members of the same industry or group or by the general public (e.g., receiving a passport, visa, airman’s certificate, or a customs inspection after regular duty hours). Assessing and Recovering User Charges OMB Circular A-25 (revised July 1993) requires that when determining the amount of user charges to assess • User charges are sufficient to recover the full cost to the federal government of providing the service, resource, or good when the government is acting in its sovereign capacity. • User charges will be based on market prices when the government, not acting in its sovereign capacity, is leasing or selling goods or resources, or is providing a service (e.g., leasing space in federally owned buildings). Under these business-type conditions, user charges need not be limited to the recovery of full cost and may yield net revenues. • User charges will be collected in advance of, or simultaneously with, the rendering of services unless appropriations and authority are provided in advance to allow reimbursable services.

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• Whenever possible, charges should be set as rates rather than fixed dollar amounts in order to adjust for changes in costs to the government or changes in market prices of the good, resource, or service provided. Special benefits, public benefits. When the public obtains benefits as a necessary consequence of an agency’s provision of special benefits to an identifiable recipient (i.e., the public benefits are not independent of, but merely incidental to, the special benefits), an agency need not allocate any costs to the public and should seek to recover from the identifiable recipient either the full cost to the federal government of providing the special benefit or the market price, whichever applies. No charge should be made for a service when the identification of the specific beneficiary is obscure, and the service can be considered primarily as benefiting the general public. Additionally, the OMB requires that charges will be made to the direct recipient of the special benefit even though all or part of the special benefits may then be passed to others. Full Cost, Market Price Defined The OMB requires that user charges be sufficient to recover the full cost when the government acts in its sovereign capacity or at market prices when the government is not acting in its sovereign capacity. OMB Circular No. A-25, while widely quoted as a key policy statement for cost determination, makes no reference to the accounting basis upon which cost-based user fees shall be determined. Full cost, pursuant to the Circular, can be determined or estimated from the best available records of the federal entity, and new cost accounting systems need not be established solely for OMB Circular A-25 purposes. Full cost and market price have been defined as 1. Full cost includes all direct and indirect costs to any part of the federal government of providing a good, resource, or service. These costs include, but are not limited to, an appropriate share of (a) Direct and indirect personnel costs, including salaries and fringe benefits such as medical insurance and retirement. Retirement costs should include all (funded or unfunded) accrued costs not covered by employee 2 contributions. (b) Physical overhead, consulting, and other indirect costs including material and supply costs, utilities, insurance, travel, and rents or imputed rents on land, buildings, and equipment. If imputed rental costs are applied, they should include

2

The term “funded cost” indicates that the federal agency has available to it congressionally approved appropriations or budget authority or contract authority to incur obligations and make expenditures. An “unfunded” cost would be a cost that must be recognized by the agency, but for which the agency does not currently have congressionally approved budget authority (e.g., commonly unfunded portions of pensions, retirement benefits, postemployment benefits, etc.).

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(1) Depreciation of structures and equipment, based on official Internal Revenue Service depreciation guidelines unless better estimates are available (2) An annual rate of return (equal to the average long-term Treasury bond rate) on land, structures, equipment, and other capital resources used (c) The management and supervisory costs (d) The costs of enforcement, collection, research, establishment of standards, and regulation, including any required environmental impact statements (e) Full cost shall be determined or estimated from the best available records of the agency (a new cost accounting system need not be established solely for this purpose). 2. Market price means the price for a good, resource, or service that is based on competition in open markets, and creates neither a shortage nor a surplus of the good, resource, or service and will be determined in the following manner: (a) When a substantial competitive demand exists for a good, resource, or service, its market price will be determined using commercial practices, for example (1) By competitive bidding; or (2) By reference to prevailing prices in competitive markets for goods, resources, or services that are the same or similar to those provided by the government (e.g., campsites or grazing lands in the general vicinity of private ones) with adjustments as appropriate that reflect demand, level of service, and quality of the good or service. (b) In the absence of substantial competitive demand, market price will be determined by taking into account the prevailing prices for goods, resources, or services that are the same or substantially similar to those provided by the government, and then adjusting the supply made available and/or price of the good, resource, or service so that there will be neither a shortage nor a surplus (e.g., campsites in remote areas). Absent from definition in OMB Circular A-25 is guidance on the accounting basis that will be used (accrual, cash, or an alternative hybrid basis) in these cost determinations. Also, neither of the two recommended methods for determining a user charge requires that the user charge decisions be based on a cost study or costing methodology or on a formal cost accounting system. Exceptions to OMB Circular A-25 Mandates In Circular A-25, the OMB includes certain exceptions to its user charge policies: 1. Agency heads or their designee may make exceptions to the general policy if the provision of a free service is an appropriate courtesy to a foreign gov-

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ernment or international organization; or comparable fees are set on a reciprocal basis with a foreign country. 2. Agency heads or their designee may recommend to the OMB that exceptions to the general policy be made when (a) The cost of collecting the fees would represent an unduly large part of the fee for the activity; or (b) Any other condition exists that, in the opinion of the agency head or his designee, justifies an exception. “Make or Buy” Decisions For decades, the federal government has had a “make or buy” policy. OMB Circular A-76, issued initially in the 1960s, outlined procedures for determining whether commercial activities should be performed under contract with commercial enterprises or performed in-house by a federal entity by federal personnel. The latest OMB Circular A-76, Performance of Commercial Activities, issued on May 29, 2003, established revised federal policy for “make or buy” decisions superseding all 3 policy statements on the subject that went before. OMB Circular A-76 states that it is a long-standing federal policy to rely on the private sector for needed commercial services. Circular A-76 is the federal government’s equivalent to the corporate world’s “make or buy” policies. It requires that a federal agency compare its own cost of providing the goods or services (or the cost to a different federal agency providing the same type of goods/services on a reimbursable basis) to the cost if the goods/services were provided by a commercial entity as the determinant activity in reaching the “make-or-buy” decisions. The A-76 cost comparison study is an OMB-specified process for developing an estimate of the cost to a federal entity to perform a commercial activity and for comparing this cost estimate to the cost of contracting out the performance or activity to either a commercial source or a public reimbursable source (e.g., another federal agency). No guidance is provided to federal entities as to whether the accrual basis or a cash basis of costs should be used in this cost study. Application of the OMB guidance results in a cost basis that might be described as a modified accrual basis of cost accumulation. In Circular A-76, the OMB acknowledges the absence of any uniform accounting system throughout the federal government. Federal “Make or Buy” Policies The stated policy in OMB Circular A-76 is that to ensure that the American people receive maximum value for their tax dollars, commercial activities should be subject to the forces of competition and that agencies shall 3

The latest revisions to Circular A-76, Performance of Commercial Activities, issued May 29, 2003, established federal policy for the competition of commercial activities and superseded OMB Circular A-76 August 4, 1983 (revised 1999); Circular A-76, Revised Supplemental Handbook, March 1996 (revised 2000); Office of Federal Procurement Policy Letter 92-1, Inherently Governmental Functions, September 23, 1992; and OMB Transmittal Memoranda 1 through 25 on the subject between the years 1999 and 2003.

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1. Identify all activities performed by government personnel as either commercial or inherently governmental 2. Perform inherently governmental activities with government personnel 3. Use a streamlined or standard competition process (as outlined in the Circular) to determine if government personnel should perform a commercial activity 4. Not perform work as a contractor or subcontractor to the private sector, unless specific statutory authority exists Inherently governmental activities. OMB Circular A-76 defines inherently governmental activities as those activities so intimately related to the public interest as to mandate performance by government personnel. Inherently, governmental activities normally fall into two categories: (1) the exercise of sovereign government authority; or (2) the establishment of procedures and processes related to the oversight of monetary transactions or entitlements. A federal agency shall base inherently governmental justifications on the Circular A-76 criterion that states that an inherently governmental activity involves 1. Binding the United States to take or not take some action by contract, policy, regulation, authorization, order, or otherwise 2. Determining, protecting, and advancing economic, political, territorial, property, or other interests by military or diplomatic action, civil or criminal judicial proceedings, contract management, or otherwise 3. Significantly affecting the life, liberty, or property of private persons 4. Exerting ultimate control over the acquisition, use, or disposition of U.S. property (real or personal, tangible or intangible), including establishing policies or procedures for the collection, control, or disbursement of appropriated and other federal funds Commercial activities. OMB Circular A-76 defines a commercial activity as a recurring service that could be performed by the private sector and is resourced, performed, and controlled by the agency through performance by government personnel, a contract, or a fee-for-service agreement. In addition, a commercial activity is not so intimately related to the public interest as to mandate performance by government personnel, and commercial activities may be found within, or throughout, organizations that perform inherently governmental activities or classified work. Reasons to Perform Commercial Activities An agency is required to use “reason codes” to indicate the agency’s rationale for government performance of a commercial activity. Some of the OMB-stated permissible reasons include • The commercial activity is not appropriate for private-sector performance pursuant to a written determination by the competitive sourcing official. • The commercial activity is suitable for or in an in-progress streamlined or standard competition as outlined in OMB Circular A-76.

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• The commercial activity is performed by governmental personnel as the result of a standard or streamlined competition (or a cost comparison, streamlined cost comparison, or direct conversion) within the past five years. • The commercial activity is pending an agency-approved restructuring decision (e.g., closure or realignment). • The commercial activity is performed by government personnel due to a statutory prohibition against private-sector performance. Conducting an OMB Circular A-76 Competition Planning activities. Prior to any announcement of a private-private sector OMB Circular A-76 competition, the federal entity must conduct a planning phase comprised of six steps: 1. Determine the activities and full-time equivalent (FTE) positions to be competed. 2. Conduct preliminary research to determine the appropriate grouping of activities as business units. 3. Assess the availability of workload data, work units, quantifiable outputs of activities or processes, agency or industry performance standards, and other similar data. 4. Determine the activity’s baseline costs as performed by the incumbent service provider. 5. Determine the use of a streamlined or standard competition. 6. Develop preliminary competition and completion schedules. Public agency announcements. An agency is required by OMB Circular A-76 to make a formal public announcement (at the local level and via www.fedbizopps.gov) for each streamlined or standard competition. The public announcement shall include, at a minimum, the agency, agency component, location, type of competition (streamlined or standard), activity being competed, incumbent service providers, number of government personnel performing the activity, and the projected end date of the competition. The public announcement date is the official start date for a streamlined or standard competition. In addition, an agency shall make a formal public announcement (at the local level and via www.fedbizopps.gov) of the streamlined or standard competition performance decision. The performance decision date is the official end date for a streamlined or standard competition. Streamlined and Standard Competition Processes Streamlined competition process. A streamlined A-76 competition is abbreviated, in comparison to an A-76 standard competition. Exhibit 14.2 illustrates, in summary, the significant activities that must be performed for the streamlined competition.

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Exhibit 14.2: Steps in Streamlined Competition A-76 Process COMPETITION

Make public announcement (start date)

Develop cost estimate

Preliminary planning

Make performance decision (end date)

RECOMPETITION

Award contract or issue agreement

Perform postcompetition accountability

An agency shall use a standard competition if, on the start date, a commercial activity is performed by the agency with an aggregate of more than 65 FTEs, or a private-sector or public reimbursable source and the agency tender will include an aggregate of more than 65 FTEs. An agency shall use either a streamlined or standard competition if, on the start date, a commercial activity is performed by • The agency with an aggregate of 65 or fewer FTEs and/or any number of military personnel; or • A private-sector or public reimbursable source and the agency cost estimate (for a streamlined competition) or the agency tender (for a standard competition) will include an aggregate of 65 or fewer FTEs. An agency shall calculate, compare, and certify costs based on the scope and requirements of the activity to determine and document a cost-effective performance decision as follows: • Cost of agency performance. OMB Circular A-76 requires, under the streamlined competition, an agency to calculate and certify the cost of performing the activity with government personnel for a minimum of three performance periods. An agency may base the agency cost estimate on the incumbent activity; however, an agency is encouraged to develop a more efficient organization (i.e., a most efficient organization, described in a section that follows). • Cost of private-sector performance. Additionally, OMB Circular A-76 requires an agency, under the streamlined competition, to determine an estimated contract price for performing the activity with a private-sector source, using documented market research or soliciting cost proposals in accordance with the Federal Acquisition Regulations. An agency may also determine an estimated cost for performing the activity with a public reimbursable source (i.e., another federal agency). • Time limit. A streamlined competition shall not exceed 90 calendar days from public announcement (start date) to performance decision (end date) unless a time limit waiver is granted, which cannot exceed the 90-day time limit, for a maximum of 135 calendar days from public announcement (start date) to performance decision (end date). Standard competition process. An A-76 standard competition is more extensive and longer in comparison to an A-76 streamlined competition. Exhibit 14.3 il-

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lustrates the significant activities that must be performed for the standard competition. Exhibit 14.3: Steps in Standard A-76 Competition Process COMPETITION

Preliminary planning

RECOMPETITION

Make public announcement (start date)

Receive offers and tenders

Perform source selection

Perform postcompetition accountability

Develop and issue solicitation

Develop offers and tenders

Make performance decision (end date)

Award contract or issue agreement

• Time limit. A standard competition shall not exceed 12 months from public announcement (start date) to performance decision (end date) without a time limit waiver. Before the public announcement of each standard competition, a time limit waiver could allow a specific standard competition to exceed the 12-month time limit by no more than 6 months, for a maximum of 18 months from public announcement (start date) to performance decision (end date). • Develop a “performance work statement.” The federal entity must develop a performance work statement (PWS) that defines what service or product is being requested, and the performance standards, measures, timeframes, and so on, that will form the technical performance criteria for the ultimate performing organization. Ideally, a PWS would be performance-oriented, specifying what outputs or measures are desired and limiting directions as to how results are to be achieved. The federal entity and competing private contractors would be required to execute the scope of effort defined in the PWS. • Cost of the PWS. To comply with OMB Circular A-76, a federal entity must conduct a detailed, procedural cost study that, in essence, is an estimate of the financial operating budget that the agency’s most efficient organization (MEO) will require to accomplish the PWS. The cost study must include factors such as • Direct costs of in-house performance—Personnel, material, supplies, and so on, including estimated labor inflation costs. • Other specifically attributable costs—Depreciation, cost of capital, facilities, rent, maintenance, utilities, insurance, travel, subcontracts, materials and supplies, and so on. • Overhead costs—Operations overhead (cost not 100% attributable to the activity under study, but generally associated with recurring management or support of the activity).

