CH 16- FEDERAL GOVERNMENT ACCOUNTING

What are the form and content of government-wide federal statements?

· Each year the federal government issues an "official" comprehensive financial report that covers all its activities and was subjected to audit. This report, the Financial Report of the United States Government, must be distinguished from the Combined Statement of Receipts, Outlays and Balances. The Financial Report features statements that are on a full accrual basis. The Combined Statement (previously known as the Annual Report), by contrast, presents budgetary results (receipts and disbursements) and thereby focuses on cash, other monetary assets, and monetary liabilities. · As required by the FASAB, the federal government's annual Financial Report should be divided into six main sections: o (1) Management's discussion and analysis (MD&A). The MD&A is similar in form and content to that required of municipalities by GASB Statement No. 34, though it is more expansive. The FASAB standards invite the preparer to include performance and forward‐looking information. The information should include separate segments that address: § Mission and organizational structure § Performance goals, objectives, and results § Financial statements § Systems, controls, and legal compliance o In fact, however, the MD&A does more than that. It also provides a lengthy discourse on the state of the U.S. economy and the federal government's long‐term fiscal outlook. (2) The report of the auditors (the GAO). o (3) Eight basic financial statements: § (a) Statement of net cost. See page 59. Perhaps the easiest of statements to understand, this statement presents the full cost of operations for all federal entities, miscellaneous earned revenue (usually from providing services to the public at a price), and gains or losses from changes in long‐term assumptions used to measure liabilities such as pensions and comparable benefits. § (b) Statement of operations and changes in net position. See page 61. This statement shows the total revenues (in separate columns for general revenues and for those classified as "funds from dedicated collections" that are set aside for specific purposes, such as for social insurance). It also shows the total net cost of government operations (drawn from the statement of net cost) as well as miscellaneous items such as intragovernmental revenues, and transfers between funds from dedicated collections and other governmental funds (both of which are eliminated in the consolidation process) and "unmatched transactions and balances" (required adjustments that result mainly from imperfections in the government's accounting system). § (c) Reconciliation of net operating cost and unified budget surplus or deficit. See page 63. This statement identifies the differences between the accrual‐based net operating cost (per the statement of operations and changes in net position) and the budget deficit that is on a near‐cash basis. § (d) Statement of changes in cash balance from the unified budget and other activities. See page 64. This statement reconciles the change in the government's budget deficit with the change in its balance of cash and other monetary assets. Even though the focus of the budget is said to be on a near‐cash basis, certain key transactions are nevertheless accounted for on an accrual basis. These (the reconciling items in the statement) are primarily borrowings and repayments of debt and the payment of interest on the debt. § (e) Balance sheet. See page 65. The balance sheet takes the form of a corporate balance sheet. It set forth the government's assets, liabilities, and the difference between the two—its net position. For reasons discussed later in the chapter, the government's obligations for social insurance programs are not recognized as liabilities until they are due and payable. Hence, they are not reported on the balance sheet, and to the consternation of critics, they do not enter into the computation of the government's negative net position. The amounts are not trivial. Whereas in 2020, the net negative position of the government was $26.8 trillion, the obligations for social insurance were either $87.0 trillion or $65.5 trillion, depending on certain assumptions. However, counter to the charges often made by the critics that by excluding the social insurance obligations from the balance sheet, the government is trying to obfuscate the severity of its fiscal position, it should be noted that the social insurance obligations are highlighted and detailed in a required statement that is presented shortly after the balance sheet. Hence, anyone who believes that the obligation should be recognized as a liability and who can add can readily adjust the reported liabilities and resultant net position to his or her liking. § Also, as will be addressed later in this chapter, effective starting in fiscal year 2026 land will no longer be reported on the balance sheet. § (f) Statement of long‐term fiscal projections. See page 66. This statement displays the present value of projected receipts and non‐interest spending under current policy in terms of both present value dollars and present value dollars as a percent of the present value of the gross domestic product. It also indicates the change from the prior year. Like the statement of social insurance, its time horizon is 75 years. This statement of projections is unlike anything required by either the FASB or the GASB and is unquestionably controversial. It is intended to fulfill a key objective of financial reporting—to show whether future budgetary resources will likely be sufficient to sustain public services and to meet obligations as they come due. Critics, however, fear that the projections are not only inherently subjective but that they may, for political reasons, be intentionally biased. § (g) Statement of social insurance. See page 67. This statement provides key actuarial information pertaining to social insurance program obligations, mainly Social Security and Medicare (including hospital insurance, other medical insurance, and drug benefits). It presents the present value, over a period of 75 years, of the expected benefit payments net of the expected contributions of plan participants. § (h) Statement of changes in social insurance amounts. See page 70. This statement indicates the reasons for changes in the social insurance obligations during the year. The major changes typically pertain to the number of participants entering or leaving the program, in the law or policies, and various economic and other health‐care assumptions. o (4) Notes to the financial statements, including a summary of significant accounting policies and details and explanations of amounts reported in the basic financial statements. See page 72. Notes also provide information on "stewardship assets" (federal land holdings and assets that have historical, cultural, and artistic value). o (5) Required Supplementary Information (RSI). See page 174. Subject only to limited auditing procedures, this section includes extensive discussions of the sustainability of current fiscal policies, detailed data on social insurance programs, as well as estimates of deferred maintenance and repairs, oil and gas reserves, and unpaid tax assessments. o (6) Other Accompanying Information (OAI). See page 210. Similar to RSI, but no item of which is explicitly required by FASAB, this section might include information on technical matters, such as unmatched transactions and balances, as well as effective tax rates, and the "tax gap" (the difference between what taxpayers should pay and what they actually pay).

What constitutes the federal budget?

· Meaning of the Term "Budget" · The Four Types of Federal Funds · The Unified Budget

Reporting the Obligations for Social Insurance Programs

· The liabilities that the FASAB had to address that were far and away the most contentious were those stemming from social insurance programs in general and Social Security and Medicare in particular. These programs have no direct counterpart in either the private or municipal government sectors of our economy. · The accounting controversy over social insurance programs stems largely from the different ways in which these programs can be interpreted. Social Security, for example, can be seen as either a government‐sponsored pension plan (involving mainly exchange transactions) or a government‐managed income redistribution program (involving mainly nonexchange transactions). It is a pension program in that both employees and employers contribute to a fund over the course of the employees' working lives in anticipation of the employees receiving a lifetime stipend on retirement. It is an income redistribution program in that the government taxes both employees and employers, dedicating the tax to program beneficiaries. The tax rate is not calculated on any generally accepted actuarial basis, and the payments that beneficiaries receive on retirement are not actuarially tied to the taxes that they or their employers paid. · In its Statement No. 17, Accounting for Social Insurance (1999), the FASAB specified that both the federal government at large and the individual agencies that administer social insurance programs should account for social insurance costs as if they were nonexchange transactions. That is, the reporting entities need recognize a liability (and related expenditure) for payments to beneficiaries or service providers only when the payments are actually due. Therefore, they need not record on their balance sheet the actuarial value of the benefits earned by program participants. · The FASAB acknowledges that of prime interest to anyone concerned with social insurance programs are their long‐term sustainability and their impact on the overall fiscal condition of the federal government. Indeed, these have been a focal point of ongoing political and economic discourse. Consequently, the FASAB requires extensive disclosure of information such as the following: o Long‐range cash flow projections in nominal dollars and as a percentage of both the payroll that is subject to the tax dedicated for the program and the gross domestic product o Long‐range projection of the ratio of contributors to beneficiaries (commonly called the "dependency ratio") o Statements presenting the actuarial present values of future benefits, contributions, and tax income and changes in such values · Well into the twenty‐first century, the debate continued over when social insurance obligations should be reported as balance sheet liabilities or merely disclosed in notes and RSI as required by Statement No. 17 (and subsequent amendments). Unable to reach consensus among its members, the FASAB issued a compromise statement, Social Insurance: Additional Requirements for Management's Discussion and Analysis and Basic Financial Statements (No. 37, April 2010). This statement retained the provisions of Statement No. 17, which did not require the government to show the obligations as a liability until they were actually due and payable. However, it mandates that the government‐wide entity (as well as entities that are responsible for social insurance programs) include in their annual report a statement of social insurance that summarizes the net present values of the anticipated cash flows, present another statement that indicates the reasons for the changes in net present value during the year, and include in management's discussion and analysis information about commitments, projections, assets, and other key fiscal measures. · Closely tied to the issue of the amounts to be recorded as liabilities and expenditures is that of how the required disclosures should be calculated. In a nutshell, the questions the FASAB faced were: (1) which participants should be taken into account in making projections and measuring the actuarial benefits and obligations, and (2) over how long a period should the projections be made and the actuarial present value calculated? · Private employers base their actuarial liability for pensions, at least in part, on the amount of benefits that their current employees and retirees have earned to date. For the federal government, a similar approach—that is, reporting what current participants in the insurance programs and retirees have earned—may not be entirely adequate. Social Security and Medicare are not voluntary programs; with few exceptions everyone must join, and everyone can expect to receive benefits. Therefore, the federal government's obligation for benefits extends not only to current participants or even current U.S. citizens but also to the unborn children of both U.S. citizens and future immigrants to the United States. · After considerable debate, the FASAB stipulated that the Statement of Social Insurance should focus primarily on the present value of cash flows related to a "closed group" population—those persons who as of the valuation date are current participants in the program as either covered workers or beneficiaries. However, extensive disclosures pertaining to an "open group" measure—which includes future as well as current participants—are also required. The FASAB does not specify the length of the projection period; however, for Social Security and Medicare, it has been 75 years, the same as that used by the trustees of Social Security and Medicare in their annual reports.

Meaning of the Term "Budget"

· Upon seeing or hearing mention of the federal budget, a knowledgeable observer may rightfully ask, "What constitutes the federal budget?" In fact, the federal government does not actually either prepare or pass a budget that is comparable with that of state and local governments. Most commonly, in the federal government the term "budget" refers to a document submitted by the president to Congress. This "budget" represents the president's requests for new budget authority as well as his estimates of revenues and previously mandated outlays for the coming year. Congress then takes the president's proposals under consideration and passes a series of appropriation measures (currently 11 or 12 regular measures plus possible supplemental measures) that authorize "obligations" (the ability to incur expenditures) for the budget year and, in some cases, for future years as well. Taken collectively, these appropriation bills provide the funding for the various federal agencies and their individual programs. Conspicuously missing from these bills are "entitlements," such as Social Security and Medicare, that do not require annual authorization. Correspondingly, revenue bills are voted upon only in years when there are changes to provisions or rates. Congress does not, therefore, pass a single budget document, as might a state legislature or city council, that encompasses all revenues and expenditures. · Alternatively, however, the term "budget" is sometimes also used to refer to actual revenues and expenditures rather than those that are proposed. Thus, when mention is made of the "budget deficit," it is often to actual results rather than to projections. To add further confusion, at the agency level, the term "budget" may refer either to budget requests to the OMB or plans for spending previously appropriated funds. Notably irrespective of the form it takes, the federal budget is near‐cash based. Accordingly, it is subject to the types of manipulations that were discussed earlier in the text with respect to state and local governments (e.g., delaying the payment of certain liabilities and speeding up the collection of revenues). By contrast, the Financial Report of the United States that will be discussed later is on a full accrual basis.

Space assets

o Assets used in the government's space program have characteristics similar to traditional military assets. Nevertheless, even prior to its decision mandating capitalization of military assets, the FASAB prescribed that these assets be accounted for as general assets. Space assets continue to be capitalized and depreciated.

Military assets

o Military assets, such as aircraft, ships, vehicles, tanks, and extraordinarily complex and costly weapons systems, pose special accounting issues. In times of peace these assets have useful lives that are as estimable as those of general assets. However, when used for the purpose for which they were designed—to fight wars—their anticipated useful lives become considerably shorter and less certain. o Prior to May 2003, recognizing the special characteristics of military hardware, the FASAB directed that what it referred to as "national defense property, plant, and equipment" had to be accounted for as "other stewardship assets." That is, acquisition costs had to be expensed as incurred, not capitalized. In 2003, however, the board took a different tack. Focusing on the need to provide information to facilitate annual performance assessment, the board stipulated that the cost of military assets should be capitalized and depreciated over their expected useful lives. That is, they should be accounted for like general assets.

Classified Information

· A unique and especially sensitive issue faced by both the federal government at‐large and several of its component departments and agencies is how to balance the need for fiscal transparency and national security; that is, how to ensure that financial statements are in accord with generally accepted accounting standards but at the same time conceal information that would be of value to the nation's adversaries. This issue is of obvious concern to the Departments of Defense, Homeland Security, and the Central Intelligence Agency but also to other agencies that carry out scientific and technological research, deal with foreign relations and are charged with protecting critical infrastructure installations. · To the casual observer the resolution of the issue may appear straightforward: aggregate all classified outlays and assets into appropriate accounts and describe them as classified. Intelligence experts, however, explain why that would be inadequate. With modern capabilities of gathering, searching through and analyzing vast amounts of publicly available data, adversaries are capable of drawing inferences as to the types of projects and activities to which resources are being directed. Thus, for example, by analyzing data from corporate financial reports, federal budget documents, USAspending.gov (the federal website that provides information on all federal grants and contracts) and various industry specific and economic reports, a sophisticated intelligence agency might be able to discern that the country is stepping up development of a particular weapons system. · In consultation with representatives of a wide range of intelligence experts, the FASAB issued Statement of Federal Financial Accounting Standards 56: Classified Activities (October 2018). Per the statement, "an entity may modify information required by other standards if the effect of the modification does not change the net results of operations or net position." In other words, agencies can distribute the classified costs among any other accounts as long as "the bottom line" of the statement is unaffected. Further, the statement states that "a component reporting entity is allowed to be excluded from one reporting entity and consolidated into another reporting entity." This modification, unlike the other one, may change the net results and net position. As a result of these two provisions, virtually every line of an entities financial statements can be altered by the addition of classified costs. Moreover, the agency is not required to indicate anywhere in its report that it has modified its statements to conceal its classified costs. · The standard also permits the FASAB to issue interpretations of the standard itself that provide additional options to veil secret information. Notably, however, these interpretations themselves can be considered to be classified information and thereby available only to those with "a need" to see them. · It must be emphasized that an agency cannot arbitrarily decide what constitutes classified information. The federal government has explicit procedures for making that determination. · Statement No. 56 highlights the ongoing tension between fiscal transparency and other values and requirements of a free society—in this case, national security. For this reason, the statement has been, and will no doubt continue to be, controversial.