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• General and administrative overhead—Cost related to headquarters management—accounting, personnel, legal, space, and other common costs performed outside the activity but in support of the activity. • Additional costs—Other costs of unusual or special circumstances (office and plant rearrangements, transport, employee recruitment, training, relocation, etc.). • Federal handicap/leveling factors—The OMB Circular A-76 costing procedure is an attempt by the OMB to establish a practical level of consistency to ensure that all substantive cost factors are considered to create a relatively equitable basis for a private-sector versus government cost comparison. Numerous exceptions, modifications, exemptions, variations, and other conditions exist in OMB Circular A-76 that must be applied before a conclusion can be reached as to whether an activity should be performed by the private sector or the government. Performance period. An agency shall use a minimum of three full years of performance, excluding the phase-in period, in a standard competition. An agency shall not use performance periods for the agency tender that differ from performance periods for private sector offers and public reimbursable tenders. The Competitive Sourcing Official shall obtain prior written approval from the OMB to use performance periods that exceed five years (excluding the phase-in period). Developing the agency tender. The agency’s “tender” is its response to a competitive solicitation that responds to the requirements of the solicitation terms and conditions. The agency tender shall include, among other things, (1) an MEO, and (2) a certified agency cost estimate. The MEO is an agency’s staffing plan identified in the agency tender. It is a mythical organization and not usually a representation of the incumbent organization. The MEO is the product of management analyses that include activity-based costing, business case analysis, consolidation, functionality assessment, industrial engineering, market research, productivity assessment, reengineering, reinvention, utilization studies, and value engineering. An MEO may be comprised of either government personnel or a mix of government personnel and MEO subcontracts. Under Circular A-76 criteria, the agency would then develop and certify the agency cost estimate of performance by the MEO. Commercial sources competing against a federal MEO must be cognizant that the agency’s tender or bid is not, in several instances, based on historical or estimated costs. The OMB has prescribed bid factors that will be used by the competing agency or other competing federal sources. These bid factors include, for example • The federal agency’s inflation factor will not be based on anticipated or historical inflation experience, but rather will be a rate mandated by the OMB that has historically been less than experienced inflation rates. • The tender for the MEO will include a fringe benefit rate for full-time and part-time civilians limited to 32.85%. • The bid for the MEO will include depreciation for assets that have longer lives, and therefore less costs, than applied by many commercial concerns

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(e.g., permanent facilities are expected to last 75 years; semipermanent ones, 50 years; and temporary ones, 25 years). • The OMB directs agencies to include a 10% factor of “other minor items” for replacement of these items. • An agency is directed to include an overhead factor of 12%. Determine the “most efficient organization.” A management plan is developed that describes the government’s MEO. The MEO forms the baseline for the government’s in-house cost estimate. The MEO must both reflect the scope of the PWS and identify organizations, staffing, operating procedures, equipment, and transition and inspection plans to monitor the in-house activity. All in-house costs associated with the performance of the MEO must be compiled in accordance with OMB Circular A-76. The MEO, whose mission is to execute the PWS, is the cost objective for which financial data must be compiled. Once the cost of the MEO is compiled, performance and cost bids may be solicited from private-sector organizations and/or other federal agencies, following which cost comparisons must be made. Public reimbursable tenders (i.e., bids by other federal agencies). When responding to another agency’s solicitation, a public reimbursable source shall develop a public reimbursable tender that responds to the Circular A-76 requirements. Even after this extensive comparative study, no activity can be converted to or from in-house federal performance costs unless a minimum cost differential is met (i.e., a differential that generally benefits the federal agency performing the activity). The minimum cost differential is the lesser of 10% of in-house personnel-related costs, or $10 million over the performance period, which could be a multiyear window. Under the A-76 policy, a private-sector organization must beat the government’s cost estimate by 10% of the personnel-related costs or by $10 million, whichever is less. This minimum cost differential is used by the federal government to ensure that the government will not convert an activity to private-sector support for marginal estimated savings. FEDERAL ENTITY COSTING For an entity, it might be said that the highest level of its cost reporting is its annual general-purpose financial statements. These financial statements (prepared in compliance with OMB form and content guidance, FASAB-recommended standards, and congressional intent expressed in various laws) result from application of accrual- or cost-based financial measures. But, the accrual or cost basis, as reflected in the primary general-purpose federal financial statements, is gross cost (i.e., full cost, plus any nonproduction costs assignable to the entity’s programs), less any exchange revenues earned (which, for most federal entities, is negligible). Cost-Based Financial Statements The OMB, throughout its guidance on the form and content of agency financial statements, makes repeated reference to cost, particularly net cost:

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• The statement of net cost is designed to show separately, on accrual-based measures, the net cost of operations and a computation of the net cost of a fiscal period for an entity’s major program components, in the aggregate, for the entire entity. • The statement of changes in net position is an analysis of the net cost of operations, financing sources, adjustments, and changes in the net position and a computation of the net cost of a fiscal period for an entity’s major program components, in aggregate, for the entire entity. • The statement of financing reconciles the accrual-based financial net cost of operations to the obligations of budget authority, demonstrating that the total resources consumed or used for the period’s operations have been considered. • The balance sheet or statement of net financial position reports the cumulative results of an entity’s operations, the principal element of which is the accrualbased net cost of operations for the period. The footnotes to the federal government’s first consolidated financial statements noted that the statements were prepared in accordance with the OMB’s form and content guidance and the FASAB’s recommended standards. For these governmentwide purposes, expenses were generally recognized when incurred on the accrual or cost basis. For these government-wide statements, exchange revenues (for services or goods provided) were recognized when earned, also using the accrual basis. Compilation of federal annual financial statements represents a cost accounting for an individual federal agency and, to a somewhat lesser extent, government-wide in the consolidated statements prepared annually by the Treasury. While these statements provide important information from an overall stewardship view, Congress, entity managers, and the public are more directly interested in specific program costs, results, outputs, outcomes, accomplishments, and the like. Thus, for managerial purposes, the agency-wide financial statements must be disaggregated into appropriations, allocations, budgetary accounts, program activities, and cost objects. Cost-Based Appropriation Budgets Earlier chapters documented the importance, in the federal government, of accounting and reporting by many bases, including congressional appropriations as well as costs. It was also noted that the Treasury is particularly interested in cash expenditures. In this chapter, reference is made to other needs: costing and reporting by appropriations, budgetary accounts, and cost objects. These bases are not mutually exclusive and, in fact, must all be reconcilable by the individual federal entities. The OMB’s guidance requires that costs be associated with program outputs so that such costs become the financial measures of resources consumed or applied in accomplishing a purpose, completing an activity, operating a program, and so on. At times, the OMB has viewed costs and expenses as synonymous with expenditures and cash disbursements, which is not correct from an accounting view, and at times is inconsistent with the OMB’s own definitions for these terms. All disbursements must be initially classified as (1) the acquisition of an asset (i.e., the entity has title to cash; uncollected receivables; advances; inventory; prop-

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erty, plant, and equipment; etc.), or (2) a current expense. The level of detail recorded must conform to the government’s Standard General Ledger and is dependent on management’s determination of the detail needed to permit mandated planning, controlling, and measuring of budget execution and operating performance. As noted, accounting and reporting for the cost of resources consumed or used provides support for budget requests and for comparing or financially measuring program operations, results, inputs, and outcomes. Should the congressional budget not be based on costs, entity management can still be analyzed on a “constructed” cost basis, if the cash-basis data are supplemented by obligation and other data. Similarly, a cost-basis report may have to be reconciled to incur obligations to determine the fund balance status of an appropriation or apportionment’s balances. Exhibit 14.4 highlights several types of data required to fully account for a federal entity’s stewardship. This exhibit also illustrates the relationship of costs to a cost-based appropriation budget request. Exhibit 14.4: Data Required to Account for Agency Resources PLANNING AND EXECUTING A PROGRAM FOR COST-TYPE BUDGETS (All programs are based on the work or service to be accomplished and what that work will cost.) THE TERMS USED (Measured in dollars)

Transactions for Control Purposes OBLIGATIONS Goods and services ordered regardless of when received, paid, or used ACCRUED EXPENDITURES Goods and services received regardless of when ordered, paid or used COSTS Goods and services used regardless of when ordered, received, or paid DISBURSEMENTS Bills paid, regardless of when ordered, received, or used

Available Resources APPROPRIATIONS Funds made available by Congress INVENTORIES Goods in stock and available for future use OTHER AVAILABLE RESOURCES Things for future use, such as items in process for use, cost in suspense, and other undistributed expenditures

HOW THE PROGRAM IS SET UP FIRST COST OF THE WORK + or – Changes in inventories + or – Changes in other available resources – Goods and services received without charge

SECOND ACCRUED EXPENDITURES + Increases in undelivered orders – Decreases in undelivered orders

THIRD OBLIGATIONS – Reimbursements and funds contributed by others – Unobligated funds on hand

FOURTH NEW APPROPRIATION REQUIRED

PROGRAM CONTROLS

ESTIMATES AND OPERATING BUDGETS Control the scope of the activity CONGRESS Through appropriations controls the maximum amount of allotments that can be made (on an obligation basis) APPORTIONMENTS Control maximum amount of allotments that can be made and the rate at which obligations can be incurred ALLOTMENTS At broad levels control the amount of obligations that can be incurred OPERATING BUDGETS Control the costs that can be incurred REPORTS Of results reflect variations in the estimates and furnish a basis for control of operating budgets

SOURCE: U.S. General Accounting Office, Policies and Procedures Manual for Guidance of Federal Agencies, Title 2 (Washington, D.C.:GAO).

Limitations of Financial and Appropriation Reporting Earlier chapters describe in detail the nature of accounting and reporting that a federal entity must make to Congress, the OMB, and the Treasury with respect to the

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status of appropriation balances. A federal appropriation or other congressional budget authority and accounts are given a formal number by the Treasury that relates congressional financing actions to a specific federal entity. Each fund or account provides the framework for establishing a set of balanced accounts. Reporting by budgetary accounts is necessary with respect to certain oversight and control functions exercised by Congress, the Treasury, and the OMB, but the financial statements are not sufficiently detailed to provide a reporting by specific appropriation account or another lower level of activity. Reporting by the appropriation account is not sufficiently inclusive to permit use of these data for managerial and cost accounting purposes. PROGRAM AND MANAGERIAL COSTING Program Costing In reference to the federal government, the term “program” lacks precision. The public might refer to major federal initiatives as programs (as in the defense, education, Social Security, and space programs, which are entire federal agencies). Individual federal entities might use the term “program” to refer to its own defined initiatives. Often, activities (which could be many) and purposes (which could be varied) might also be known as programs. A program might be generally defined as a major activity or operation within a department and agency that could be associated with one or more appropriations. Programs and activities are often the subject of congressional and presidential budget decisions and appropriation funding and the continual focus of department or agency senior management. A program might be a large unit or operation or a significant subdivision of a federal department or agency for which Congress has appropriated funds or provided spending authority. Most federal policy and financial decisions are based on the costs, benefits, and effectiveness of individual federal programs that often have unique operating and environmental characteristics. From 4 this perspective, a federal program is a major cost center. When a program is financed by a single appropriation or budgetary account, the cost reporting is considerably simplified. The account structure of an entity’s general ledger will provide much of the cost data of a program. The determination of a program’s cost is more complex when financing sources include or require blending of two or more appropriations and other budgetary accounts. For these programs, the financial support received from all sources must be compiled in determining costs. Managerial Costing Managerial cost accounting is a process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control an organization. It is the accounting method or process that provides the information necessary for inter4

US Government Accountability Office, Financial Reporting: Framework for Analyzing Federal Agency Financial Statements (GAO AFMD-91-19), March 1991.

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nal managers to support a variety of internal operational decisions and responsibilities. Managerial accounting can be contrasted to financial accounting in that the latter is concerned with providing primarily historical financial information to parties external to the entity (e.g., Congress, the Treasury, the OMB, etc.) in the form of financial statements or other aggregated reportings. As noted by one authority: “managerial cost accounting need only be understandable to the manager who uses the measurement. It need not respond to an outsider’s requirement for common un5 derstanding. Thus managerial costing will exhibit a functionality-based diversity.” Managerial accounting is essentially an internal financial reporting. It permits detailed assessment or measurement of performance and accomplishment. In contrast, financial statements are directed more toward oversight and compliance with externally imposed criteria. An entity’s managerial cost accounting system shares summary data from an entity’s core financial and other nonfinancial transaction-processing systems. It is the manipulation and analysis of the financial data by managers that provides the cost information to support managerial accounting and decision making. Like financial accounting, managerial accounting should be the product of a uniform (for that entity), classified (by some hierarchy that relates to the financial accounts), and defined (in a manner whereby cost elements are the same across programs and from one reporting period to the next) systematic data accumulation process. This is not a simple undertaking. Exhibit 14.5 provides an overview of information requirements that are typical of data available to and used in managerial accounting by a federal entity and for conceptual purposes defines three classification structures: financial information, operational information, and program information. Managerial costing for program management and measurement has been the subject of considerable analysis by parties within and outside of the government. The FASAB has recommended that managerial cost accounting be a fundamental part of every entity’s financial management system and that federal entities report full cost. Full cost is the sum of 1. Costs of resources consumed by the segment that directly or indirectly (i.e., not specifically identifiable with a cost object and therefore allocated on some reasonable basis) contribute to the output. 2. Indirect costs of a federal entity, including general and administrative costs (e.g., personnel, procurement, finance, general research/technical support, or maintenance not dedicated to a specific cost object). 3. General management support costs (e.g., high-level management costs as entity-wide planning, budgeting, and policy setting, possibly by the Office of the Secretary). 4. Costs of identifiable supporting services provided by other responsibility segments within the reporting entity. 5

Dr. Dale R. Geiger, Practical Issues in Managerial Cost Accounting, California State and George Washington Universities. This is one series of articles exploring cost measurement issues, particularly with respect to the Department of Defense, but equally applicable to any federal entity.

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5. Costs of identifiable supporting services provided by other reporting entities. Interentity costs would be the value of all resources received from an6 other federal entity in support of the reporting entity’s programs or mission. With respect to federal interentity support costs, the entity providing the services has the responsibility to provide to the receiving entity the full cost information, either through a billing or other advice form. Cost accounting for interentity services that are not fully reimbursable (i.e., not billable) should be limited to material or financially significant items that 1. Are significant to the benefiting or receiving entity 2. Form an integral or necessary part of the benefiting or receiving entity’s output 3. Can be identified or matched to the benefiting or receiving entity with rea7 sonable precision COSTING FEDERAL BUSINESSES Several federal entities provide intragovernmental services and goods to other federal entities on a reimbursable basis. Generally, these entities are required by law to set “selling prices” to permit recovery of full costs. These business-type activities generally account, manage, and report on their accounts on a full cost basis, using an accrual basis of accounting that closely parallels that of private-sector organizations. Many of these entities, such as revolving funds, industrial funds, franchise funds, working capital funds, and others, are discussed in an earlier chapter. As noted, if a federal entity is a manufacturing activity, the accounting complexities increase severalfold. As in the private sector, in the federal sector, the conversion costs of molding raw materials into finished goods must be accounted for on a perpetual basis. Additionally, a distinction has to be made between direct and indirect materials and labor costs; research and development costs and administrative expenses may exist that must also be recovered in the established selling prices. These enterprises often require the monitoring of overhead and indirect costs and the timely reporting of budget, volume, and efficiency variances. There is no government-wide system prescribed for the accounting of these types of business funds, but all essentially adhere to the cost or accrual basis of financial accounting, managerial accounting, and financial reporting.

6

7

Joint Financial Management Improvement Program, Managerial Cost Accounting Implementation Guide, Washington, D.C. Federal Accounting Standards Advisory Board, Managerial Cost Accounting Concepts and Standards for the Federal Government, Washington, D.C.

• Program • Project

Program

Efficiency Measures (outcomes)

Standards

• Quantitative outcome goals • Planned program costs

Goals and Objectives

Program Accumulators

• Output units • Output costs

Operations Accumulators

• Dollars • Revenue (optional) • Costs • Planned total revenue (optional) • Units

Financial Accumulators

• Outcome measures • Program costs

• Management special information needs

Special Descriptors

• Planned output costs • Planned output units

Program Information (Optional)

• Efficiency measure type

Efficiency Measures (outputs)

Operations Information

• SGL account • Object class/cost element • Entity/nonentity indicator • Federal/nonfederal indicator • Reporting period

Accounting Categorization

• Planned outcomes

• Product/service type

Activity Type

• Fund year (optional) • Account symbol (optional)

Funding Identification

SOURCE: Federal government’s Joint Financial Management Improvement Program, Managerial Cost Accounting Systems Requirements, 1998, Washington, D.C.

Program Unit

Responsibility segment Responsibility center Program Project

Operations Unit

Reporting entity Responsibility segment Responsibility center ABC activity (optional) Others as needed

• Program

• • • •

• • • • •

Organization Unit

Financial Information

Exhibit 14.5: Summary Information Classification Structure Elements Used for Managerial Cost Accounting

15

GRANTS

For many federal agencies, expenditures by grants are minimal; but for other agencies, federal funds spent under grants to purchase or support a wide variety of assistance, research, consulting, program operations, and support greatly exceed all other expenditures in the entity’s budget. Due to the dollar magnitude of grants expenditures, Congress monitors expenditures, program operations, and outcomes of federal grants programs rather closely. In addition, many others within and external to the government are concerned with the manner in which grants are awarded and the amounts, purposes, and accomplishments of federal grantees. Definitions The definition or connotation of a federal grant-in-aid has evolved over several decades. Early grants were an endowment or gift to grantees of monies with minimal reporting and accountability responsibilities. Today recipients of federal grants operate programs, perform services, and render technical assistance. In fact, the terms and conditions of many grants are indistinguishable in practice from those of federal contracts. Generally, a grant would be defined as money or property in lieu of money paid or furnished by a grantor to a grantee provided as financial assistance to the grantee or through the grantee. Typically, in the public sector, grants would not include other types of assistance, such as loans or other programs of indemnification. The money that the federal government spends on grants annually exceeds several hundreds of billions of dollars. Over the years, the federal government has variously defined grants, depending on the nature of the activity or the objective of the grant. Today, however, the federal definition is rather consistent with those of state and local governments. The Office of Management and Budget defines the object 1 expenditure class of federal grants, subsidies, and contributions in this way: Cash payments to states, other political subdivisions, corporations, associations, and individuals, include • Grants (including shared revenues) • Subsidies (including credit program costs) • Gratuities and other aid (including readjustment and other benefits for veterans, other than indemnities for death or disability) • Contributions to foreign countries, international societies, commissions, proceedings, or projects that are 1. Lump sum or quota of expenses 2. Fixed by treaty 3. Discretionary grants 1

OMB Circular A-11, Preparation, Submission, and Execution of the Budget, 2005 edition.

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NOTE: Obligations under grant programs that involve the furnishing of services, supplies, materials, and the like, by the federal government, rather than cash, are not charged to this object class, but to the object class representing the nature of the services, articles, or other items that are purchased.

In Circular A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations, the OMB describes grant awards and agreements to institutions of higher education, hospitals, and other nonprofit organizations in a more expansive 2 manner: [Grant Awards and other agreements] means financial assistance that provides support or stimulation to accomplish a public purpose. Awards include grants and other agreements in the form of money or property in lieu of money, by the federal government to an eligible recipient. The term does not include: technical assistance, which provides services instead of money; other assistance in the form of loans, loan guarantees, interest subsidies, or insurance; direct payments of any kind to individuals; and contracts which are required to be entered into and administered under procurement laws and regulations.

The term grant awards and other agreements is more restrictive than the term federal financial assistance, which would include assistance that nonfederal entities receive or administer in the form of • Grants • Loans • Loan guarantees • Property • Cooperative agreements and interest subsidies • Insurance • Food commodities • Direct appropriations • Other assistance Federal financial assistance is a more inclusive term of Congress that appears in the Single Audit Act of 1984, as amended, and sets forth a required scope of comprehensive annual audits performed on over 100,000 state and local governments, nonprofits, and academic institution grantees. The Governmental Accounting Standards Board, the standard setter for accounting and financial reporting of state and local governments, defines grants and other financial assistance in its Codification and Statement 24 as • Transactions in which one government entity transfers cash or other items of value to (or incurs a liability for) another governmental entity, an individual, 2

OMB Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations, as amended to September 1999.

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or an organization as a means of sharing program costs, subsidizing other governments or entities, or otherwise reallocating resources to the recipients • Pass-through grants, which are grants or other financial assistance received by a governmental entity to transfer to or spend on behalf of a secondary recipient A recipient government or a governmental entity that receives grants and other financial assistance for transfer to or to spend on behalf of a secondary recipient is a party in a pass-through grant. Within the government, the terminology of contracts versus grants is not consistently applied. Instruments considered to be contracts by one federal entity may be accounted for as grants by another. In addition, a variety of descriptors have been applied to grants; the more common classifications have included • Formula grants, which by law have a mandated funding level for which only identified types of grantees are eligible, with little or no discretion being exercised by the federal grantor • Project grants, which resemble contracts because grantors agree to pay the grantee for services, performance, or the completion of a project • Construction grants, which are awarded only for construction of permanent facilities, often with the federal grantor and the recipient grantee agreeing to share in the total cost of the program • Categorical grants, which are awarded by federal grantors for a specified objective or purpose • Block grants, which are intended to consolidate the funds for broad purposes into a single funding action, typically issued with fewer expenditure restrictions to governments • Noncompetitive grants, which may be awarded to all applicants meeting specified legal or other criteria • Competitive grants, which may be awarded to a selected number of grantees having similar qualifying characteristics after an evaluation of proposals, in a manner similar to that used for competitive contract awards The GASB has distinctions for those grants that are contributions or gifts of cash or other assets from another government to be used or expended for a specified purpose, activity, or facility. These grants include: operating grants, which finance program operations or which might be used for both operations and capital outlays, and capital grants, which are restricted for acquisition and construction of fixed, capital assets. None of these definitions should be viewed as mutually exclusive. In practice, a grant award could conceivably fall within two or more of any of the categories mentioned. Federal Entities with Responsibility for Grants Congress. As with all federal expenditures, Congress, by virtue of Constitution, has the sole mandate to authorize and appropriate money for grants and all other federal expenditures. The more common form of congressional direction is to in-

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clude specific provisions in a federal entity’s enabling legislation, setting forth criteria and conditions relating to any conferred grant-making authority. The involvement of Congress may vary from general oversight and monitoring compliance with legal provisions, to imposing directed guidance on a federal agency on matters concerning its expenditure of funds under grants and grantee accounting requirements, audit conditions, and other matters. Office of Management and Budget. The OMB and its predecessor, the Bureau of the Budget, issued several circulars relating to grants and practices of federal grantees. Exhibit 15.1 lists several circulars currently applicable to grants, awards, and other forms of assistance that contain criteria for determining allowable and unallowable costs and the uniform administrative requirements for grants, contracts, and other agreements. These OMB Circulars are the rules and regulations that a federal grantor must apply to its grants management programs as well as those that must prevail between the federal grantor and its grantees receiving federal assistance. Exhibit 15.1: OMB Circulars Applicable to Federal Grant Programs OMB Circulars

Subjects

A-11

Preparation, submission, and execution of the budget

A-102

Uniform administrative requirements for grants-in-aid to state and local governments

A-110

Uniform administrative requirements for grants and other agreements with institutions of higher education

A-21

Cost principles applicable to grants and contracts with educational institutions

A-87

Cost principles applicable to grants and contracts with state and local governmental units

A-122

Cost principles applicable to grants and contracts with nonprofit organizations

A-133

Audits of states, local governments, and nonprofit organizations

SOURCE: Office of Management and Budget Web site, Listing of Active Circulars, www.whitehouse.gov/omb/circulars/index.html, May 31, 2006.

Additionally, the OMB exerts considerable influence over federal grantor entities in its role as the reviewer of budgets and expenditures of federal grantor agencies and through the exercise of OMB apportionment authority by controlling the timing, rate, and purpose of expenditures made by federal grantors. The OMB has the lead responsibility in developing government-wide policies to ensure that grants are managed properly and that federal monies are spent in accordance with applicable laws and regulations. However, the OMB does not award grants or other federal assistance agreements. These are functional responsibilities that Congress has bestowed on federal executive operating agencies.

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Government Accountability Office. The GAO, by several laws, is required or authorized to audit the expenditure of federal funds under grants. The exercise of this responsibility generally takes two forms: (1) the GAO monitors the accounting and controls existing within the federal grantor entity to ensure that the appropriate checks and balances exist and that grant funds are being properly applied and expended; and (2) the GAO will conduct numerous on-site reviews, audits, and examinations of programs operated by the grantee organizations. Individual grantor entities. The Budget and Accounting Procedures Act of 1950 required the head of each grantor entity to establish and maintain an adequate system of accounting and internal controls. Implicit in this responsibility is the design of accounting and control procedures relating to the receipt and evaluation, negotiation, award, and administration of grants. Grant controls must be sufficient to monitor the obligation, liquidation of obligations, costing, and payments of the funds granted to nonfederal organizations. The proper execution of accounting and these controls requires coordination among several functional organizations in the grantor organization. Accounting and Control Considerations It is the responsibility of the federal grantor entity to establish the implementing regulations and related accounting and internal controls to properly discharge its stewardship responsibilities for grant funds being expended under its grant programs. While specific steps or details vary, federal grantors have generally established procedures requiring • A formal review process to objectively assess and evaluate grant proposals received by the federal entity • Adherence to prescribed negotiation practices precedent to the award and execution of a grant agreement • Preparation and approval of a preaward or commitment form to document the existence and reservation of previously unobligated funds equal to the estimated amount of the grant • Conduct of a survey or review of the recipient’s accounting and management control systems through on-site examinations and consultations with other federal entities with which the recipient has done business in the past • Specific conditions governing bank accounts and contributions of any required matching or cost-sharing contributions by the recipients • Evaluation of the recipient’s management personnel, personnel practices, and intent to comply with various federal laws • Execution and issuance of the grant agreement with timely notification to the entity’s fiscal function for prompt obligation of funds in an amount equal to the funded value of the grant • Periodic assessments or evaluations of the extent to which the purpose or objective of the grant is being or has been achieved • Periodic reporting of the rate of expenditures by the grantee, as well as of performance or deliveries being provided by the grantee

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• Conduct of a prepayment audit, if the grantee is on a reimbursement basis, to ensure that expended funds are consistent with the grant conditions • Prompt and accurate payment of all invoices submitted by grantees • Settlement of any advances of money and inventories of property in a manner consistent with agency policy and grant conditions • Final audit of the recipient, with the federal entity retaining the right to recover appropriate amounts after fully considering audit recommendations and any disallowed costs identified during the audit • Timely settlement of grant debts and prompt closeout, final accounting, and reporting at the conclusion of the grant program Grants Procedures and Controls An agency’s accounting for grants must be on the basis of each grant awarded and must cover the full period of the grant from the time of the preaward commitment of funds to the final closeout and liquidation of any remaining obligated funds. This accounting includes four phases or steps: 1. The formal recognition of the approval of the grant application 2. The award or execution of a grant agreement that formally obligates agency funds 3. The disbursement of federal money 4. The financial reporting, closeout, and final settlement of the grant Any advances or letter of credit withdrawals provided to grantees must be shown as receivables until the grantee provides evidence of performance or compliance with conditions of the grant agreement. The actual awarding and administration of a grant requires close coordination among several program officials and functional organizations within a federal agency that have responsibility for the grants. Exhibit 15.2 summarizes the general nature of processes, forms, accounting, and reporting used by federal grantors to monitor their grant programs.

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Exhibit 15.2: Federal Agency Functions FEDERAL AGENCY FUNCTIONS

GRANT ACTIVITIES

ACCOUNTING PROCESS

GRANTOR PROGRAM OFFICE

ACCOUNTING SECTION

GRANTEE

• Informs organizations of grant programs • Reviews grant applications • Awards grants • Reviews progress and monitors performance • Recommends payment

• Confirms availability of funds • Commits funds • Obligates funds • Establishes letter of credit and monitors • Prepares check payment schedule • Performs fund and cost fiscal accounting for grant • Completes internal and external reports

• Prepares grant application • Negotiates grant agreement • Accepts grant • Performs required service • Requests payment by letter of credit withdrawal or for reimbursement of cost incurred • Submits reports

Notice

TREASURY DEPARTMENT • Issues checks for letter -of -credit advances • Issues check to reimburse grantee • Reports checks issued

Federal Register • Program • Eligible entities • Procedures Application

Grant application • Purpose • Time period • Cost estimate

Grant

• • • •

Purpose Period Amount Conditions

1

Letter of credit

• Letter-of-credit funding

• Grantee • Limit • Period

Letter-of-credit withdrawal

2

KEY Required Accounting Process

Grant reports

3

• • • •

Progress Financial Property Etc.

1 Record obligation Record advance 2 payment under letter of credit 3 Reduce obligation and advance; record expenditures, expenses, and liability 4

Reduce liability and record payment

Payment schedule

• Advance funding • Reimbursement method 4

• Payee • Amount

Electronic Funds Transfer or Check

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Grant forms. The federal grantor agencies have developed rather similar practices for monitoring grant programs. In each agency, certain events or transactions are formally recognized in the accounts and periodically reported. Typically, formal authorizations and approvals are required for each step in the grant process, although the specific forms and content vary by entity to ensure compliance with congressional concerns for specific programs. Specific forms are designed to document the several actions required to manage and control these programs: • Commitment of funds • Grant agreement • Financial expenditure reports or invoices • Advances • Schedule and voucher of payments • Financial and property closeout settlement Commitment of funds. The initial fiscal action by federal entities, generally preceding the approval and award of a grant, is the receipt of a grant application or request submitted by prospective grantee recipients that contains • The purpose of the request for grant • A requested grant budget or estimate or request for grant funds • A description of the intended grant program • Obligations and conditions of the parties to the grant • Approval by the responsible grantor official • The formal or informal commitment or reservation of unobligated funds to meet the anticipated grant program expenditures In OMB Circular A-11, Preparation, Submission, and Execution of the Budget, federal grantor agencies are informed that discretionary grants will be obligated after the grant amount is determined administratively and recorded at the time the grant award is signed. In this guidance, the OMB reiterates that the grant award is normally the documentary evidence that the grant has been awarded and reminds agencies that letters of credit are issued after grant awards are made and generally are not valid obligating documents. In most federal grantor agencies, the commitment of funds to meet future grant expenditures is not formally recognized in the accounts. Typically, a register or other internal record, which is not usually made available to persons external to the agency, is maintained. This commitment of funds does not meet the criteria of Section 1311 of the Supplemental Appropriation Act of 1955 for valid obligations of the federal government. Grant agreement. The award and execution of the grant agreement constitutes a legal obligation of the federal government and binds the government to disburse grant funds either unconditionally or conditionally, pursuant to the terms of the grant. The executed grant agreement is generally signed by both the federal grantor and the grantee and contains such information as the (1) description of the scope of the grant program; (2) time period of the grant; (3) description of all special and

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general terms and conditions; (4) amount of the grant; and (5) amount of the grant funded at time of award. The last two items are important from an accounting viewpoint. The amount of the grant could be significantly in excess of the amount funded or obligated by the grantor agency. In such instances, the grant is said to be incrementally funded. Incremental funding is used by the government to generally limit its liability to only the amount funded, by stating that the full funding is conditional upon the later availability of additional funds. The accounting entry to record the obligation related to the incrementally funded grant should be for the amount cited in the grant agreement as being funded, even though a larger value may be cited as the total amount of the grant. If advance payments are made to grantees at the time of the grant award, these advances are recorded as receivables due to the federal government until evidence of performance has been received from the grantee. There will be instances when payments are made to grantees and no performance or reporting is required, or when payments may have been scheduled to correspond approximately with planned grantee performance. Under these circumstances, the payments are concurrently reported as obligated amounts, liquidation of the obligated amounts, accrued expenditures, and program expenses. Financial expenditure reports or invoices. Certain grantees may be required to submit periodic expenditure reports and possibly invoices to request reimbursement by the grantor of grant funds expended. These documents generally are subject to a prepayment audit or review before being approved for payment by the federal entity. Once payment has been authorized by the grantor, these expenditure reports are used as the basis for liquidating earlier obligations, reducing any advance accounts receivable pursuant to the grant agreement, recording the liability for amounts owed to the grantee, and making charges to appropriate cost and property records. Advances. Certain grantee organizations are permitted to receive advances of funds by which the grantor finances the grant program. Advances may be in two forms: (1) a lump-sum advance to cover operations for a specified time period, such as 30 or 60 days, and (2) letters-of-credit drawdown. A lump-sum advance may be provided to the grantee at the time of the grant award. Throughout the grant period, the advance is replenished as financial reports or invoices are submitted and is eliminated at the conclusion of the grant. The letterof-credit process requires the completion and existence of certain forms, such as • An authorized signature card identifying the grantee’s certifying officer, and placed on file with the Treasury and the grantee’s commercial bank or other designated disbursing organization. • A letter of credit, completed by the federal government’s grantor, forwarded to Treasury, and identifying the Federal Reserve Bank or Treasury disbursing agency; the grantee; the permitted periodic withdrawal amount; and the time period for which the letter of credit will be available. • A request for payment on letter of credit, prepared by the grantee and consistent with the letter-of-credit conditions, to withdraw funds to perform the scope of the grant program. The form requires the reconciliation of balances,

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withdrawals, and other letter-of-credit transactions, as well as an identification of the program for which funds are being withdrawn. Federal grantors will typically include a clause in the funding agreement that the grantee must accept with respect to the letter of credit, such as • The grantee will initiate cash drawdowns only when actually needed for disbursements. • The grantee will make timely reports of cash disbursement and balances as required by the federal grantor agency. • The grantee will impose the same standards of timing and amounts on any secondary recipients, including the reports of cash disbursements and balances. • The grantee will maintain a financial management system for effective control and accountability for the federal grant funds. Exhibit 15.3 provides an overview of the typical federal letter-of-credit participants and the process generally required to initiate federal financing. Exhibit 15.3: Letter-of-Credit Funding Process Federal Grantor Agency

Federal Reserve or Treasury Department

Award of grant

Prepares authorized signature card

Prepares letter of credit; executes required forms

Maintains file of letter of credit and signature card

Records withdrawal by grantee

Makes payments to grantee; submits periodic reports to grantors

Monitors cash disbursements and provides outlays information

Grantee

Prepares and submits requests for payments under letter of credit

Submits reports of federal cash transactions

SOURCE: Cornelius E. Tierney, Federal Grants-in-Aid: Accounting and Auditing Practices (New York: American Institute of Certified Public Accountants, p 31).