Forthcoming Major Change

· In 2021 the FASAB issued Statement No. 59, Accounting and Reporting of Government Land which makes major—seemingly radical—changes to the way land is accounted for and reported. Per the statement, land will no longer be reported on federal balance sheets; not on those of individual agencies and not on that the federal government at large. Instead, all land will be expensed as acquired. Gains on the sale of land will be computed based on a book value of zero. However, per the new standard, what is lost in data previously reported on the balance sheet will be more than compensated for by way of information disclosed in notes. · There are several asserted benefits to new approach: o Land is currently reported on the balance sheet by businesses as well as state and local governments at historical cost—in many cases the amount paid for it decades earlier. That amount has zero decision utility. It is not indicative of the amount for which it could be sold, the amount that would be required to replace it or its value in producing goods or services. This is especially true of land held by the federal government, much of which it acquired by purchase, treaty or conquest in previous centuries. Moreover, attempts to report federal land at its fair value are likely to be futile. Much of it, such as the millions of acres of forest, park and military base land, is not comparable to land held in the private sector and hence there are no sales transactions that can be used to determine a value. o There are currently inconsistencies in how land is reported. Land that is used for commercial purposes, such as that on which a post office sits, or general operating purposes, such as a military base, is reported differently than that which is classified as stewardship land, such as a national park. Further, much of the land is mixed use, held, for example, for both preservation and recreational purposes. o Data on the quantity of land held and descriptions of how it is being used is likely to be considerably more informative to statement users than dollar amounts that not only may be misleading but also distort the balance sheet. · Per the new statement, the following are among the disclosures required by agencies for general purpose (as opposed to stewardship) land: o A concise statement explaining how land relates to the mission of the entity o A brief description of the entities policies relating to land acquisition, maintenance, use and disposal, as well as any statutory requirements, prohibitions or other limitations governing the land o Land should be assigned to one of the following three sub‐categories and for each the entity should indicate the estimate number of acres held at both the beginning and end of the reporting period § Commercial. This is mainly land that generates revenue from arrangements with outsiders, such as those through leases, concession arrangements, and right‐of‐way grants. § Conservation and preservation. This includes geological resource sites, wildlife and plant life refuges, archeological sites and Native American and other ethnic cultural sites16 § Operational. This includes military bases, science labs, nuclear facilities and administrative offices. o If applicable, the amount of estimated acres held for disposal or exchange and their predominant use · The new standard continues to separate general purpose land from stewardship land. As under present standards, stewardship land will continue to be "off the balance sheet" and disclosures, similar in spirit for those of general purpose land, will continue to be mandated. As might be expected, the disclosures required in the federal government's at‐large consolidated financial report for both stewardship and general land are considerably limited. Mainly what is mandated is only a concise statement explaining how the land relates to the mission of the government and the estimated number of acres in each of several categories · The new standard will not have to be fully implemented until fiscal year 2026. Until that year, general purpose land will continue to be recognized on the balance sheet. However, starting in fiscal year 2022, certain disclosures will have to be made, first as required supplementary information, then as notes.

What constitutes the federal government reporting entity

· The federal government consists of the legislative, executive, and judicial branches of government. Within the executive branch are: o The offices of the president and vice‐president as well as various other offices, such as the Council of Economic Advisers, the National Security Council, and the Office of Management and Budget o The 15 cabinet‐level departments o Approximately 130 additional entities. Of these, many, such as the Postal Service, the Securities and Exchange Commission, and the Social Security Administration, have names that are widely recognized. Others, such as the Delta Regional Authority, the State Justice Institute, and the Marine Mammal Commission, are undoubtedly unknown to most readers of this text. · It might appear that the federal reporting entity is simply all these entities. But such is not the case. It is not easy to define what, in fact, is a federal entity. Some entities are only partially in the federal domain. The Holocaust Memorial Museum, for example, was chartered by a vote of Congress, receives funding from both federal and private sources, and is governed by a board of trustees composed mainly of private citizens. Others, such as the Federal National Mortgage Association (better known as Fannie Mae), which purchases mortgages on residential properties, are government‐sponsored enterprises designed to be stockholder owned and governed and operated like most publicly held corporations. Still other entities have been taken over temporarily by federal regulatory agencies and placed in receivership owing to financial difficulties. Many failed banks were in this category, as were General Motors and the giant insurance company AIG for a time. In addition, other organizations are explicitly appropriated funds by the federal government, but by virtually all other criteria would not be considered part of the federal government (e.g., Gallaudet University). · The most problematic entity of all is the Federal Reserve System. The Federal Reserve System is the nation's central bank and thereby controls the nation's monetary policy. Although ultimately responsible to Congress, it was nevertheless granted relative operating independence to shield it from political influence. Historically, therefore, it was not considered part of the federal government for purposes of financial reporting. As a result of the fiscal crises of 2008, however, the relationship between the Fed and the federal government changed significantly. In an effort to provide assistance to various financial institutions and to prevent the economy from falling into an abyss, the Federal Reserve System closely coordinated its policies with those of the Treasury Department. The fiction that the Federal Reserve System was still not an agency of the federal government became more difficult to sustain. · Largely as a result of the changing relationship between the Fed and the rest of the federal government, the FASAB revisited previous pronouncements that defined the federal reporting entity and in 2014 issued Statement No. 47, Reporting Entity, which made it clear that the Fed should be considered part of the federal government for purposes of financial reporting. · Per Statement No. 47, the federal government‐wide reporting entity should include all organizations: o Budgeted for by elected officials of the federal government o Owned by the federal government o Controlled by the federal government with risk of loss or expectation of benefits · The statement then distinguishes between entities that should be consolidated in the government‐wide statements and those about which information should merely be disclosed in notes. Per the statement, the following characteristics, no one of which is determinative, should be taken into account in establishing whether the entity should be a consolidation rather than a disclosure entity: o It is financed with taxes or other nonexchange revenue. o It is governed by Congress and/or the president. o It imposes, or may impose, risks and rewards on the federal government. o It provides goods or services on a nonmarket basis. · Although the statement is silent on whether any particular entity should be a consolidation as opposed to a disclosure entity, based on its criteria, the Federal Reserve System is being reported only by way of disclosure, not consolidation.

Introduction

· The federal government is unique among U.S. institutions—and so, also, are its accounting and reporting concerns. Although obviously distinguishable by its size (dollar amounts in financial statements are typically shown in "billions"), it also is differentiated by: o The range of its activities (e.g., defense, Social Security and Medicare, and managing the money supply) o The diversity of its resources (e.g., national parks and monuments, stores of gold bullion, and military hardware) o The nature of its obligations (e.g., Social Security and Medicare benefits, loan guarantees, and commitments to carry out social programs) o The extent of its powers (e.g., to tax, to print currency, and to regulate commerce) · Federal accounting is often said to be an oxymoron, with critics claiming that if the federal government were a publicly traded corporation, its financial statements would never be accepted by the Securities and Exchange Commission. Although there may be an element of truth to this charge in that there are differences between FASAB and FASB standards, it is also a gross mischaracterization. In fact, as shall be highlighted in this chapter, the federal government as a whole, as well as each of its component entities, issue annual reports that are on a full accrual basis, are founded on principles that for the most part are at least as rigorous as those applicable to the private sector, and incorporate disclosures that are far more forthright than can be found in any corporate financial statements. Moreover, in significant ways the federal government's financial statements are considerably more progressive—and most definitely more candid—than those of both private‐sector entities and lower‐level governments. Notably, for example, the financial report of the federal government as a whole, the Financial Report of the United States Government, incorporates a management's discussion and analysis that includes a detailed discussion of the government's current net position as well as long‐term trends. Accompanied by numerous charts and graphs that project revenues and expenditures as well as key ratios for up to 75 years, the most recent statements contain explicit warnings that current federal policies are not fiscally sustainable. One chart, drawn from the 2020 annual report, the latest available as this text went to press (see Figure 16-1), indicates that if present trends continue, by 2095, federal spending will increase to over 50 percent of gross domestic product (up from approximately 22 percent in 2020). Another (not shown) projects a 2095 federal debt of 623 percent of GDP (up from 100 percent in 2020), an obviously untenable amount. How many corporate reports are so forthright? The financial statements of the government agencies, as opposed to the federal government as a whole, are also progressive in that they include information on service efforts and accomplishments—the very type of information that the GASB has been promoting for three decades but, owing to opposition from certain user groups has been unable to mandate. · Nevertheless, there is still room for improvement. The federal government's financial statements are subject to annual audit, but as of 2020, its auditor, the Government Accountability Office (GAO), has still been unable to issue an unqualified opinion on them. In part, that is because of the complexity of coordinating and consolidating the separate accounting systems of over 150 federal departments and agencies. Most notably, the Defense Department, which accounts for approximately 10 percent of all federal outlays, was unable to earn an unqualified opinion on its own financial statements, mainly because of problems of managing and consolidating the separate accounting systems of the army, navy, air force, and various other component units.