Voucher and schedule of payments. As described in earlier chapters, the voucher and schedule of payments is the formal request sent by a federal agency to the Treasury to inform the Treasury to make payment of specific amounts to identified payees. The Treasury makes no distinction between payments made to reimburse grantees for services performed and payments to grantees as advances. The voucher and schedule of payments represents the documentation to support the federal entity’s accounting for cash disbursements. The accounting for cash disbursed and the necessary reconciliations between a federal agency’s records and those of the Treasury are the responsibility of the individual federal agency.

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Accounting forms. Accounting forms and records may vary by federal entity and are designed to address the general as well as the unique accounting requirements of the program. The purpose of the documentation, rather uniform across the government, is to provide for full disclosure of the federal entity’s grant activities. The forms and records used in practice will include subsidiary accounts, general ledger accounts, and provisions for accrual, adjusting, and closing entries. Subsidiary accounts. As part of the grantor’s responsibility to maintain an adequate system of accounting and controls, entities must design and use an integrated account structure to permit full accounting of the federal resources consumed and the cost of performance. This system will require—for each grant—the coding, accounting, and reporting of transactions by appropriation, organization, budget activity, program structure, operating unit, and object classification. General ledger accounts. All federal grantors must design a general ledger account structure to best control and account for all resources for which it has stewardship responsibility. The account and ledger structure should be sufficiently detailed to permit the preparation of required reports from control or subsidiary account balances without the need for further analysis or allocation of data. Accrual, adjusting, and closing entries. Standard or predetermined journal entries often exist to accurately reflect cost in the records as well as cash disbursements at the end of the period. Typically, end-of-period accruals, adjustments, or closing entries exist in preprinted form or, in the case of computerized systems, preprogrammed entries. In these instances, only the calculation of the dollar value may be required to complete the accounting. OMB Obligation, Accrual, and Costing Criteria for Grants The OMB has prescribed government-wide regulations relating to the obligation, accrued expenditure, and cost concepts for accounting and reporting transactions relating to grants awarded to state and local governments and other recipients. Except when otherwise precluded by law, all federal grantor agencies are required to report obligations and applied costs to the OMB in accordance with OMB guidance. Obligations incurred. The amounts to be recorded and reported as obligations for grant-in-aid programs, shared revenues, and taxes payable to state and local governments must be determined in accordance with these criteria set forth in OMB Circular A-11, Preparation, Submission, and Execution of the Budget: • For grants that have no administrative determinations and that are automatically fixed by formula or specified by law, the reported obligation will be the amount (1) determined by the application of the legal formula or the amount appropriated, whichever is smaller; and (2) reported at the time the amount determined becomes available to the grantee. • For grants based on approved financial programs, the reported obligation will cover the time period for which financial requirements have been established and approved, and for which it has been determined that funds are to be paid to the grantee.

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• For construction grants and related projects, the reported obligation will be the federal share of the project at the time of federal approval. • For other grants requiring administrative approval, the reported obligation will be the amount approved for payment. Note that drawdowns under letters of credit do not constitute legal obligations of the government. The drawdown of funds is actually an advance of funds to the grantee. In effect, an advance constitutes an interest-free loan to the grantee, which must be repaid if the desired services are not performed. According to the OMB, the requirement that recipients of federal funds provide matching contributions does not affect the federal government’s recorded obligations. When it is determined that future payments should be modified or assistance to a grantee discontinued, the earlier reported obligation should be adjusted at that time. The accounting and reporting of obligations for federal grants, subsidies, and contributions, other than those just cited, must conform to other OMB Circular A-11 criteria, such as • Amounts for grant agreements will be recorded at the time the agreement is consummated. • Amounts paid in accordance with treaties will be recorded at the beginning of the period for which the money is appropriated. • All other amounts for grants, subsidies, and contributions will be recorded at the time payment is made. Accrued expenditures. Accrued expenditures are charges incurred by the grantee during a given period requiring the provision of funds for • Goods and other tangible property received • Services performed by its employees, contractors, subgrantees, subcontractors, and other payees • Other amounts becoming owed under grant and cooperative agreement programs for which no current services or performance is required, such as an3 nuities, insurance claims, and other benefits Accrued expenditures and applied costs will be recorded as the amounts become legally due to grantees for performance rendered, or when approved by the federal agency for payment if no performance is required. As mentioned, treaties will be recorded at the beginning of the period for which the money is appropriated by Congress. Note that advance payments to grantees, until performance is complete under the grant, are recorded as federal assets (receivables due to the federal entity) until the money is earned by the grantee, at which time the advances outstanding are reduced and the expense of the grant is recognized. Any taxes, assessments, and payments in lieu of taxes will be reported at the same time as obligations are incurred. 3

As applied by the Department of Health and Human Services, pursuant to 45 CFR 92.3, which parallels the definition for the term “accrued expenditures” applied by other federal grantors.

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Accounting Entries for Grants Accounting for grants requires the processing of the several transactions highlighted in Exhibit 15.4. Each of the noted events, discussed in the sections that follow, has an economic impact that changes the financial position of the federal grantor’s fund balance and must be formally identified and recorded in the federal grantor’s accounting records. Exhibit 15.4: Accounting Transactions: Government Grants Budgetary entries Entry 1: Award of Grant Allotments available for commitment/obligation Undelivered orders

DR CR

Proprietary entries (None)

x x

Entry 2: Advances of Funds—Cash (None)

Advances to others—Grantees Fund Balance with Treasury

Entry 3: Receipt of Expenditure Report or Invoice Undelivered orders x Asset accounts Expended appropriation—Capital x Program/operating expense Expended appropriation—Operating x Accounts payable—Grantees Advances to others— Grantees Entry 4: Advances—Letter-of-Credit Withdrawals (None) Advances—Letters-of-credit withdrawals Fund Balance with Treasury Entry 5: Payment or Reimbursement to Grantees (None) Accounts payable—Grantees Fund Balance with Treasury Advances to others— Grantees Advances—Letters-ofcredit withdrawals Entry 6: Closing Entries Expended appropriation Appropriations realized

DR CR

x x

Net results of operations Program/operating expenses

x x x x x x

x x x x x x x x

Commitment of funds. Federal grantors often maintain a register or file identifying approved grant applications and other pertinent information, including the amount to be funded by the grantor. In some agencies, a formal entry is made to record this event. However, neither the approved grant application nor the funds committed to approved grant applications satisfies the criteria for a valid obligation under the Supplemental Appropriation Act of 1955. The approval of a grant application is not viewed as an obligation or future liability of the agency. (Only the actual grant award is the legally binding obligation of the federal government.)

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Obligating grant funds (Exhibit 15.4, Entry 1). The formal execution and award of a grant agreement constitutes the action that is the formal, legally binding obligation that must be formally recognized in the accounting records of the federal grantors. The amount of funds obligated varies depending on the specific terms of the grant agreement. For example, a grant for three years could possibly be funded in three one-year increments and would be referred to as an incrementally funded grant. In this case, an accounting entry would have to be made in each of the three years to record the incrementally funded legal obligation of the federal government. Similarly, the total amount of the grant may include a required sharing or contribution by the grantee. In this instance, the federal grantor records an obligation only for the federally funded share. When the amount cited in the grant agreement is more than the amount obligated by the grantor, the grant is said to be incrementally funded, as discussed earlier. At the time of the grant award, a budgetary accounting entry must be made for each grant awarded to reduce a portion of the unobligated allotment balance in the accounts of the federal grantor and to establish the formal federal obligation for each grant that will then be liquidated or reduced in the future to recognize the grantee’s performance. The grant award does not require an entry in the proprietary accounts of the federal grantor at this time since no performance or service has been rendered by the grantee. Advance of funds (Exhibit 15.4, Entry 2). The grantee may be eligible to receive an advance of funds to assist in financing the grant program. For qualifying grantees, the principal types of advances available are • An advance of funds equal to the total amount of the grant when the time period is relatively short or the grant is for a relatively small amount • A cash advance for a specified period of grant operations, possibly 30 to 45 days, the advance being replenished periodically as the grantee submits financial expenditure reports • An advance under a letter of credit, when an advance drawdown would be permitted against the established account balance to cover specified time periods or operations (though in some instances, the letter of credit is established with a zero-balance bank account condition) If funds are advanced by the federal grantor under any of these conditions, a proprietary accounting entry in the grantor’s account is required to recognize the accounts receivable due to the grantor and to record the disbursements of cash advanced to the grantee. No entry is made to budgetary accounts because the cash advance has no effect on the amount of funds legally obligated by the grantor agency. The advance represents merely an interest-free loan to the grantee organization that, if not liquidated or reduced by future performance, would have to be repaid to the federal grantor. Performance by the grantee (Exhibit 15.4, Entry 3). As services are rendered or activities of the grant are performed, grantees are required to submit financial expenditure reports, or in some cases invoices, evidencing the expenditures made during the accounting period. Once these documents are examined and approved by the

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federal grantor, two accounting entries must be made, one budgetary, one proprietary. The reports and invoices are viewed as the legal authority (1) to reduce or liquidate a portion of the earlier obligations or advances and (2) to recognize the accrued expenditures and the grantor entity’s liabilities under the grant for the performance reported by the grantee. The budgetary accounting entry (Entry 3a) reduces the earlier obligation and recognizes the amount of the appropriation expended under the grant, equal to the expenses reported or claimed. The proprietary entry (Entry 3b) is required to reflect the grant expenses incurred or accrued, reduce any outstanding advances made to the grantee, and record any accounts payable due to the grantee. Withdrawals under letters of credit (Exhibit 15.4, Entry 4). When evidence is received by the federal grantor of withdrawals by a grantee under a letter of credit, an account receivable must be established and an entry made to record the disbursement of cash. As in the case of other advances, generally no budgetary accounts have been affected because no additional federal funds have been legally committed. Funds have merely been advanced to the grantee, and the federal grantor could, if desired, demand full refund prior to the time grant services have been performed. However, as mentioned, when no performance is required or when payments are scheduled to correspond approximately with performance outlined in the grant agreement, payments shall be concurrently accounted for as liquidating the earlier obligation and recording the costs to be charged to the program. Payments to grantees (Exhibit 15.4, Entry 5). Disbursements to grantees require an entry by the federal entity to reduce any accounts payable due to the grantees and record the disbursement of cash. No budgetary accounting entry is necessary at this time. This entry to the proprietary accounts reflects the payment of the liability resulting from the liquidation of an earlier obligation. The amount of the disbursement entry could vary depending on whether funds must be retained by the federal grantor to settle any earlier advances made to the grantee. Accrual entries. At the end of a reporting period or fiscal year, the federal grantor must determine the amount of grant expenditures that have accrued but that have not been reported or reflected in documentation from the grantee. Such a condition would exist when the end of the period occurs between reporting dates. In this event, an estimate of the grantee’s performance or an accrual is necessary. Grant accruals may be estimated in this manner: • The rate of grant expenditures, as evidenced by earlier expenditure reports, may be used as a basis for estimating the amount of accrued but unreported performance since the last reporting. • If they exist, more reliable or current estimates by government officials familiar with the grantee’s progress would suffice. • When no performance is required for entitlement to grant funds, the earlier obligated amount may be used as the best estimate of the accrued expenditure. The end-of-period accrual entry requires that two entries be made: (1) a budgetary entry to liquidate or reduce the obligation, which by performance has now been transformed into an accrued expenditure, and (2) a proprietary entry to record the

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grant expense and the amount due, but not yet billed by the grantee at the end of the period. Closing entries (Exhibit 15.4, Entry 6). At the end of each fiscal year, certain budgetary and proprietary accounts should be closed to provide an end-of-period accounting for the expended appropriation, the unexpended appropriation, and any outstanding undelivered orders (or unliquidated obligations). Two groups of entries are required to close the books. At the end of the year, a budgetary entry (Entry 6a) is required for amounts earlier recorded as credits to the expended appropriation account, which is now closed to the appropriation realized account. A proprietary entry (Entry 6b) is required to close program operating expense accounts to permit the determination of the grantor’s net cost/results of operations of the grantor agency’s appropriated activities. Reversal entries. Once the necessary end-of-period closings and reportings have been completed, it may be necessary to return the budgetary and proprietary accounts to the status held prior to entering of the accrual information. This procedure will minimize the risk of duplicating transactions and amounts when the formal documentation is received or when the precise amount of accrued grant expenditures becomes known at a later time. Without the reversal entry, there is the risk that the partial liquidation resulting from the end-of-period accrual will be treated improperly in the accounting records for the next fiscal period and that the documentation later submitted by the grantee will be processed for the full amounts shown. Should this occur, a duplicate accounting will result and account balances will be overstated by the amount of the earlier accrual. COOPERATIVE AGREEMENTS Cooperative agreement transactions and grants are accounted for in similar manners. The cooperative agreement instrument was defined by Congress in the Federal Grants and Cooperative Agreement Act of 1977. Under that legislation, Congress distinguished among contracts, grants, and cooperative agreements by identifying the following conditions under which each instrument was to be used: • A contract is to be used whenever the principal purpose of the instrument is the acquisition, by purchase, lease, or barter, of property or services for the direct benefit of the federal government; or whenever an executive branch agency determines that the use of a contract is appropriate. • A grant is to be used whenever the purpose of the relationship is to transfer money, property, services, or anything of value to accomplish a public purpose of support or stimulation authorized by federal statute and no substantial involvement is anticipated between the federal executive branch agency and the recipient during the performance of the contemplated activity. • A cooperative agreement is to be used whenever the purpose of the relationship is the transfer of money, property, services, or anything of value to accomplish a public purpose of support or stimulation authorized by federal statute, and substantial involvement is anticipated between the executive

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branch agency and the recipient during performance of the contemplated activity. The statutory criterion, which is not that definitive, for choosing between grants and cooperative agreements is that a under a cooperative agreement ...substantial involvement is expected between the federal executive agency and the state, local government, or other recipient when carrying out the activity contemplated in the agreement.4

Since the cooperative agreement has a contract format, federal agencies often use the standard general contract conditions, modified to the circumstances. The accounting for a cooperative agreement, however, remains similar to that performed for a grant agreement.

4

OMB Circular A-102, Grants and Cooperative Agreements with Executive Departments and Establishments, revised March 1997.

APPENDIX THE FEDERAL GOVERNMENT AND SARBANES-OXLEY In 2002, Congress, by the Sarbanes-Oxley Act, gave preeminence to internal controls in financial reporting. The act mandated that the management of publicly traded corporations assess and report on its controls, conduct a review of its controls assessment, and have an independent audit of its financial controls. As a result, Sarbanes-Oxley was the most publicized and most reported upon financial legislation since the Securities and Exchange Laws of 1933 and 1934. Until 2002 and the Sarbanes-Oxley Act, no law required any entity, private, public, or not-for-profit, to have an independent management assessment and public reporting of internal controls and to have management’s assessment audited simultaneously with that entity’s financial statements. By the Sarbanes-Oxley Act, Congress sent a clear, simple message to public corporations: “assess internal controls over financial reporting; audit internal controls over financial reporting.” At that time, Congress did not send the same message to federal agencies. Over the years, intentionally, or otherwise, federal financial management policies have been grouped under three broad categories: (1) federal accounting and financial reporting, (2) federal internal and financial reporting controls, and (3) federal auditing. Thus, the authors of this book have strived to separately address each topic in extensive detail to provide single-source guidance on each to better assist those with these types of financial management responsibilities. Kearney & Company’s books, all published by John Wiley & Sons, Inc., include • Federal Government Auditing: Laws, Regulations, Standards, Practices and Sarbanes-Oxley, John Wiley & Sons, Inc., New York, NY, 2006 • OMB Circular A-123 and Sarbanes-Oxley: Management’s Responsibility for Internal Control in Federal Agencies, John Wiley & Sons, Inc., New York, NY, 2006 • Federal Accounting Handbook: Policies, Procedures, Standards, and Practices (Second Edition), John Wiley & Sons, Inc., New York, NY, 2006. This appendix highlights the controls and governance provisions of Section 404 of the Sarbanes-Oxley Act and describes the similar or corollary internal controls assessment and testing practices within the federal government. SARBANES-OXLEY: CORPORATE CONTROLS Sarbanes-Oxley Section 404 On July 30, 2002, with the passage of the Sarbanes-Oxley Act, Congress in Section 404 of that law gave a preeminence to internal controls in financial reporting by mandating reporting, disclosures, and independent auditing requirements that, until this Act, were not much discussed. By Section 404 of this Act, Congress required that Each annual report submitted to the Securities and Exchange Commission by a publicly listed corporation is to contain an internal control report, which shall:

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State the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and Contain an assessment by management of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. Sec. 404(a)

and With respect to the internal control assessment made by management, the public accounting firm that prepares or issues the audit report shall attest to, and report on, the assessment made by the management of the effectiveness of internal control. Sec. 404(b)

The Sarbanes-Oxley Act changed corporate governance and financial reporting, and permanently altered the regulatory environment for publicly listed companies that had prevailed since the 1930s. This act created a broad, new oversight regime by prescribing specific procedures, steps, and practices to address governance failures. It also codified several new responsibilities of corporate executives, corporate directors, and their lawyers, accountants, and regulators. The act requires all publicly listed companies to include a separate auditor’s report attesting to management’s assessment of the company’s internal control in their annual report to the Securities and Exchange Commission (SEC). The auditor must independently attest or audit, and independently opine, on the operational effectiveness of a public company’s internal controls. Public Company Accounting Oversight Board The new priority given to internal controls over financial reporting was clear in 1 Public Company Accounting Oversight Board (PCAOB) Release No. 2004-001, wherein PCAOB stated that, in order to achieve reliable financial statements, internal controls must be in place to • See that records accurately and fairly reflect transactions in, and dispositions of, a company’s assets • Provide assurance that the records of transactions are sufficient to prepare financial statements in accordance with generally accepted accounting principles • Provide assurance that receipts and expenditures are made only as authorized by management and directors • Ensure that steps are in place to prevent or detect theft or unauthorized use or disposition of the company’s assets of value that could have a material effect on the financial statements PCAOB’s stated position is that users can have more confidence in the reliability of a financial statement if management demonstrates that it has exercised adequate internal control over (1) the bookkeeping, (2) the sufficiency and accuracy of books of accounts and records, (3) adherence to rules about the use of the company’s assets, and (4) the possibility of a misappropriation of company assets. Compliance with the Sarbanes-Oxley Act requires an entity’s management to 1

The PCAOB was established by Congress to implement the Sarbanes-Oxley Act. proposed by PCAOB must subsequently be approved by the SEC.

Standards

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• Establish and maintain adequate internal control structure • Have and implement policies and procedures for governing financial reporting • Annually assess and report to the government on the effectiveness of its internal controls and procedures The Sarbanes-Oxley Act requires the independent auditor’s report on financial controls to accompany the auditor’s report on the financial statements of all publicly listed corporations. This dictates that the auditor must separately test and report on the effectiveness of controls over financial reporting. To comply, the auditor must conduct an audit of controls and then report the findings resulting from that audit. Such an audit must be comprised of tests to • Evaluate whether the control structure and procedures are reasonably detailed to accurately and fairly reflect the transactions and dispositions of the assets • Provide reasonable assurance that transactions are recorded, as necessary, to prepare financial statements in accordance with generally accepted accounting principles • Provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations of management and directors of the entity • Describe all material weaknesses and any material noncompliance found on the basis of testing • Render an audit opinion on whether management’s assessment of effectiveness of controls is “fairly stated.” The Sarbanes-Oxley Act and PCAOB’s related standards are clear that the required audit of the internal controls over financial reporting is to be integrated, not separate from, the audit of an entity’s financial statements. PCAOB Auditing Standard No. 2 cites the integrated audit criteria and further notes that Notwithstanding the fact that the two audits are interrelated, the integrated audit results in two separate objectives: (1) to express an opinion on management’s assessment of the effectiveness of the company’s internal control over financial reporting, and (2) to express an opinion on whether the financial statements are fairly stated.

The Sarbanes-Oxley Act requires management of a publicly traded company to base its assessment of the effectiveness of internal controls over financial reporting on a “suitable, recognized control framework established by a body of experts that followed due-process procedures to develop the framework.” The guidance in PCAOB Auditing Standard No. 2 is based on the Internal Control—Integrated Framework (Framework) developed by the Consortium of Sponsoring Organizations (COSO) of the Treadway Commission in 1992. The Act recognizes that other suitable, possibly different, frameworks not containing exactly the same elements as COSO may be used, but PCAOB cautions that these other frameworks should have 2 elements that encompass all of the COSO general themes. 2

This is based on a 1992 report by the COSO, a consortium of cooperating organizations that included the Financial Executives Institute, the American Institute of Certified Public Accountants, the American Accounting Association, the Institute of Internal Auditors, and the Institute of Management Accountants.

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Committee of Sponsoring Organizations: Structural Internal Control Components The COSO control structure. Under the COSO definition, internal controls encompass or consist of five interrelated structural components: 1. Control environment—The environment “sets the tone” of an organization, provides the discipline and structure, and is the foundation for all other components of internal control. 2. Risk assessment—Requires the identification, analysis, and assessment of the relative risks to achievement of entity objectives. 3. Control activities—Includes the policies, procedures, and practices that help ensure that management directives are carried out, including a range of activities such as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets, and segregation of duties. 4. Information and communication—Comprises the information systems that produce reports containing operational, financial, and compliance-related information that make it possible to administer, control, and manage an organization’s performance. 5. Monitoring—Requires the periodic, regular monitoring of systems of internal controls to assess the controls systems performance over a period of time that includes regular management and supervisory activities and other actions that personnel take in performing their duties. The existing practices relating to financial controls (updated for fiscal year 2006) for federal departments and agencies are highlighted in the following sec3 tions. These policies and practices, though, have been evolving for years, most notably, but not originally, in OMB Bulletin 01-02, Audit Requirements of Federal Financial Statements (of October 2000); OMB Circular A-123 (of 1995), Management Accountability and Control; and, most recently, OMB Circular A-123, Management’s Responsibility for Internal Controls (a slightly refined title), which supersedes the OMB’s Bulletin 01-02 and the earlier Circular A-123. FEDERAL CONTROLS: DEPARTMENTS AND AGENCIES Federal Controls: A Concern for Decades Since the Constitution, Congress has desired that sounder, more effective internal controls be designed, implemented, and used by federal agencies. Congress has held hearings, commissioned studies, and heard speeches and presentations before its committees about the importance of internal controls over financial reporting. 3

Readers desiring additional information may examine related books authored by Kearney & Company concerning federal financial management. These include Federal Government Auditing: Laws, Regulations, Standards, Practices and Sarbanes-Oxley, and OMB Circular A-123 and Sarbanes-Oxley: Management’s Responsibility for Internal Control in Federal Agencies, both published by John Wiley & Sons, Inc., New York, NY, 2006.

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Congress’s attempts to address the historically weak and deteriorated controls of the federal government are unmistakable based on the trail of laws addressing the installation and strengthening of controls. The Sarbanes-Oxley Act requires publicly listed companies to base their annual assessment of controls on a “suitable, recognized control framework,” particularly that of the COSO. Prior to the Sarbanes-Oxley Act, other laws resulted in the COSO Framework being adopted and applied to operations of federal agencies; but, government-wide policy, regulations, guidance, and auditing standards had essentially made the COSO Framework the financial management standard of internal controls for the federal government as early as 1995. In the 1990s, a number of laws were enacted with respect to federal financial management systems, and with few exceptions, parts of each law emphasized the need for strengthened controls. Similar internal controls assessment and reporting responsibilities required of federal agencies that were not reported at the time of Sarbanes-Oxley had been embedded in several laws concerned with federal financial management dating to the early 1980s. Today, federal agencies, pursuant to OMB Circular A-123, make a reporting to the President, Congress, and to the interested public in two principal formats: 1. The annual Performance and Accountability Report (PAR) by heads of federal agencies that consolidates controls information required by the Federal Managers’ Financial Integrity Act of 1982 with performance-related reporting mandated by laws passed in the 1990s into a broader PAR issued annually by the agency head. 2. The annual reporting of tests of an agency’s controls over financial reporting by independent auditors as part of an audit of that agency’s annual financial statements pursuant to Government Auditing Standards. In 1982, Congress again displayed its continuing concern for the financial management practices of the federal government by requiring, under a composite of laws, each executive agency to establish systems of accounting and administrative controls, assess those controls, and issue an annual report. None of these laws required a federal agency to have its internal controls over financial reporting independently audited in the manner of all publicly listed corporations required by the Sarbanes-Oxley Act. Later in this appendix, it is noted that the OMB, in its internal controls guidance, Circular A-123, highlighted specific legislation of the 1980s, 1990s, and through 2002 that approximated the public sector governance rules for internal controls imposed by the Sarbanes-Oxley Act. Federal Controls: Two Groupings In the new Circular, A-123, the OMB stated that a defined assessment process for controls was needed, described such a controls assessment process, and identified, for policy purposes, the following groupings of controls: • For purposes of department and agency PARs, internal controls encompass program, operational, and administrative areas, as well as accounting and fi-

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nancial management, and should be an integral part of an agency’s entire cycle of planning, budgeting, management, accounting, and auditing. From this view, internal management control “…is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.” • For purposes of assessing, documenting, and reporting on internal controls over financial reporting (a subset of internal controls), effective internal control over financial reporting provides reasonable assurance that financial reporting misstatements, asset losses, or noncompliance with applicable laws and regulations material in relation to financial reports, would be prevented or detected. Financial reporting for this purpose encompasses the annual financial statements of an agency as well as other significant internal and external financial reporting. • Other significant internal and external financial reporting would be any financial reporting that could have a material effect on significant spending, budgeting, or other financial decisions of an agency, or that is used to determine compliance with laws and regulations by an agency. This Circular describes internal controls of federal entities as broader than just controls over accounting and financial management, but also encompassing program, operations, and administrative areas as well. By this newer policy statement, internal controls over financial reporting are described and considered to be a subset of the overall controls of a federal agency. Performance Reporting: Consolidation of Reports Criteria Federal controls policies. The genesis of the federal government’s PAR is the Federal Managers’ Financial Integrity Act of 1982 that requires an annual statement on whether the agency financial management systems conform with the government-wide requirements presented in OMB Circular No. A-127, Financial Management Systems. OMB Circular A-123 is a consolidating policy statement that blends financial management requirements of many laws, earlier OMB regulations, positions of federal inspectors general, and guidance promulgated over the years by the Government Accountability Office (GAO). Exhibit A.1 (following this appendix) highlights several tasks required to assess agency controls and render the annual statement regarding the effectiveness of an agency’s internal controls to comply with OMB Circular A-123. For PAR reporting, OMB Circular A-123 states that an agency’s entity-wide internal controls include an agency’s processes for planning, organizing, directing, controlling, and reporting on agency operations. The overall objectives include the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. The specific statutory guidance considered by OMB in its deliberations on Circular A-123 emanate from

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• Federal Managers’ Financial Integrity Act of 1982 (FMFIA)—The OMB, in consultation with the Comptroller General, established guidelines for evaluation by individual agencies of their own systems of accounting and administrative controls. The head of each agency is required to annually assess its systems for compliance with this guidance, make an annual determination concerning its controls, and report on this compliance with the FMFIA to the President and Congress. The FMFIA stated that controls systems were to provide reasonable assurance that (1) obligations and cost incurred and reported by federal agencies are in compliance with applicable law; (2) federal funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation; and (3) revenues and expenditures applicable to a federal agency’s operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports and to maintain accountability over the assets. • Inspector General Act of 1978—Inspectors general and/or external auditors were required by the Government Auditing Standards and OMB Bulletin No. 01-02 to report material weaknesses in the internal control and noncompliance with laws and regulations as part of the annual financial statement audit. • Single Audit Act of 1984—Requires financial statement audits of nonfederal entities that receive or administer awards of federal financial assistance that include testing the effectiveness of the internal control and determining whether the award monies have been spent in compliance with laws and regulations. • Chief Financial Officers Act of 1990 (CFO Act)—Agencies are required to prepare annual financial statements and have those statements independently audited, at which time the auditors must, in compliance with Government Auditing Standards, report on any findings related to an agency’s internal controls and its compliance with laws and regulations. • Government Performance and Results Act of 1993 (GPRA)—Requires agencies to develop strategic plans, set performance goals, and report annually on actual performance compared to goals. These plans and goals must be integrated into (1) the budget process, (2) the operational management of agencies and programs, and (3) accountability reporting to the public on performance results, and on the integrity, efficiency, and effectiveness with which they are achieved. • Federal Financial Management Improvement Act of 1996 (FFMIA)—Requires agencies to have financial management systems that substantially comply with (1) federal financial management systems requirements; (2) accounting and financial reporting standards promulgated by the Federal Accounting Standards Advisory Board (FASAB); and (3) the US Standard General Ledger “at the transaction level.” Agency heads should make an annual determination about whether their financial management systems substantially comply with the FFMIA. • Federal Information Security Management Act of 2002 (FISMA)—Requires agencies to provide a comprehensive framework for ensuring the effectiveness