An international standard-setting agency

· As might be expected, no standard‐setting organization has the authority to establish accounting standards for governments other than those within its own country. Nevertheless, the International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) is responsible for developing a set of standards intended to improve both the quality and comparability of financial reports. · As of December 2020, IPSASB has issued 42 standards (in addition to studies, implementation guides, and occasional papers). Many of its standards address issues similar to those dealt with by the GASB. A key part of its strategy is to converge its standards with those of the International Accounting Standards Board (IASB), the board that sets standards for businesses. Not surprisingly, therefore, in its pronouncements, the IPSASB makes clear that regardless of historical tradition, public‐sector accounting should be on a full accrual, not a cash, basis. This position is manifest in all its pronouncements. Thus, for example, per the standards: o Property, plant, and equipment, including infrastructure (but excluding heritage assets) should be capitalized and depreciated. o Revenue from exchange transactions should be recognized when the revenue can be measured reliably, it is probable that the entity will realize an economic benefit, and both the stage of completion of the transaction and the costs incurred can be measured reliably. o Inventories intended for sale should be recognized as an expense in the period in which related revenues are recognized. If there is no related revenue, then the expense should be recognized when the goods are distributed or a related service is rendered (i.e., on a consumption rather than a purchases basis). o Borrowing costs should be recognized as an expense as "incurred" (i.e., not necessarily when cash is disbursed). · The IPSASB cannot require individual countries to adopt its standards; it can merely encourage them to do so. According to the IPSASB, the GASB is considered a standard setter with full accrual accounting standards that are "broadly consistent" with IPSAS requirements. The public‐sector standards for Australia, Canada, New Zealand, and the United Kingdom are also considered broadly consistent.

Recognizing the Cost of Subsidized Direct Loans and Loan Guarantees

· As part of their social, educational, and commercial programs, federal entities make low‐interest direct loans and guarantee loans made by banks and other institutions. The low‐interest loans provide a direct benefit to the borrowers by providing funds at less than the rate they would otherwise have to pay. The guarantees virtually eliminate credit risks to the lenders and thereby enable them to provide funds to the borrowers at reduced interest rates. The targeted beneficiaries of these loan programs include farmers, veterans, students, and small businesses. · Prior to the Federal Credit Reform Act of 1990, agencies were not required to recognize explicitly the costs of making the low‐interest loans. Instead, they simply reported less interest revenue than they would have had they charged prevailing interest rates. Correspondingly, they recognized the costs of the loan guarantees only as they reimbursed the lenders upon borrower defaults. · The Federal Credit Reform Act of 1990 requires that the president's budget reflect the long‐term costs in the year in which the direct loans and the guarantees are made. To enhance conformity between budgeting and accounting practices, the FASAB directed that the same principles apply to annual financial reports. According to the FASAB, when a government makes a subsidized direct loan, it should recognize as an asset the present value of its estimated net cash receipts, including both interest and repayment of principal. It should report an expense equal to the difference between the face value of the loan and the present value of the estimated net cash receipts. · Per current standards, present value should be based on the interest rate of marketable Treasury securities with similar terms to maturity as the cash flows. Some critics, however, contend that such rate is too low. It thereby overstates the value of the anticipated cash receipts and understates the value of the subsidy. They assert that the government should use a rate that reflects what a borrower would have had to pay on loans from a private‐sector bank or comparable lender. · When a government guarantees loans (as opposed to making them directly), it should also recognize both an expense and an obligation in the amount of the present value of its anticipated payments to the lender. Then, each year the government should reassess the present value of the anticipated payments and recognize the change in value as either an increase or a decrease in its loan guarantee liability, offset by either a debit or credit to loan guarantee expense.

Federal Accounting Standards Advisory Board

· Established in 1990, the FASAB is responsible for promulgating federal accounting standards. In 1999 the American Institute of CPAs, in accordance with Rule 203 of its Code of Ethics, granted the FASAB exclusive authority to establish generally accepted accounting principles (GAAP) for federal entities, thereby giving it status comparable with that of the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB). o Rule 203 (of the American Institute of Certified Public Accountants' Code of Professional Conduct) § The provision that auditors should not express an unqualified opinion on financial statements that are in violation of the standards established by organizations designated by the AICPA's Council. · The FASAB is titled "advisory" because technically both the OMB and the GAO have the authority to dictate accounting practices for federal agencies. Although in practice the FASAB may be as independent as the FASB or the GASB, it must nevertheless submit for review each proposed standard to the Treasury, the GAO, and the OMB—three principal agencies through whose combined effort the board was established. If either the GAO or the OMB objects, then the standard is returned to the board for reconsideration. · The FASAB is composed of nine members: o One from the legislative branch of the federal government (the GAO) o Two from the executive branch (one each from the OMB and the Treasury) o Six, including the chair, who are "public members" (i.e., not employees of the federal government) · The mission of the FASAB is to establish accounting standards "after considering the financial and budgetary information needs of congressional oversight groups, executive agencies, and the needs of other users of federal financial information." Hence, its constituents encompass parties both within and outside the federal government. Unlike the GASB or the FASB, the FASAB is not concerned primarily with accounting reports that will be used by capital market participants to assess stocks and bonds (although increasingly the financial health of the federal government is being assessed by potential investors in U.S. Treasury bonds). Also, unlike those two boards, the general area of "managerial cost accounting" is within its purview (although another federal board, the Cost Accounting Standards Board, located within the OMB, establishes detailed cost accounting rules that must be adhered to by government contractors). · Standard setting for the federal government is especially challenging because key users have sharply contrasting information requirements. For example, economists request statistics on national income and product accounts to obtain a "macro" view of the economy. Budget analysts, however, need data on the various federal appropriation, apportionment, and cash flow accounts so that they can monitor the budgetary process. Oversight agencies want information on financial positions, results of operations, and costs of services. Moreover, as will be discussed in a section to follow, the federal budget can include different combinations of costs and revenues depending on the purpose for which it is to be used. Upon its establishment, the FASAB set out to develop, from the ground up, a fundamental model of accounting for both the federal government as a whole and its separate components. By the mid‐1990s, it had largely accomplished that objective, having recommended standards that encompass a wide range of resources, obligations, and transactions. Since then it has not only been fine‐tuning its basic model but also adding major components to it. By 2021 it had issued 58 standards, plus nine statements of concepts and several technical bulletins. Moreover, as this text goes to press, it has underway projects that will consider major improvements to the management discussion and analysis and required note disclosures. As one of its early projects (following the precedent of both the FASB and the GASB), the FASAB established a set of financial reporting objectives, which were intended to lay the foundation for resolving specific accounting issues. These objectives call for federal reporting to provide information that facilitates and promotes: o Budgetary integrity o Sound operating performance o Effective stewardship over government resources o Adequate financial management systems and controls

What types of accounts are maintained by federal entities?

· Federal departments, bureaus, agencies, and other types of units maintain dual systems of accounts: o Budget accounts ensure that the entity complies with budgetary mandates, does not overspend its appropriations, and is able to fulfill uniform budgetary reporting requirements. o Proprietary accounts provide the information for the financial statements based on FASAB standards and are intended to provide an economic, rather than a budgetary, measure of operations and resources. (The term proprietary does not, however, imply business activities, as when used in a municipal context.) · The budget accounts are comparable to both the budgetary accounts and the encumbrance accounts established by municipalities. Entries are made to record apportionments, allotments (a part of an apportionment that an agency is permitted to expend during a specified time period), commitments (reservations of funds prior to an order), and obligations (encumbrances). · The proprietary accounts are similar to conventional revenue, expense, asset, liability, and equity accounts. The accounts that are unique to the federal government are mainly in the equity (referred to as "net position") section of the balance sheet. Thus, for example, "unexpended appropriations" represent the portion of net assets made available by Congress, but not yet expended. "Cumulative results of operations" (the equivalent of retained earnings) indicate the net assets from operations in both the current and previous years. Proprietary accounting is mainly on a full accrual basis

The Four Types of Federal Funds

· Federal operations are accounted for in four types of funds: a general fund, special funds, trust funds, and revolving funds. Because federal operations are so vast and information requirements of users so varied, the OMB tabulates receipts and outlays in different ways, some of which may include only selected fund types. · Like its counterpart in municipalities, the federal government's general fund accounts for the resources, mainly from income taxes, that are not restricted for specific purposes. These resources are used to pay for national defense, interest on the public debt, and most social programs (excluding large‐dollar programs such as Social Security and Medicare and unemployment compensation, which are accounted for in trust funds). The general fund includes both capital and operating expenditures. However, the federal budget distinguishes between the two in that the capital expenditures are concentrated in particular budget accounts or identified separately in accounts that include both types of expenditures. · Special funds, like the special revenue funds of municipalities, are maintained to account for resources that are designated for specific programs or activities. Typically financed by dedicated fees, these include the Crime Victims Fund and the Land and Water Conservation Fund. · Trust funds are also used to account for resources restricted for specific purposes. The largest of the trust funds are the Old‐Age and Survivors Insurance Fund (which along with the Disability Insurance Trust Fund constitutes the Social Security program), the Supplementary Medical Insurance Fund and the Hospital Insurance Trust Fund (which constitute Medicare), and various government employee retirement funds. Trust funds are conceptually different in the federal government than in other governments or not‐for‐profits. In the federal sector, they are simply any funds that are designated by law as trust funds and have dedicated receipts. Like special funds, they are similar to special revenue funds. They are not funds in which only the income, not the principal, can be expended. · Revolving funds, comparable with a municipality's enterprise funds, account for the federal government's business‐type activities. The most significant of these is the U.S. Postal Service. The activities accounted for in revolving funds generate their own receipts, and therefore the sponsoring agencies are authorized by law to expend their resources without annual congressional appropriation.

General Assets

· General assets are comparable to those of a business and include land, buildings, and equipment. Accordingly, the FASAB recommends that they be accounted for similarly. That is, they should be capitalized and depreciated over their useful lives. Land should be capitalized but not depreciated. (But see discussion below of forthcoming changes.) This category consists of assets that: o Are used to produce goods or services or to support the mission of the entity and can be used for alternative purposes (that is, by other federal programs, state or local governments, or nongovernmental entities) o Are used in business‐type activities o Are used by entities in activities whose costs can be compared to other entities (e.g., costs of federal hospitals that can be compared to nonfederal hospitals). o Military assets o Space assets

Stewardship assets heritage assets

· Heritage assets have value because of their historical, natural, cultural, educational, architectural, or artistic significance. They include museums, monuments, and historical sites; they are expected to be preserved indefinitely. · Some heritage assets may have the characteristics of both operational and true heritage assets. The government holds some heritage assets, such as the Washington Monument, purely for their cultural, architectural, or aesthetic qualities. It holds others, such as the White House and the Eisenhower Executive Office Building in Washington, D.C. (an operating administrative complex), for both their historical and functional attributes. To reduce the subjectivity that would be required in having agencies either allocate a portion of an asset's cost to one category or another or in having them determine whether an asset was primarily operational or heritage, the FASAB stipulated that all multiuse heritage assets be capitalized as general property, plant, and equipment and depreciated over their useful lives. · The cost of acquiring heritage assets that have only historical, artistic, or cultural significance should be expensed as incurred. That is, entities should report them in their statement of net cost. The assets should be referenced on the balance sheet, but no dollar value should be assigned. Instead, information such as the following should be disclosed in notes to basic financial statements: o A brief statement explaining how the assets relate to the entity's mission o The goals and principles the entity established to acquire and maintain the assets o A brief description of the types of assets that the entity holds o The physical quantities of assets in each of its major heritage asset categories

The Unified Budget

· In 1968 (for fiscal year 1969), the government adopted the practice of preparing a unified federal budget that encompasses all four types of funds. The objective was to capture, in a single tabulation, the impact of federal activities on the national economy. In addition, the unified budget was intended to provide a comprehensive measure of the cost of the government's programs that officials could use in establishing spending priorities. · Mentions of the unified federal budget almost always refer to actual revenues and expenditures rather than those that are projected or that must be voted upon by Congress. Unlike, for example, the property taxes of a local government, most federal revenues do not have to be levied or otherwise voted upon each year. Similarly, many outlays are appropriated for a period extending beyond a year. Others are considered entitlements attributable to programs, such as Social Security and Medicare, for which, once authorized, no periodic appropriations are necessary. · Ironically, through a series of laws enacted in 1983, 1985, and 1990, Congress excluded Social Security receipts and disbursements from the "official" calculation of the budget and accorded them special "off‐budget" standing. The aim of Congress was to remove Social Security from the constraints to which on‐budget expenditures are subject. Accordingly, when the various mandatory spending caps are applied, Social Security receipts and outlays are not taken into account. · The treatment of Social Security is one of the most confusing aspects of the federal budget. Social Security represents nearly one‐sixth of federal expenditures and is therefore of critical importance in assessing the federal budget's economic effect. As a consequence, budget policy makers tend to emphasize aggregate budget data, including Social Security, and most references to the federal budget are to the unified budget rather than to the official budget and hence incorporate the off‐budget Social Security accounts. Thus, the budget deficits or surpluses that are most commonly referred to incorporate Social Security receipts and disbursements. · Until 2011, cash receipts to the Social Security fund have exceeded cash disbursements, thereby increasing aggregate budget surpluses or decreasing aggregate budget deficits. This excess of receipts over disbursements has now been reversed. As baby boomers continue to retire and draw benefits, in the absence of changes to the structure of contributions or benefits, Social Security will have a significantly negative impact on budgetary surpluses or deficits. · Postal Service receipts and outlays are accounted for similar to those of Social Security, mainly to accord the service the flexibility to manage its operations more like a business than a traditional government agency. Hence, although officially part of the unified budget, they too are considered "off budget" with respect to certain spending limitations.

Deferred Maintenance

· In contrast to those of both the FASB and the GASB, the standards of the FASAB mandate extensive RSI disclosures pertaining to deferred maintenance and repairs. Deferred maintenance and repairs "is maintenance and repair activity that was not performed when it should have been or was scheduled to be and which is put off or delayed to a future period." Per the FASAB Statement No. 6, Accounting for Property, Plant, and Equipment (November 1995), and amended by Statement No. 42, Deferred Maintenance and Repairs (April 2012), government organizations are required to measure their deferred maintenance either by performing a condition assessment or using "life‐cycle costing" techniques. Then they must provide detailed information, for each of its asset classes, of the dollar cost of the deferred maintenance and how they arrived at that cost.

What are other key features of the FASAB model?

· Not surprisingly, many of the issues being dealt with by the FASAB are similar to those being addressed by the GASB and, in a broad sense, the FASB. They deal with the recognition of revenue and expenses and, correspondingly, with the valuation of assets and liabilities. · Basis for Recognizing Revenues · Accounting for Plant and Equipment · Recognizing Liabilities and Related Expenses · Reporting the Obligations for Social Insurance Programs · Recognizing the Cost of Subsidized Direct Loans and Loan Guarantees · Acknowledging Tax Expenditures