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of information security controls over information resources that support federal operations and assets and annually report on the effectiveness of the agencies’ security programs. Weaknesses found under the FISMA, categorized as “significant deficiencies,” must also be reported as material weaknesses under the FMFIA. • Improper Payments Improvement Act of 2002 (IPIA)—Agencies are to review and “identify programs and activities that may be susceptible to significant improper payments” and annually submit estimates of improper payments, corrective actions to reduce the improper payments, and statements as to whether its current information systems and infrastructure can support the effort to reduce improper payments. The incidence of improper payments should be considered when assessing the effectiveness of the internal control. • Reports Consolidation Act of 2000—Required the consolidation of numerous performance, management, and accountability reports, mandated by many earlier laws, into one annual report, the PAR, to be annually submitted by the head of a federal agency to the President, Congress, and the general public. Pursuant to these laws and the accompanying OMB guidance, federal agencies are responsible for developing, maintaining, and reporting practices and procedures that satisfy the requirements of the following structural components of internal control: • Control environment—The organization structure, including the culture, tone of integrity, and ethical behavior defined by agency management • Risk assessment—Identification and assessment of internal and external risks that might prevent the agency from meeting its objectives • Control activities—Such as properly segregating employee and management duties; physical control over assets; appropriate transaction approval, authorizing, and executing of procedures; prompt recordation and appropriate documentation of all transactions; and inclusion of effective general and application controls relative to computer-based systems • Information and communications—The timely communication with relevant personnel within the agency • Monitoring—Periodic reviews, reconciliations, and comparisons of data as part of the regular assigned duties of designated personnel These are the same structural components of an effective system of internal controls that appear in the COSO Framework recommended by the Treadway Commission in 1992 and mandated by Sarbanes-Oxley for publicly listed corporations. Control Deficiencies: For Performance and Accountability Purposes To comply with the above statutes and the OMB’s Circular A-123, federal agency mangers must identify and report those deficiencies of interest or those which should be of interest to the next level of management. Some working definitions of reportable deficiencies in Circular A-123 include

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• Reportable condition—A deficiency reported to the next supervisory level that represents significant deficiencies in the design or operation of the internal control that could adversely affect the organization’s ability to meet its internal control objectives • Material weakness—A reportable condition that the agency head determines to be significant enough to be reported outside of the agency and included in the FMFIA report to the President and Congress • Significant deficiency—A control weakness, as defined in the FISMA of 2002, 4 is a material weakness for PAR purposes. The above definitions of reportable condition and material weakness are different from and should not be confused with identically worded terms used by federal auditors. As applied by auditors, reportable conditions and material weaknesses, defined differently in federal Government Auditing Standards, must be identified and reported in the audit report regardless of whether agency management elects not to report the weaknesses outside of the agency. Performance and accountability reports. The reporting addressed by the Sarbanes-Oxley Act and periodically made by corporations to the SEC is uniform in format and content from one year to the next. This is not the condition with respect to the periodic PARs of federal departments and agencies. The content of an agency’s PAR may vary from one year to the next, and between one agency and another, depending on program operations, circumstances, and conditions encountered during a fiscal year, and the goals and objectives of the reporting agency. Generally though, the federal PAR is comprised of several sections: • The management discussion and analysis is a high-level overview and description of an agency’s mission and structure; performance goals and results against the goals; financial highlights of the past year; systems and controls issues; and future or possible demands, risks, uncertainties, events, conditions, and trends that could affect agency performance. • The annual performance report is a narrative description of operational achievements, setbacks, attained outputs and outcomes, and changes among the constituencies served during the reporting year. • The annual accountability report highlights an agency’s key financial outputs and outcomes for the reported year, plus the audited financial statements of the agency, along with the footnotes and other supplementary information to conform to the generally accepted accounting principles of federal entities, as prescribed by the FASAB. • The annual, audited financial statements, which are prepared in conformance with the accounting principles prescribed by the FASAB and independently audited in conformance with the Government Auditing Standards. 4

The FISMA is specifically concerned with national security systems, whether such a system is used by or operated on behalf of the agency, but would not include systems of routine administrative and business applications (e.g., payroll, finance, logistics, and personnel management applications).

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• The management and performance challenges report is a report by the Inspector General regarding the ten areas (which will change or evolve over the years) considered to be the most serious management challenges facing the agency. No audits of federal controls. The OMB, in Circular A-123, describes internal controls over financial reporting as a subset of a federal entity’s overall system of internal controls, and currently neither law nor OMB regulation requires that these controls be audited. The OMB requires these financial controls to be “assessed” by agency management. For years, numerous laws and several OMB Circulars and Bulletins have required that audits involving federal monies be conducted in accordance with the Government Auditing Standards. However, these auditing standards, issued by the GAO, do not require that a federal agency’s internal controls be audited. Instead, Government Auditing Standards require only that the internal controls be tested by auditors of department and agency financial statements and that the results of those tests be reported. Specifically, the government’s audit standards for financial audits require auditors (1) to obtain a sufficient understanding of internal control for the purpose of planning the audit, and (2) to determine the nature, timing, and extent of audit tests to be performed. Such tests are not of sufficient depth or breadth to support an auditor’s opinion on a department or agency’s controls over financial reporting. The federal government’s auditing standards do require auditors, when providing an opinion or a disclaimer on the financial statements, to include in their report on the financial statements either 1. A description of the scope of the auditors’ testing of internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements, and the results of those tests, or an opinion, if sufficient work was performed, or 2. Reference to the separate report(s) containing that information. If auditors report separately, the opinion or disclaimer should contain a reference to the separate report containing this information and state that the separate report is an integral part of the audit and should be considered in assessing the results of the audit. For financial audits, including audits of financial statements in which the auditor must provide an opinion or disclaimer, auditors should report, as applicable to the objectives of the audit • Deficiencies in internal control considered to be reportable conditions, as defined in the auditing standards of the American Institute of Certified Public Accountants • All instances of fraud and illegal acts unless clearly inconsequential • Significant violations of provisions of contracts or grant agreements and abuse For financial audits of federal entities, the auditing standards define reportable conditions differently than OMB Circular A-123. For audit purposes, reportable

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conditions are significant deficiencies in the design or operation of internal controls that could adversely affect the entity’s ability to record, process, summarize, and report financial data consistent with the assertions of management in financial statements. OMB Circular A-123. Historically, OMB guidance required that auditors report on internal controls; however, there has never been a requirement for an audit opinion on internal controls, and auditors are allowed to issue a disclaimer stating “the objective of the financial statement audit was not to provide assurance on internal control. Consequently, we [the auditors] do not provide an opinion on internal control.” To comply with this guidance, an auditor would conduct tests sufficient to obtain an understanding of the components of internal control and to assess the level of control risk relevant embodied in classes of financial transactions, financial account balances, and disclosures to the financial statements. This guidance defined financial controls as including relevant data processing general and application controls, and controls relating to intraentity and intragovernmental transactions and balances. For decades, laws have held the heads of individual federal agencies responsible for developing and maintaining effective internal controls over their agencies’ programs, operations, and activities. By its newer Circular A-123, the OMB has provided more uniformity with respect to agency controls, and has directed agencies, government-wide, to study, analyze, continuously monitor, annually assess, and provide Congress and the President with (1) an annual statement of assurance as to the overall adequacy and effectiveness of the internal controls within the agency, and (2) an annual statement of assurance over the effectiveness of internal control over financial reporting. That annual assurance statement by the head of a federal agency, relative to internal controls over financial reporting suggested by the OMB, provided it was warranted by observed conditions and circumstances, might read as follows: The Department’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As required by the Federal Managers’ Financial Integrity Act, the agency conducted its evaluation of the effectiveness of the Department’s internal control over financial reporting in accordance with OMB Circular A-123, Management’s Responsibility for Internal Control. Based on the results of this evaluation, the Department can provide reasonable assurance that internal control over financial reporting as of June 30, 2XXX is operating effectively, and no material weaknesses were found in the design or operation of the internal control over financial reporting.

The OMB states that Circular A-123 “does not require a separate audit opinion on internal controls.” However, those agencies that are required (which may be the case in certain circumstances), or have elected, to receive an audit opinion on their internal controls over financial reporting, must request a waiver from the OMB with respect to certain reporting particulars. Congress: no audit of controls. By Section 4 of the Homeland Security Financial Accountability Act (October 16, 2004), Congress required that for each fiscal year, the Department of Homeland Security submit a PAR that includes an audit

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opinion of the Department’s internal controls over financial reporting. However, with respect to the implementation of this audit opinion requirement, the Department shall include audit opinions in its PAR only for fiscal years after fiscal year 2005. For fiscal year 2005, the Department shall include in the PAR an assertion on the internal controls that apply to the financial reporting of the Department. With respect to the requirement for an audit opinion related to internal controls over financial reporting by each of the federal government’s chief financial officers, Congress opted to study this requirement further, to wit: 1. In general—Not later than 180 days after the date of the enactment of the Homeland Security Financial Accountability Act, the Chief Financial Officer’s Council and the President’s Council on Integrity and Efficiency shall jointly conduct a study of the potential costs and benefits of requiring agencies to obtain audit opinions of their internal controls over financial reporting. 2. Report—Upon completion of the study under Number 1, the Chief Financial Officer’s Council and the President’s Council on Integrity and Efficiency shall promptly submit a report on the results of the study to the Committee on Government Reform of the House of Representatives, the Committee on Governmental Affairs of the Senate, and the Comptroller General of the United States. 3. Not later than 90 days after receiving the report, the Comptroller General shall perform an analysis of the information provided in the report, and report the findings of the analysis to the Committee on Government Reform of the House of Representatives and the Committee on Governmental Affairs of the Senate.

• Who are they? • What are their roles? • Levels of oversight?

• • • • • Planning Organization Controlling Reporting Monitoring

• • • •

Financial transactions Accounts, account groups Financial statements Financial management

Defined as controls over/for:

Financial Reporting Controls:

• Effectiveness and efficiency of operations • Reliability of financial reporting • Compliance with laws and regulations

Objectives of internal controls:

• • • • •

Includes processes for:

Agency head Senior agency executives CFO Program managers Organization Policies and procedures Program results Safeguard program integrity

• Accounting • Financial management

Appoint members, develop and perform financial controls assessment work plan:

Appoint Financial Controls Senior Assessment Team:

• • • •

Entity-Wide controls assessments:

• • • •

Members:

Appoint Entity-Wide Senior Assessment Team:

• Management accountability • Operations issues • Appropriate entity-wide internal controls • Process to assess financial controls • Materiality (for external disclosure) • Input for resources to correct deficiencies

Council-type issues:

Lead managements officials:

Defined as: Program controls Operational controls Administrative controls Accounting controls Financial management controls

Establish Agency Senior Management Council:

TASK B—ORGANIZE MANAGEMENT COUNCIL

Entity-Wide Internal Controls:

TASK A—PLAN CONTROL REVIEWS

IG Act of 1978 FMFIA of 1982 CFO Act of 1990 GPRA of 1993 FFMIA of 1996 Single Audit Act of 1996 FISMA of 2002 IPIA of 2002

• Internal surveys • External surveys

• Results of earlier systems/ controls survey

• Reportable conditions • Material weaknesses • Significant deficiencies

• Identify past

• Past issues, problems? • Past IG • Financial and other audit reports • Consultant evaluations

For example:

Know Agency Controls History:

Agency controls policies OMB Bulletin 01-02 OMB Circular A-123 Government Auditing Standards • AICPA Auditing Standards

• • • •

Other guidance:

• • • • • • • •

Federal laws, as amended:

Discuss/Compile Controls Review Criteria:

TASK C—CONDUCT CONTROLS ASSESSMENT TASKS

Planning? Budgeting? Management? Accounting? Auditing? Financial statements? Internal financial reports? External financial reports? Budgetary reports? Selected accounts? Line items of reports? Parts of reports?

• Entity-wide • Over accounting and financial reporting

• Communicating controls process and methods • Applying internal controls standards

Document Process / Methodology for:

• • • • •

• Do controls cover/apply to

• • • • •

• Are controls integral to entire cycles for

• In writing and in place? • Achieve effective and efficient operations? • Ensure reliability of financial reporting? • Promote compliance with laws and regulations?

• Internal control objectives

• Properly recorded? • Properly accounted for?

• Are revenues and expenditures

• To avoid waste? • To contain losses? • To eliminate abuses?

• Do obligations and costs comply with laws and regulations? • Are assets/resources safeguarded?

Determine Controls Assessment Objectives

Existence/occurrence Completeness Rights/obligations Valuations

Existence/occurrence Completeness Rights/obligations Valuations Presentation/disclosure Government-wide laws OMB Circulars, Bulletins GAO guidance Agency policy, procedures, and practices

• Materiality levels for entity-wide controls • Materiality for financial reporting controls • Financial statement purposes • Other financial reporting • Selected accounts, line items of reports, parts of reports • Management assessments

Obtain/Identify/Determine Materiality Thresholds for:

• • • •

Compliance assertions:

• • • • •

Account, account group assertions:

• • • •

Transaction(s) assertions:

Discuss Management Assertions:

TASK C—CONDUCT CONTROLS ASSESSMENT TASKS continued Draft Assessment Review Guides

Document and Summarize Observations

Financial management Program management Property management Payroll, travel, supplies Procurement management

Secured access Systems development life cycle Disaster recovery Outsourced data systems

• • • • •

Federal programs Operations environment Financial statements/reporting Program financial reporting Organizational structure

Define Agency-Wide Controls Environment

• Relevance to agency responsibilities • Accuracy • Data completeness • Timeliness of information • Documentation

• Systems effectiveness

• • • •

• Input • Processing • Output

• Equipment type, software • Documentation • Application control

• Computer systems

• • • • •

• • • •

• Reportable condition • Material weakness • Significant deficiency

Note poor control designs Ineffective controls Steps to improve controls Consistency of deficiency definitions

Assess Periodic Controls Monitoring Programs:

• Within and outside of agency • Implementation response—central agency controls guidance • Between operational, financial, and information systems staffs

Information and Communications:

• Sustained, effective controls environment

• Segregation of duties • Transaction authorization and processing • Physical asset control • Advance authorization and approvals • Appropriate documentation • Computers—general and application controls

• Dissemination of control objectives • Illustrative scope of controls

Management Communications Regarding Controls:

• Determine risk impact and effect on resources

• Prevent controls • Detect controls

• Identify significant risk areas • Design/implement controls activities

• • • •

Operational system(s) Managerial system(s) Accounting system(s) Financial, nonfinancial controls

Perform Entity-Wide Programs Risk Assessments:

Conduct Preliminary Systems Assessments:

TASK D—MANAGEMENT’S CONTROLS ASSESSMENT

Entity level Program level Process level Transaction level Applications level

Draft Entity-Wide Controls Assessment Report(s)

• Conformity with OMB A-123 content • Compliance with reporting dates • Compliance with corrective action

Review Management Assurances in PAR for:

• • • • •

Assess Controls at:

TASK D—MANAGEMENT’S CONTROLS ASSESSMENT continued

IG offices CFO and staff Key program staff IG and staff

Group/individual accounts Group/individual transactions Standard/nonstandard entries Prevent controls Detect controls

• Assess general controls • Assess applications controls

For Computer systems:

• • • • •

For accounting/financial compilations:

Authorizations/approvals Support documents Document(s) flows and forms Manual/computer systems

Prepare Annual Assurance Statement on Internal Controls

• Reportable conditions • Material weaknesses • Significant deficiencies

• • • •

For financial processes:

Detect controls Prevent controls Process for standard entries Process for nonstandard entries and unusual entries • Forms and documents approvals • Tasks segregation

• • • •

Examine Financial Controls:

Control questionnaires Walkthroughs Controls checklists Decision trees Flowcharting Selected tracing

Financial Controls Deficiency Criteria:

• Program managers and staff • Budget officials and staff • Financial managers and staff