Recognizing Liabilities and Related Expenses

· Of all the accounting and reporting issues facing the federal government, those pertaining to liabilities are probably the least tractable and the most controversial. As explained by the FASAB, government liabilities are attributable to events. "Events" encompass both "transactions" and other "happenings of consequence" involving the government. · Transactions can be of two types: o Exchange transactions, in which each party gives and receives something of value (e.g., when the government purchases goods or services). o Nonexchange transactions, in which the government provides something of value without directly receiving something of value in return—for example, when the government incurs an obligation under a grant or entitlement program. An entitlement program is one that provides benefits to parties if they satisfy certain conditions (such as being unemployed or having an income below a specified amount). Once the program is authorized, no further congressional action is needed to appropriate the funds to sustain it. Thus, the cost to the government is never certain; it depends on the number of parties satisfying the conditions. · Happenings of consequence can also be classified into two categories: o Government‐related events represent mainly accidents for which the government is responsible and required by law to reimburse the injured parties for damages. o Government‐acknowledged events are occurrences for which the government is not responsible but elects, as a matter of policy, to provide relief to the victims. They include primarily natural disasters, such as hurricanes and earthquakes. · Neither exchange transactions nor government‐related events pose issues unique to governments. Therefore, consistent with the principles of accrual accounting, the FASAB prescribes that federal entities recognize both a liability and a related expense resulting from an exchange transaction when an exchange takes place (e.g., when the government receives the contracted‐for goods or services). They should recognize a liability and a related expense for a government‐related event as soon as the event occurs and the anticipated outflows of resources are both probable and measurable. · Nonexchange transactions and government‐acknowledged events raise the difficult question of recognition because they stem from the government's use of its sovereign power and there may be no well‐defined event or transaction that establishes the obligation. For example, Congress authorizes financial assistance to parties satisfying specified conditions. It thereby commits the federal government to a future outflow of resources. Yet, until the parties demonstrate that they have met the specified conditions, the government does not have an obligation either of an established amount or to identifiable parties. The commitment may extend over an unspecified number of years, and the ultimate amount to be paid may depend on economic and social conditions well into the future. Further, the government can unilaterally cancel or change the program at any time. · To help ensure consistency among a broad spectrum of events and transactions, the FASAB directs that federal entities recognize liabilities for: o Nonexchange transactions when due. Thus, government agencies need recognize liabilities for grants and entitlements only as payments are due. o Government‐acknowledged events when the government formally acknowledges financial responsibility for the event and an amount is due and payable as a result. Thus, the government need recognize liabilities for disaster relief only when it has authorized specific grants to specific individuals, or contractors have actually provided their goods or services.

What are the key international trends in governmental accounting?

· Over the last several decades, accounting practitioners as well as students have directed considerable attention to the "international" aspects of business accounting. Initially, owing to the prevalence of international trade and cross‐border investment, their concerns were mainly with understanding the accounting and reporting systems of other countries. More recently, however, they have focused efforts on "harmonizing"—making uniform—business accounting standards throughout the world. · By contrast, far less attention has been paid to the international aspects of governmental accounting. In large measure, governmental accounting standards have been strongly influenced by the institutional characteristics of individual countries. Accordingly, the practices of one country have not been as readily transferable to others. Further, governments—particularly local governments—have typically generated their resources within their own country, so there has been less need for them to present financial statements to outsiders. In addition, even though national governments may have sought funds from sources beyond their borders, the lenders apparently have been willing to base their credit analyses mainly on broad economic, social, and political indicators rather than on financial statements prepared in accordance with GAAP. · This, however, is now changing. Governments themselves increasingly engage in international exchanges. At both the national and local levels, they use nondomestic contractors to construct major infrastructure projects, they purchase goods and services from international corporations, and they sell securities in the international credit markets. In the 1960s, for example, foreign holdings of the U.S. federal debt held by the public were less than 5 percent. In some recent years it has approached 50 percent (although by 2020 it had decreased to approximately 33 percent). Moreover, owing perhaps to major defaults by national governments and losses on projects that they financed, lenders are demanding more and better fiscal data. · Credit rating agencies, such as Moody's, Standard & Poor's, and Fitch, have responded to the demand for improved information by rating the bonds of governments, both national and local, outside the United States just as they do those within. Indeed, the factors that they take into account are similar to those they use domestically. Hence, they assess factors that are generally reported on in financial statements as well as those that bear only indirectly on the entity's fiscal condition. Examples include: o The diversity, performance, and prospects of each member state's national economy o Intergovernmental fiscal and financial arrangements o Trends in fiscal balances o Debt burdens, pension obligations, and contingent liabilities o Tax competitiveness within a regional and worldwide context, along with tax‐raising flexibility o Liquidity and debt management.

Department of the Treasury

· Per the United States Code (31 U.S.C. §321), the Department of the Treasury is responsible for a broad range of financial functions. These include managing the public debt, collecting receipts and making disbursements, minting coins and printing currency, managing the government's gold supply, and regulating the nation's banking system. The department's divisions include the Internal Revenue Service (IRS), the Alcohol and Tobacco Tax and Trade Bureau, the U.S. Mint, and the Office of the Comptroller of the Currency. · Another of its units, the Bureau of Fiscal Service, is the government's central collection and disbursement agent. As such, it is responsible for taking in revenue from the IRS, Customs, and other agencies, writing most of the government's checks, and borrowing the money needed to operate the government. It is also in charge of the government's main accounting functions, such as overseeing the central accounting and reporting systems, keeping track of monetary assets and liabilities, and issuing financial reports. The Bureau also works with the individual federal agencies to bring greater uniformity to their accounting and reporting practices.

Leased Assets

· Starting in fiscal 2021 government leasees will be required to capitalize property, plant, and equipment acquired through long‐term lease arrangements, and report offsetting long‐term liabilities. Correspondingly, government lessors will have to recognize lease receivables and deferred revenue. The new FASAB rules are based upon those of the GASB, although there are some differences between the two. One prominent dissimilarity, relates to intragovernment leases. The majority of leases entered into by federal entities are intragovernmental. Primarily to reduce agency preparation costs as well as the costs of intragovernmental eliminations required to produce the government‐wide consolidated financial report, the FASAB does not require the capitalization of these leases. Therefore, government lessees should recognize payments to the lessor as expenses based on the provisions of the lease agreement; most commonly, therefore, as they are made. Correspondingly the lessor should recognize revenue at the same time.

Basis for Recognizing Revenues

· The FASAB distinguishes between two types of revenues: o Exchange (or earned) revenues arise from sales transactions in which each party receives benefits and incurs costs. o Nonexchange revenues materialize when the government commands resources but gives nothing in exchange (at least not directly). Nonexchange revenues include taxes, duties, fines, and penalties. · Exchange revenues, the FASAB asserts, should be recognized when goods or services are provided to the public or to another governmental entity. Thus, for example: o Revenues from goods sold should be recognized on delivery of the goods to the customer. o Revenues from services should be recognized as an agency performs the services and meets related obligations. o Revenues from long‐term contracts should be recognized on a percentage of completion basis. If a contract is expected to result in a loss, the loss should be spread over the contract in proportion to the share of estimated total costs incurred in each period. This provision is contrary to the principles of both the FASB and the GASB (as articulated in the FASB's Statement No. 5 and adopted by the GASB) that losses should be recognized when it is probable that an asset has been impaired or a liability incurred and the amount of the loss can be reasonably estimated. · According to the FASAB, a federal entity should accrue nonexchange revenues "when a specifically identifiable, legally enforceable claim to resources arises, to the extent that collection is probable and the amount is measurable." Thus, for example: o Income taxes should be recognized when assessed by the taxpayer (as indicated by a cash payment or a filed tax return) or by the result of audits, investigations, or litigation. The government should not recognize as revenues amounts that it estimates it will receive as the result of audits to be conducted in the future. o Fines and penalties may be accrued (1) upon the expiration of the period during which the offender may contest a court summons, (2) when the offender pays the fine before a court date, or (3) when the court imposes a fine. o Donations (as to a federal museum, presidential library, or memorial) should be recognized when the entity has a legally enforceable claim to the donated resources, collection is "more likely than not," and the amount is measurable.

What statements are required of federal agencies?