Review objectives Review methodology Location(s) involved Staff to contact

Control environment Risk assessments Control activities Information and communications Monitoring Document Financial Controls:

• • • • • •

• • • • •

Acquire Understanding of Effectiveness of Control Elements:

Obtain/Examine Control Policies:

• • • •

Discuss Financial Controls Assessment Plan:

• Past IG program and other review reports • Past IG audit reports • Past financial statement audit reports • Past GAO reports

Review, Follow-Up on Control Deficiencies in:

• • • •

Senior Assessment Team Meets with:

TASK E—A-123 SURVEY OF FINANCIAL CONTROLS Draft Financial Controls Assurance/ Assessment Report(s)

369

Index A “A” apportionments, 73 ABC (activity-based costing), xiii Accounts receivable, 176 Accountability of Tax Dollars Act (2002), 8, 20, 155 Accountable budgetary events, 66-76 allocations, nature of congressional, 72-73 allotments, nature of federal entity, 73 allowances, nature of federal, 73 apportionments, nature of OMB, 73 appropriations, nature of congressional, 68-69 authorizations, nature of congressional, 67-68 availability of budget authority by time periods, 70 budgetary accounting, 66-67 GAO decisions, 69-71 obligations, nature of federal, 74-76 types of budget authority, 71-72 Accountable officers, 119-124 certifying officer responsibilities, 121 defined, 119-120 disbursing officer responsibilities, 120-121 liabilities of, 121-123 reporting by, 123-124 Accountable proprietary events, 76-80 Accountants, xxiii Account Descriptions and Postings, 149 Account groups, SGL, 146 Accounting bases, xx-xxii, 180 Accounting forms accrual/adjusting/closing entries, 205, 221 contract, 221 general ledger accounts, 205, 221 for interagency expenditures, 231-232 for receipts/transfers/ reimbursements/refunds, 247-248 subsidiary accounts, 204-205, 221 travel/transportation, 204-205 Accounting policies, 175 Accounting reports, 54 Accounting transactions, 149

Account symbols and titles, 108-109 Accrual accounting, 13 Accrual entries, 195, 205, 221 Accrual of expenses or costs, 227 Accrual reversals, 195 Accrued expenditures, 192, 206, 222 Activity-based costing (ABC), xiii Adjustments and changes to costs, 168 Advances, 94, 129-130, 208, 226 Advance receivables, 93-94 Advice of allotment, 88, 89 Agency budget proposal support, 49 Agency debt authority, 72 Agency-wide financial information classification structure, 136 Allocations, xx, 72-73, 87-88 Allotments, xx, 73, 82, 88-89 Allowances, 73, 193 Annuities, 234 Anti-Deficiency Act (1870), 7, 9-10, 54, 86, 88, 121-123 Apportionment and Reapportionment Schedule, 86 Apportionments, xx, 43, 54, 56-57, 73, 82, 86-87 Appropriations accounting for, 83-86 authority for, 71 Constitutional authority for, 8-9 defined, 52, 82 general/special fund, 48 nature of congressional, 68-69 recording, 85-86 reporting, 156-157 types of, 71 Appropriation authority, 72 Appropriation expenditures, 90-91 Appropriation laws, xviii, 67, 70 Appropriation legislation, xx Appropriation realized, 85 Appropriation received, 167 Appropriation reimbursements, 251-252 Appropriation used, 167 Appropriation warrants, 84-85 Assets, 258-274 accounting entries for, 261-263 accounting for, 79 controls/procedures for, 258-261 entity vs. nonentity, 162

on federal entity balance sheets, 162-163 fixed assets, 268-274 inventories, federal, 265-267 prepaid supplies/materials, 274 proprietary accounting for, 79, 94-95 receivables, federal, 263-264 security deposits, 275 suspense accounts, 274 Auditability, 152-153 Auditors, xxiii Authority, budget, 71-72 Authorization legislation, xx, 67, 68 Authorizations, 67-68 Availability of budget authority by time periods, 70 Availability of funds, 68 Available receipts, 248-249 B Balance sheet. See Statement of Financial Position “B” apportionments, 73 Bills of lading, 204 Billing and collection system, 125 BOB. See Bureau of the Budget Borrowing authority, 44 Budget, federal. See Federal budget Budget accounts, 116-118 Budget and Accounting Act (1921), 4, 5, 7, 10, 64 Budget and Accounting Procedures Act (1950), 7, 8, 11-12, 106 Budgetary accounting, xx-xxi, 147 Budgetary accounting events, 66-76 allocations, nature of congressional, 72-73 allowances, nature of federal, 73 apportionments, nature of OMB, 73 appropriations, nature of congressional, 68-69 authorizations, nature of congressional, 67-68 availability of budget authority by time periods, 70 entity allotments, nature of federal, 73 GAO decisions, 69-71 obligations, nature of federal, 74-76

370

Index

types of budget authority, 71-72 Budgetary accounting practices, 82-91 for allocations, 87-88 for allotments, 88-89 for apportionments, 86-87 for appropriations, 83-86 liquidating obligations/appropriation expenditures, 90-91 for obligations, 90 Budget authority, 43-44, 71-72 Budget authority availability by time periods, 70 Budget centers, 141 Budget cycle phases, 46-57 congressional action phase (2), 51-52 execution phase (3), 52-57 formulation phase (1), 46-51 review/audit phase (4), 57 Budget estimates, specificity of, 48-49 Budget execution phase (3), 52-57 controlling/monitoring congressional appropriations in, 53-54 “M” accounts, 56-57 OMB role in, 53 reporting during, 54, 57 within the entity, 54-55 Budget execution report, 57 Budget formulation phase (1), 46-51 Budget formulators and analysts, xxii Budgeting concepts, 59-62 Budget reports, 54 Budget reporting, 136 Budget review and audit phase (4), 57 Bureau of the Budget (BOB), 4, 9-11 Business accounting, xxi C Cabinet departments, xxi, 6-7 Cash accounting, xxi-xxii Cash advances, 220 Cash assets, 175-176 Cash disbursements, 119-124 Cash transactions, interagency, 237-239 CBO. See Congressional Budget Office Central accounts system, 107-118 accounting activities in, 107-112

accounting for disbursements/outlays, 109-111 accounting for expired receipt/expenditure appropriations, 111-112 accounting for receipts, 107-109 reporting for, 112-116 types of accounts in, 116-118 Certification of fund availability, 126-127 Certifying officers, 121 CFO Act. See Chief Financial Officers Act CG. See Comptroller General Changes in accounting principles, 168 Chart of Accounts, 149 Chief financial officers, 7 Chief Financial Officers Act (CFO Act) (1990), xvii, xix, 7, 8, 17, 21-40 annual independent audits, 32 background of, 21-24 controllership responsibilities of OMB, 27-28 deficiencies of, 33-40 department/agency CFO responsibilities, 28-31 department/agency financial statements, 31-32 deputy CFO responsibilities, 31 and FASAB origins, 33-34 and FASAB overview, 34-36 and FASAB pronouncements, 38-40 financial-management responsibilities of OMB, 25-27 and GAAP for federal government, 36-38 intent of, 24-25 and OMB, 5 Citizens, xxiii Civil Service Commission (CSC), 186 Collections, 45 Combined Statement of Receipts, Expenditures, and Balances, 115 Commercial off-the-shelf (COTS) software, 153 Commitment of funds, 225 Commitments, 82, 178 Committees on the budget, 58 Communications transactions, 232-234 Compliance considerations, 4

Comptroller General (CG), xvii, 4-6, 10, 11, 19 Computer Security Act (1987), 137 Concurrent resolution, 58, 59 Confidentiality of information, 46 Congress, U.S. appropriation/authorization actions of, xx appropriation laws passed by, xviii borrowing authority of, 44 budget duties of, 41, 42 change in members of, xv and Constitutional authority for appropriations, 8-9 contract authority of, 44 contract responsibilities of, 213-214 federal financial policy function of, 3 financial accounting function of, xxi payroll responsibilities of, 185-186 receipts/revenues/finances responsibilities of, 243 travel/transportation responsibilities of, 198 Congressional action budget phase (2), 51-52 Congressional Budget and Impoundment Act (1974), 8, 14-15, 51, 57-59 Congressional Budget Office (CBO), 14, 47, 58-59 Congressional budget process, 58-59 Consistency of financial data, 135 Consolidated financial statements, 115-116 Consolidated statement of net position, 166 Consolidated working fund accounts, 117 Constitutional authority for appropriations, 8-9 Constitution of the United States, 7 Content of financial information, 157 Contingencies, 178 Continuing activities, 50 Continuing contracts, 222 Continuing resolution, 52 Contracts, 127, 211-227 accounting for, 225-227 controls/procedures for, 216-221

371

Index cost-reimbursable contracts, 212, 213 definitions used with, 211-213 federal entities with responsibilities for, 213-216 fixed-price contracts, 213 OMB obligation/accrual/costing criteria, 221-224 organizational relationships required in, 218 purchase orders, 213 for variable quantity, 222 Contract authority, 44, 72 Contract documents, 219-220 Contractor-submitted proposals or bids, 219 Controlling congressional appropriations, 53-54 Core Financial System Requirements (JFMIP), 137 Corrections of errors, 168 Costs accounting for, 80 adjustments and changes to, 168 with contracts, 223-224 defined, 45-46 of personnel services, 192-193 proprietary accounting for, 80, 96 travel, 206 Cost accounting, xxi, xxii Cost accumulation, 148 Cost centers, 141 Cost-based budgets, 13 Costing federal entities, programs, and activities, 311-334 assessing/recovering user charges, 319-320 background for, 311-314 conducting OMB Circular A76 competition, 324 exceptions to OMB Circular A-25 mandates, 321 federal business costing, 333 federal entity costing, 328-331 federal “make or buy” policies, 322-323 full cost/market price defined, 320-321 “make or buy” decisions, 322-323 methodologies, 315-318 program/managerial costing, 331-333

reasons to perform commercial activities, 323 special benefits/beneficiaries, 319 streamlined/standard competition processes, 324-328 user charges/user fees, 318-322 Costing of funds, xx Cost-plus-fixed-fee contracts, 222 Cost-reimbursable contracts, 212, 213 COTS (commercial off-the-shelf) software, 153 Credit transactions, 239-240 Crosswalks to Standard External Reports, 149 CSC (Civil Service Commission), 186 Cumulative results of operations, 86 Current appropriation authority, 72 Currently authorized activities, 50 Current service budget, 58 Current services budget, 58 D Daily Treasury Statement, 114 Data conversion, 152, 153 Debt, 177 Debt receipts, authority to spend, 71 Default costs, 101 Deferred maintenance, 165 Definite appropriation authority, 72 Department budget proposals, 49, 50 Deposit fund accounts, 118 Direct deposit system, 126 Director of OMB, xvii Disbursements, 124-132 accounting for, 80, 129-132 cash. See Cash disbursements in central accounts system, 109-111 defined, 45 forms of, 125-126 internal controls for, 126-129 proprietary accounting for, 80 Disbursing funds, xx Disbursing officer, 120-121 Disposal liabilities, 177 Dockery Act (1894), 106 Documentation, 137 Donations, 167

E Earmarked funds, 178 Economists, xxii Electronic transfer system, 126 Employee benefits, 177 Entity assets, nonentity vs., 162 Entity financial statements, 158-159 Environmental liabilities, 177 Exchange revenues, 80, 252 Expended appropriation, 76 Expended appropriations, 82 Expending funds, xx Expenditures, 45, 76-77 Expenditure account symbol, 110, 111 Expenditure appropriations, 111-112 Expenditure reporting, 157, 226 Expense reporting, 157 Expenses, 80 Expired appropriation accounts, 70 Expired appropriations, 110 Expired receipts, 111-112 F FACTS II (Federal Agencies’ Centralized Trial-balance System II), 170 FASAB. See Federal Accounting Standards Advisory Board FASB (Financial Accounting Standards Board), xiv Federal accounting implementing, 4-7 legislation concerning, 7-20 objectives of, 3-4 Federal accounting and financial reporting, 134-136 Federal accounting standards, 136 Federal Accounting Standards Advisory Board (FASAB), xvii, xviii, 19-20 Federal agencies, xxi, 6-7 Federal Agencies’ Centralized Trial-Balance System II (FACTS II), 170 Federal budget, xiii budget execution phase (3), 52-57 budget formulation phase (1), 46-51 changes in process, 57-59 concepts, 59-62 congressional action phase (2), 51-52 defined, 41-42

372 fiscal years, 42-43 phases of budget cycle, 46-57 review/audit phase (4), 57 terms used in, 43-46 timetable for, 52 Federal controls, 353-367 background, 356-357 deficiencies, control, 360-364 flowchart for, 365-367 groupings of, 357-358 performance reporting, 358-360 and Sarbanes-Oxley Act, 353-356 Federal Credit Reform Act (1990), 8, 16-17, 97-104 background, 97-98 financial statement disclosure, 103-104 objectives of, 98 Post-SFFAS No. 2 activity, 99-100 recordkeeping requirements, 102 SFFAS No. 2, 99 SFFAS No. 18, 100 SFFAS No. 19, 100-101 subsidy reestimate requirements, 102-103 TR No. 3, 101 TR No. 6, 101-102 Federal Deposit Insurance Corporation, xviii Federal disbursements, 124-132 accounting for, 129-132 forms of, 125-126 internal controls, 126-129 Federal entities allotments of, 73 changes in, xv-xvi contract responsibilities of, 216 financial statements of, 158-159 payroll responsibilities of, 187 with relevant accounting responsibilities, 255-257 reporting obligations of, xvii-xviii responsibilities of, 6-7 travel/transportation responsibilities of, 198 Federal entity balance sheets, 159-163 assets/liabilities on, 162-163 classifications of consolidated, 160-163 entity vs. nonentity, 162 intragovernmental vs. governmental liabilities on, 162

Index net position on, 163 Federal financial and information systems, 133-153 financial management system requirements, 136-144 problems in, 152-153 reporting, 134-136 SGL, 145-149 system integration/interrelationships, 150-151 Federal financial management background of, xiii-xiv changing environment of, xv differing views on, xxii-xxiii major initiatives of, xvi-xvii Federal Financial Management Improvement Act (1996), 8, 19-20, 82-83 Federal financial statements, xix-xx, 155-180 balance sheets, 159-163 entity financial statements, 158-159 footnotes to statements, 175-178 government-wide financial statements, 178-180 management discussion/analysis, 174-175 required supplementary stewardship information, 178 statement of budgetary resources, 168-171 statement of changes in net position, 166-168 statement of custodial activity, 173-174 statement of financing, 171-173 statement of net cost, 164-166 structure of, 158-159 users of, 156-158 Federal fund accounting, 65-66 Federal funds, 244 Federal government branches of, xii financial management background in, xiii-xiv impact of, xiii Federal Managers’ Financial Integrity Act (1982), 8, 15-16 Federal obligations, 74-76 Federal organizations, xviii Federal Prison Industries (FPI), 230 Federal reporting entities, xvii-xviii Federal Reserve Board, xviii

Financial (proprietary) accounting, xxi Financial Accounting Standards Board (FASB), xiv Financial communication system, 126 Financial expenditure reports/invoices, 220 Financial legislation, 7-20 Accountability of Tax Dollars Act, 20 Anti-Deficiency Act, 9-10 Budget and Accounting Act, 10 Budget and Accounting Procedures Act, 11-12 Chief Financial Officers Act, 17 Congressional Budget and Impoundment Act, 14-15 Constitutional authority for appropriations, 8-9 Federal Credit Reform Act, 16-17 Federal Financial Management Improvement Act, 19-20 Federal Managers’ Financial Integrity Act, 15-16 Government Corporation Control Act, 10-11 Government Management Reform Act, 19 Government Performance and Results Act, 18 Public Law 84-863, 13-14 Supplemental Appropriation Act, 12-13 Financial management system requirements, 136-144 core requirements, 136 system complexities, 136-137 transaction classification structure, 137-143 transaction coding hierarchy, 143 Financial reporting, 136 Financial statement disclosure, 103-104 Financing account, 100 First concurrent resolution, 59 Fiscal policies and procedures. See Treasury fiscal policies and procedures Fiscal years, 42-43 Fixed-price contracts, 213, 222 Footnotes to federal entity financial statements, 175-178 Foreign currency, 175-176 Format of financial information, 157