· The FASAB reporting model for individual federal agencies is similar to that of the federal government at large. Like the financial report of the government at large, agency statements should contain a discussion and analysis by management, the auditor's report, the basic financial statements, information on stewardship assets, investments and responsibilities, notes to the financial statements, and other RSI. · The number of basic financial statements of agencies varies with the type of agency. Agencies that collect funds for other agencies or that are responsible for social insurance programs must present certain additional statements not required of agencies that do not. · Balance Sheet (or Statement of Financial Position) · Statement of Net Cost · Statement of Changes in Net Position · Statement of Budgetary Resources · Statement of Custodial Activities · Statements of Social Insurance and Changes in Social Insurance

Government Accountability Office

· The Government Accountability Office (GAO) was created in 1921 (during the administration of President Harding) by the Budget and Accounting Act (31 U.S.C.S. §702). Until then, all federal audit and accounting functions were within the domain of the Treasury Department. The act specified that the GAO was to be "independent of the executive departments and under the control and direction of the Comptroller General of the United States." Subsequently, the Reorganization Act of 1945 made clear that the GAO was part of the legislative branch. o Government Accountability Office (GAO) § The congressional agency responsible for conducting financial and performance audits of federal agencies, programs, and activities and for carrying out other accounting and finance‐related activities of the federal government. · The GAO (the watchdog of Congress) is most closely identified with its role as the government's auditor, conducting both financial and performance examinations of federal organizations and programs. In fulfilling this role, and as discussed in the previous chapter, it prescribes standards for auditing and evaluating government programs, and participates with the OMB and the Treasury in being a sponsoring member of the FASAB. · Many of the GAO's engagements that one may think of as audits are, in fact, more in the order of investigations or research projects than audits. Thus, in recent years it has studied the reasons behind high textbook prices, the adequacy of the nation's retirement systems, the costs and benefits of the mandatory auditor rotation, and the success of U.S. efforts in Iraq and Afghanistan. · The GAO also has a wide variety of responsibilities that are considerably removed from accounting and auditing. These include, but are by no means limited to, adjudicating claims against the U.S. government and assisting Congress in drafting legislation.

Office of Management and Budget

· The OMB assists the president in preparing the federal budget and supervises the executive branch agencies in implementing it. Because it has the authority to make budgetary recommendations to the president, the OMB is one of the most powerful agencies in the federal government. The OMB not only recommends overall funding priorities and assesses competing demands for resources, but it also reviews each federal agency's spending plans and evaluates the effectiveness of its programs. · In addition, the OMB oversees and coordinates the administration's procurement, financial management, information, and regulatory policies. It has the authority to prescribe the form and content of financial statements and other administrative reports, a power that it exercises by issuing bulletins and circulars that establish reporting, cost accounting, auditing, and procurement standards (but not specific accounting standards). · The OMB has the further responsibility of apportioning federal appropriations. First, Congress (either with the approval of the president or by overriding a veto) appropriates the total amount that can be spent by each agency. Then, OMB grants the agency its apportionments. Apportionments are shares of the total appropriation that are available to be spent. The total appropriation is most commonly apportioned by specific time periods (such as quarters) but alternatively by programs, activities, or projects. The apportionment process helps to ensure that an agency does not dissipate its resources prior to year‐end, and it gives the executive branch added control over its spending. o apportionment § The shares of a total federal appropriation that the Office of Management and Budget permits an agency to spend within a particular time period (such as a quarter) or for designated programs, activities, or projects. · The OMB's responsibilities for fiscal management were substantially expanded by the Chief Financial Officers Act of 1990 (31 U.S.C. §501). Asserting that billions of dollars were lost each year because of fiscal ineptitude, the bill aimed to build a modern fiscal management structure. To this end, it established both the position of Chief Financial Officer (CFO) of the United States and corresponding CFO positions within each federal agency and department. Officially designated as "Deputy Director for Management" and reporting to the head of the OMB, the CFO of the United States is responsible for overseeing a wide range of federal agencies internal budgeting, accounting, and other fiscally related activities. · The CFO Act also mandated that federal agencies submit their annual reports for independent audit. These audits may be carried out either by their own inspectors general or by independent external auditors. Further, it required the OMB to prepare an annual report setting forth its accomplishments in the area of fiscal management and, as appropriate, recommending improvements.·

Balance Sheet (or Statement of Financial Position)

· The balance sheet (see page 51) shows the entity's assets, liabilities, and net position. The assets would include the entity's fund balance with the Treasury. This balance can be used only for the purposes for which the funds were appropriated. Net position is the residual difference between assets and liabilities. It generally comprises unexpended appropriations (amounts not yet obligated or expended) plus the cumulative difference, over the years, between the entity's revenues and other sources of funding and its expenses. · Conspicuously missing from the balance sheet of the Department of Labor is a cash balance. Most federal agencies do not have substantial cash accounts. What would otherwise be a cash balance is subsumed within the fund balance with the Treasury. · The balance sheet is on a full accrual basis and accordingly reports long‐lived assets. However, as is discussed in the following section, owing to their special nature, certain types of long‐lived assets are not given balance sheet recognition. These include parklands, historic sites, and national monuments. Such assets are considered stewardship assets and are reported in a section of the report that supplements the basic financial statements. Also to be excluded, for reason to be discussed later in this chapter, starting in fiscal year 2026, will be general purpose land. o stewardship assets § In federal accounting, assets that the federal government owns but does not use to produce goods or services and which are not accorded balance sheet recognition. Includes, for example, national parks and forests, undeveloped acreage, and heritage assets.

Accounting for Plant and Equipment

· The federal government controls over a trillion dollars in long‐lived assets, some of which are unlike assets owned by businesses or other levels of government. They include military weapons, national parks and monuments (that produce little or no revenue but are in constant need of maintenance and repair), and conventional assets, such as office buildings and equipment. Recognizing that their diversity necessitates different approaches to accounting and reporting, the FASAB groups the assets into two broad categories: general and stewardship. Stewardship assets are then further divided into two subcategories: land and heritage assets. · (1) General Assets o Military assets o Space assets ·(2) Stewardship assets - heritage assets · Land · Forthcoming Major Change

Land

· The federal government owns approximately 640 million acres, which is about 28 percent of all of the land in the United States. Most of this is managed for purposes related to preservation, recreation, and development of natural resources. It includes national parks, national forests, and nature preserves—the vast seemingly uninhabited terrain that one observes when flying from the midwest to the far west. It also includes more than 4,800 defense installations as well as land on which post offices, court houses, and other federal buildings stand. · Land that is used for operational and commercial purposes, including that for military purposes, is accounted for just as it would be in the private sector. It is capitalized, but not depreciated. Stewardship land, however, is reported differently. Stewardship land is defined as land other than general property, plant and equipment. Examples include land used as forests and parks and that used for wildlife and grazing. · In that it is neither used in government operations nor held for sale; stewardship land need not be capitalized and therefore should not be reported on an entity's balance sheet. Instead, like heritage assets it should be expensed as acquired. In periods subsequent to acquisition, the entity should provide, in a note to the financial statements, salient information relating to the land. This should include the relationship of the land to the mission of the entity, the entity's policies relating to the land, the amount of land in physical units, and a description of each major category of land.

What else constitutes the federal government's reporting system?