373

Index FPI (Federal Prison Industries), 230 Franchised fund accounts, 117 Full cost, 148 Funds (term), 63 Fund accounting, 63-66 Fund Balance with Treasury, 85, 86, 175 G GAAP (generally accepted accounting principles), xiv GAO. See Government Accountability Office GAO decisions, 69-71 GASB (Governmental Accounting Standards Board), xiv General Accounting Office. See Government Accountability Office General fund expenditure accounts, 116 General fund receipt accounts, 116 General fund receipts, 48, 108 General ledger accounts, 191-192, 205, 221 Generally accepted accounting principles (GAAP), xiv General Services Administration (GSA), 198, 214, 230 Government Accountability Office (GAO), xiii, xiv and Budget and Accounting Procedures Act, 12 contract responsibilities of, 214 establishment of, 4, 10 and Federal Financial Management Improvement Act, 20 fund accounting responsibilities of, 64 interagency-expenditure responsibilities of, 230 payroll responsibilities of, 186-187 responsibilities of, 5-6 Governmental Accounting Standards Board (GASB), xiv Governmental receipts, 108 Government-chartered organizations, 49 Government Corporation Control Act (1945), 8, 10-11, 155 Government Management Reform Act (1994), 8, 19, 107, 116

Government Performance and Results Act (1993), 8, 18 Government Printing Office (GPO), 230 Government-sponsored enterprises, xviii, 49 Government-wide financial statements, 178-180 GPO (Government Printing Office), 230 Grants, 127, 335-351 accounting/control considerations for, 339-340 controls/procedures for, 340-345 and cooperative agreements, 350-351 definitions, 335-337 federal entities with responsibilities for, 337-339 OMB obligation/accrual/ costing criteria for, 345-350 GSA. See General Services Administration H Hamilton, Alexander, 64, 105 House of Representatives, 106 House of Representatives Order, 106 I IFB (invitation for bid), 219 Impoundment, 57-58 Imprest funds, 121 Imprest fund accounting, 130-131 Imputed financing sources, 167 Income and expense statement. See Statement of Operations Incurring obligations, 90 Indefinite appropriation authority, 72 Individual payroll records, 190-191 Industrial funds, 293-309 accounting procedures for, 299-302 cost accounting considerations for, 295-296 cost accounting methods for, 296-297 operations of, 294-295 process cost accounting, 302-309 work order/job cost accounting, 297-299 Insurance claims, 235-236 Integrated financial management system, 133, 136

Interagency cash transactions, 237-239 Interagency credit transactions, 239-240 Interagency expenditures, 229-240 accounting entries for, 236-240 federal entities with responsibilities for, 230 OMB criteria for selective, 232-236 procedures/controls for, 230-232 Interest rate reestimate, 100 Internal controls, 137 Intrabudgetary receipts, 108 Intragovernmental liabilities, governmental vs., 162 Intragovernmental orders, 222 Inventory, 177 Invested capital, 85 Investments by federal entities, 176 Invitation for bid (IFB), 219 Invoices, 226 J Joint Financial Management Improvement Program (JFMIP), xvi Journal voucher system, 125 L Leases, 178 Leave, accounting entries for, 193, 196 Letters of credit, 131-132 Letters-of-credit system, 125-126 Letters-of-credit withdrawals, 226 Liabilities, 275-281 of accountable officers, 121-123 accounting entries for selected, 278-281 accounting for, 79 controls/procedures for, 275-278 on federal entity balance sheets, 162-163 intragovernmental vs. governmental liabilities, 162 payment of, 210 proprietary accounting for, 79, 94-95 reporting of, 281 Liabilities not covered by budgetary resources, 177 Life insurance liabilities, 178

374

Index

Liquidating obligations, 90-91, 208, 209 Loans, 16-17, 97-98, 176, 234-235 Loan guarantees, 97-98, 176, 234-235 Local government securities, xiv M “M” accounts, 43, 56-57, 70, 110 Maintenance, 137 Management by objectives (MBO), xiii, 60 Management fund accounts, 117-118 Management funds, 49 Management’s Discussion and Analysis (MD&A), 159, 174-175 Master payroll records, 190-191 MBO. See Management by objectives MD&A. See Management’s Discussion and Analysis Monetary assets, 175-176 Monitoring congressional appropriations, 53-54 Monthly Treasury Statement of Receipts and Outlays, 114-115 Multiple-year appropriation account funds, 70 Multiple-year appropriations, 109 N Nature of department budget requests, 50 Net cost of operations, 165-166 Net equity position, 282 Net position, 163, 168 Net results cost of operations, 168 Nonappropriated fund activities, 283-309 revolving/similar-type funds, 283-290 supply /industrial funds, 290-309 Nonentity assets, 175 Nonexchange revenues, 80, 167, 252-253 No-year appropriation account funds, 70 O Object classification, 183 Obligated balances, 44-45 Obligations, xx accounting for, 90 with contracts, 226 liquidating, 90-91, 208, 209

payment of earlier, 129 review of anticipated, 126 Obligations, federal, 74-77, 82 Obligations incurred, 90, 192, 205-206, 221-222 Office of Management and Budget (OMB), xiii, xiv apportionment function of, xx budget execution role of, 53 budget formulation roles of, 46-48 and CFO Act, xvii, 17 contract responsibilities of, 214-216 establishment of, 10 and Federal Managers’ Financial Integrity Act, 15 financial accounting function of, xxi and Government Performance and Results Act, 18 interagency-expenditure responsibilities of, 230 payroll responsibilities of, 186 receipts/revenues/finances responsibilities of, 245 responsibilities of, 4-5 travel/transportation responsibilities of, 198 Office of Personnel Management (OPM), 186 Offsetting collections, 71-72 OMB. See Office of Management and Budget OMB apportionments, 73 OMB Bulletins, 5, 158 OMB calendar, 53 OMB Circulars, 5 A-11 - Preparation and Submission of Budget Estimates, 136, 215, 216 A-21 - Cost Principles for Educational Institutions, 45, 214 A-34 - Instructions on Budget Execution, 136 A-87 - Cost Principles for State, Local and Indian Tribal Governments, 45, 214 A-122 - Cost Principles for Non-Profit Organizations, 46, 214 A-123 - Management’s Responsibility for Internal Control, 15, 57 A-127 - Financial Management Systems, 133

A-136 - Financial Reporting Requirements, 103, 155, 158 Omnibus Budget Reconciliation Act (1990), 16 One-year appropriation account funds, 70 One-year appropriations, 109 Operating expenses, 95-96 OPM (Office of Personnel Management), 186 Organization and program costs, 164-165 Outcome measure, 18 Outlays, 44, 45, 77, 109-111, 124, 170-171 Output measure, 18 Overexpenditure, 123 Overobligation, 123 P Partial budgeting, prohibition of, 50-51 Pay, accounting entries for, 193-195 Payments, 191, 226 Payment of earlier obligations, 129 Payroll, 185-192 congressional responsibilities for, 185-186 controls over, 187-190 forms for, 190-192 GAO responsibilities for, 186-187 individual entities’ responsibilities for, 187 OMB responsibilities for, 186 OPM responsibilities for, 186 and personnel forms, 190 Payroll costs, 194 Payroll distribution journal, 191 Payroll forms, 190-192 Payroll records, 190-191 Payroll vouchers, 191 Pensions, 234 Performance budget, 64 Performance goal, 18 Performance indicator, 18 Permanent appropriation authority, 72 Personal compensation, 184-185 Personal compensation obligations, 183-196 accounting entries for pay/leave/allowances, 193-196 definitions used in, 184-185 OMB obligation/accrual/costing criteria, 192-193

375

Index payroll controls/procedures, 187-192 payroll responsibilities, federal entities with, 185-187 timing of, 183-184 Personnel benefits, 185, 194 Personnel forms, 190 Petty cash funds, 121 Planning, programming, and budgeting systems (PPBS), xiii, 60-62 Planning, programming, budgeting, and execution systems (PPBES), 60-62 Postage, 236 PPBES. See Planning, programming, budgeting, and execution systems PPBS. See Planning, programming, and budgeting systems Preaudit of disbursements, 127-128 President of the United States budget duties of, 41, 42 budget formulation duties of, 46, 47 Printing, 236 Private-sector accounting, xxi Procurement forms, 218-221 Procurement request or authorization, 218-219 Program account, 99 Program activity, 18 Program costs, 95-96 Program evaluation, 18 Program managers, xxiii Prohibition of partial budgeting, 50-51 Project management, 152 Properties, 177 Property, plant, equipment, 177 Proprietary accounting, 67, 78-80. See also Financial accounting Proprietary accounting practices, 91-96 for advance receivables, 93-94 for advances, 94 for assets, 92, 94-95 for costs, 92-93, 96 for expenses, 92-93 for liabilities, 92, 94-95 for program/operating expenses, 95-96 Proprietary receipts, 108 Public debt authority, 72 Public Law 84-863 (1956), 8, 13-14

Public Law 101-510, 111 Public vouchers, 202, 204 Purchase orders, 213 Q Quality assurance, 152

reporting of, 289-290 violations, funding, 288-289 Revolving fund accounts, 117 Revolving fund operations, 49 RFP (request for proposal), 219 Risk management, 152

R

S

Reapportionment requests, 56-57 Reappropriation, 72 Receipts, 240-241 accounting entries for, 248-249 accounting for, 79-80 accounting forms for, 247 in central accounts system, 107-109 controls/procedures for, 245-246 defined, 45 federal entities with responsibilities for, 243-245 proprietary accounting for, 79-80 Receipt appropriation account symbol, 110 Receivables advance, 93-94 Refunds, 242, 247, 248, 252 Reimbursements, 242, 246-248, 251-252 Relevance of financial data, 136 Reliability of financial data, 135 Rent, 232-234 Reports/reporting, 112-116 of Anti-Deficiency Act violations, 122-123 budget/accounting, 54 budget execution, 57 by federal entities to Treasury, 112-113 by Treasury, 113-116 Report on Budget Execution, 86-87 Request for proposal (RFP), 219 Request for travel advance, 200 Reservation of funds, 126 Responsibility centers, 141 Revenues, 79-80, 242-245, 251-252 Reversal entries, 227 Review of anticipated obligations, 126 Revolving funds, 283-290 definitions, 283-284 establishing, 286 financing nonappropriated activities, 284-285 objectives of, 285-286 OMB review/reporting, 287-288

Salaries, 127 Sarbanes-Oxley Act (2002), 15, 57, 353-356 SEAS (service efforts and accomplishments), xiv SEC (Securities and Exchange Commission), xiv Second concurrent resolution, 59 Secretary of the Treasury, xvii, 6, 19 Section 1311(a) of Budget and Accounting Procedures Act, 13 Section 3679 of Anti-Deficiency Act, 9-10 Section 3679 of Revised Statutes, 55 Securities, state/local government, xiv Securities and Exchange Commission (SEC), xiv Segregation of fiscal duties, 128 Senior Executive Service (SES), 186 Service efforts and accomplishments (SEAs), xiv SES (Senior Executive Service), 186 SFFAS. See Statements of Federal Financial Accounting Standards SGL. See Standard General Ledger Sick leave, 196 Single, integrated financial management system, 133 Six Sigma, xiii Special fund expenditure accounts, 117 Special fund receipts, 48, 108 Special fund receipt accounts, 116 Specificity of budget estimates, 48-49 Spendout rate, 77 Standard General Ledger (SGL), xvi, 20, 81-83, 136, 145-149 Standard stock items, 222 State government securities, xiv Statement of Accountability, 113, 123

376

Index

Statement of Budgetary Resources, xix, 168-171 Statement of Cash Flows, xix Statement of Changes in Net Position, xix, 166-168 Statement of Custodial Activity, xix-xx, 173-174 Statement of Financial Condition and Income, 113 Statement of Financial Position (balance sheet), xix, 159-163 Statement of Financing, xix, 171-173 Statement of Net Cost, xix, 164-166 Statement of Obligations, 113 Statement of Operations, xix Statement of Retained Earnings, xix, 113 Statement of Transactions, 113, 123-124 Statement of Unexpended Appropriation Balances, 113 Statements of Federal Financial Accounting Standards (SFFAS), 99-101, 163, 168 Stewardship information, 176 Stock fund operations, 290-291 Subsidiary accounts, 191, 204-205, 221 Subsidy reestimates, 102-103 Summary payroll vouchers, 191 Supplemental Appropriation Act (1955), 8, 12-13, 74 Supplementary stewardship information, 159 Supply funds, 290-293 Support for department and agency budget proposals, 49 T Taxes, 167 Taxes receivable, 176 Technical/default reestimate, 100 Technical Releases (TRs), 101-102 Telephone expenditures, 236 Testing problems, 152 Time and attendance reports, 190 Time distribution sheets, 190 Timeliness of financial data, 135, 157-158 Title H (of Government Management Reform Act), 19 Title I (of Government Management Reform Act), 19 Title II (of Budget and Accounting Act), 4, 10

Title III (of Budget and Accounting Act), 4, 10 Title III (of Government Management Reform Act), 19 Title IV (of Government Management Reform Act), 19 TRs. See Technical Releases Training, 137 Transaction classification structure, 138-143 by function, 143 by fund, 139-140 by location, 143 by mission, 143 by object classification, 142 by organization, 141 by program, 140 by project, 141-142 by system/life-cycle costing, 143 hierarchy of, 143 Transaction life cycle, 78-79 Transfers, 44, 167-168, 241-242, 246-251 Transfer appropriation accounts, 72, 118 Transportation forms, 202-205 Transportation requests, 208-209 Travel advances, 207-208 Travel and transportation, 127, 196-210 accounting entries, 206-210 controls/procedures for, 198-205 definitions used with, 196-197 OMB obligation/accrual/costing criteria, 205-206 of persons, 197 responsibilities for, 198 of things, 197 Travel forms, 199-202 Travel request and authorization, 200, 204 Travel voucher, 200-202 Treasurer of the United States, 6, 105 Treasury Department, xiv, xvii, 105-132 Bureau of the Budget in, 4 central accounts system, 107-118 fiscal policies/procedures, 119-132 as keeper of government’s purse, xxi-xxii legal basis for activities of, 105-107

receipts/revenues/finances responsibilities of, 243-245 reporting by, 113-116 responsibilities of, 6 Treasury Financial Manual, 6 Treasury fiscal policies and procedures, 119-132 cash disbursements/accountable officers, 119-124 federal disbursements, 124-132 “True cost,” 98 Trust fund accounts, 118 Trust funds, 49, 244-245 U Unapportioned authority, 85 Unavailable receipts, 249 Understandability of financial data, 134 Unexpended appropriations, 85 Unexpended balances, 45 Unexpired appropriation accounts, 70 US Standard General Ledger Account Attributes for FACTS I and FACTS II Reporting, 149 Unobligated balances, 45 Usefulness of financial data, 135, 157-158 User support, 137 Utilities transactions, 232-234 V Veteran benefits, 177 Vouchers, 125 Voucher and schedule of payments, 202, 204, 220-221 W Wall Street analysts, xxii Withdrawals, 125, 226 “Within the entity,” 54-55 Z Zero-based budgeting (ZBB), xiii, 60