· The reporting system of the federal government is considerably broader than the annual reports of the government as a whole and its individual agencies and departments. When viewed holistically, the federal government is far more transparent regarding its finances than either private‐sector corporations or state and local governments. · Recognizing the limitations of traditional accounting systems that focus exclusively on financial metrics, Congress enacted the Government Performance and Results Act of 1993, which requires federal agencies to develop strategic plans, operational objectives, and measures of performance and to report on the extent to which it met its objectives. · As detailed in the act, as part of its annual budget request to the OMB, each agency must prepare and submit a performance plan that includes: o Objective, quantifiable, and measurable goals that define the agency's anticipated level of performance o A description of the operational processes, skills, technology, and "human capital" required to meet the performance goals o A basis for comparing actual results to the goals o The means of verifying and validating actual performance · In addition it must also submit a report that: o Reviews success in achieving the performance goals of the previous fiscal year o Evaluates the performance plan for the current fiscal year relative to the previous year's results o Explains any deviations from its goals, indicating why a goal was not met, describing plans for achieving the goal, and, if the goals were impractical or infeasible, spelling out why and recommending corrective step · The act also requires agencies to develop "strategic plans" that cover a 5‐year period. The plans should set forth the agencies' missions, goals, and objectives and the means to achieve them. · In 2010 Congress updated the Government Performance and Results Act with the passage of the Government Performance and Results Modernization Act. Based on the experience with the initial act, the new measure is intended to ensure that agency goals better align with the broader goals of the federal government, provide a tighter link between their performance goals and their strategic plans, and mandate quarterly reviews and progress assessment of priority goals. · In another measure, albeit only indirectly related to accounting, Congress in 2006 enacted the Federal Funding Accountability and Transparency Act (FFATA) (P.L. 109‐282). Intended to reduce wasteful spending, the legislation makes available on a searchable website (www.USASpending.gov) detailed information on federal awards and contracts. This act was subsequently amended in 2014 by the Digital Accountability and Transparency Act (DATA Act) (P.L. 113‐101) both to require full disclosure of virtually all federal agency expenditures and to ensure that such information is compiled and collected in a standardized format. As a result of these acts, one can go to www.USASpending.gov and with a few clicks learn the details of almost every contract entered into by the federal government. · Since 1990, the GAO has been publishing an annual list of "high‐risk areas"—government programs and operations that are especially vulnerable to fraud, waste, and mismanagement, as well as areas in need of broad reform. Each year it reviews its list, adding new programs and deleting others. Among areas that are perennially on the list are certain Department of Defense activities, tax collection operations, Medicare, and NASA contract management.

Statement of Budgetary Resources

· The statement of budgetary resources (see page 54), which is prepared on a budgetary rather than an accrual basis, shows the sources and uses of budgetary resources. The amounts in this report are incorporated in the Treasury's cash‐oriented Combined Statement of Receipts, Outlays and Balances. The first part of the statement shows the source of budgetary resources (the unobligated amounts from prior years, the spending authorized by the federal budget and various miscellaneous receipts). The second part indicates what was done with those resources; that is how much was obligated and what is the status of those resources that were not obligated. The third part indicates the outlays during the year; that is the payments to liquidate the obligations. A required note (Note 18, see page 102) details the amounts reported in this statement. · The financial statements of agencies must include a relatively new schedule, one which can be included in notes, rather than incorporated into the report as a basic statement. This schedule (see Note 19, see page 105), reconciles the cost of operations, which are determined per FASAB standards and hence are on an accrual basis, with the net outlays, which are on a budget basis. Thus, for the Department of Labor, the net cost of operations, per the statement of net cost was $506,171,000, whereas the net outlays, per the statement of budgetary resources were $486,367,798. As might be expected, major reconciling items include depreciation, deferred compensation and timing differences involving receipts and payments of cash and amounts accrued as accounts receivable and payable.

Statement of Changes in Net Position

· The statement of changes in net position (see page 53) summarizes all entity transactions in addition to net cost of operations that affect net position. It explains how the entity financed its net costs. It includes amounts received from appropriations, dedicated taxes, borrowings, and other financing sources. It also reports "imputed financing"—costs incurred by the federal agency that are paid for by another federal entity. In the case of the Department of Labor, these imputed costs are pensions and other postemployment benefits. The column marked "Funds from Dedicated Collections" indicates funds, such as the Unemployment Trust Fund and the Black Lung Disability Trust Fund, that are restricted for specified purposes. · The statement of changes in net position links the statement of net costs to the balance sheet. "Net Cost of Operations" ($506,171,000), per the lower portion of the Consolidated Statement of Changes in Net Position, is also the bottom line of the Consolidated Statement of Net Cost. Net position, the bottom line of the Consolidated Statement of Changes in Net Position (negative $15,300,143), also ties into "Total net position" on the Consolidated Balance Sheet.

Statement of Custodial Activities

· The statement of custodial activities is required only of an entity, such as the IRS or Homeland Security, which through its Customs Service has a primary mission of collecting funds to be turned over to the Treasury or other departments. It shows the resources collected and their disposition (i.e., the amounts transferred to other agencies and the amounts not yet transferred). As a consequence, its bottom line should always be zero. The Department of Labor is not required to prepare the statement of custodial activities.

Statement of Net Cost

· The statement of net cost (see page 52), probably the most significant of the six statements, reports on program operating costs and revenues. Similar to the government‐wide statement of activities required by GASB Statement No. 34, it presents earned revenues (i.e., those from exchange transactions) as a deduction from costs, thereby highlighting the amount that must be paid from taxes and other financing sources. By focusing on the net cost to the government of individual programs, it provides decision‐makers a basis on which to compare program inputs with results and thereby assess agency performance. Like the balance sheet, the statement is on a full accrual basis. Hence, the reported expenses capture the full cost of operating a program, including depreciation, not merely the cash disbursements of a particular year.

Statements of Social Insurance and Changes in Social Insurance

· The statement of social insurance (see page 56) is required only of the relatively few agencies that are charged with administering the government's major social insurance programs. These include not only the Department of Labor, which administers the Black Lung Disability Program, but also the Social Security Administration, the Railroad Retirement Board (railroad retirement benefits), and the Department of Health and Human Services (Medicare). The Department of Labor's statement shows the actuarial present value of the benefit payments that it will have to pay out to the eligible victims of coal mine dust exposure as well as expected receipts. Notably, agencies must also present a statement that indicates the reasons for the changes in the value of the benefit payments.

Which agencies are responsible for federal accounting and reporting?

· government's various agencies and departments, with each agency and department having its own accounting system and preparing its own reports. Currently, however, the three federal agencies with oversight responsibility for financial management—the Department of the Treasury, the Office of Management and Budget (OMB), and the GAO—as well as the FASAB (the board that establishes accounting standards) are taking major strides toward coordinating the accounting systems and reporting practices of the individual agencies. · Department of the Treasury · Office of Management and Budget · Government Accountability Office · Federal Accounting Standards Advisory Board

Acknowledging Tax Expenditures

· payments to parties that engage in targeted activities, or they can provide tax credits, deductions, or similar tax benefits to those parties. Thus, for example, the federal government can subsidize farmers by paying them cash if their revenue per acre falls below a benchmark or guaranteed level. Alternatively, it could give them tax credits—an allowable reduction of their tax liability—in the same amount. The economic impact on the government's surplus or deficit would be the same, and the benefit to the farmers would also be virtually identical. However, if the government paid the farmers directly, the outlay would be reported as an expense in both its budget and its financial statements. By contrast if it provided the tax credit, it would not be reported as an expense and would not be given any explicit budgetary or accounting recognition. The government would incur what is known as a tax expenditure. · Tax expenditures are revenue losses attributable to provisions of the tax code that allow taxpayers special exclusions, exemptions, credits, or deductions, usually to achieve identified policy objectives. Although tax expenditures are often thought of as tax "loopholes," they are, in fact, far broader than that. They range from provisions that affect only well‐targeted taxpayers and activities to those that benefit wide segments of society. They include, for example, provisions in the tax code that permit natural gas companies to take accelerated depreciation on their pipelines as well as those that permit employees to exclude from taxable income the value of health insurance provided by their employers. The revenue "lost" to the Treasury of these special provisions is by no means small. It is estimated, for example, that the exclusions of employer‐paid medical insurance alone cost the Treasury $202 billion in revenue in 2019. · Consistent with its reporting objectives of providing information to statement users as to the federal government's budgetary integrity, operating performance, and fiscal stewardship, the FASAB, in 2017, issued its Statement No. 52, Tax Expenditures. This statement requires that the federal government, in its Consolidated Financial Report (CFR): o include narrative disclosures that inform readers as to the definition of tax expenditures, their general purpose, how they are treated within the federal budget process, and their impact on the government's financial position o alert readers as to the availability of published estimates of tax expenditures, such as those published annually by the Department of the Treasury's Office of Tax Policy · While such note disclosures are no substitute for incorporating the tax expenditures into the government's statement of net cost—an impractical requirement in light of definitional and measurement issues—it does serve to warn statement users that targeted tax benefits, even when virtuous, can be as expensive as direct appropriations.