accounting for revenue and other financing

FASAB-----------------------------------------------------------------

ACCOUNTING FOR REVENUEAND

OTHER FINANCING SOURCES

AND

CONCEPTS FOR RECONCILING BUDGETARY AND FINANCIAL ACCOUNTING

Statement of Recommended Accounting Standards Number 7

April 1996

This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_7.pdf.

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APPLICABILITY, MATERIALITY, AND TERMINOLOGY

These standards apply to general purpose financial reports ofU.S. Government reporting entities. These standards need not beapplied to immaterial items unless otherwise noted. Statement ofFederal Financial Accounting Concepts No. 2 (SFFAC No. 2),Entity and Display, lists criteria for defining Governmentreporting entities. Paragraph 78 of Entity and Display notesthat some of a reporting entity's components may be required bylaw or policy to issue financial statements in accordance withaccounting standards other than those recommended by the FASABand issued by the OMB and the GAO, e.g., accounting standardsissued by the Financial Accounting Standards Board or by aregulatory agency. Those components should continue to issue therequired reports. The reporting entities of which the componentsare a part, however, need to be sensitive to differences thatmay arise because of different accounting standards. If thesedifferences are material, the standards recommended by the FASABand issued by the OMB and the GAO should be applied. Thecomponents would need to provide any additional disclosures ordifferent recognition and measurement required by the accountingstandards issued by the OMB and the GAO that are not required byother standards.

"Disclosure" in this document indicates providing information innotes or narrative regarded as an integral part of the basicfinancial statements. "Supplementary" indicates providinginformation that is regarded as "required supplementaryinformation" as that term is used in accounting and auditingstandards. The limited auditing procedures for this informationare defined in auditing standards. "Other accompanyinginformation" refers to unaudited information that accompaniesthe audited financial statements. It is not regarded asessential for "fair presentation." Another kind of supplementaryinformation is "Required Supplementary Stewardship Information."This is a proposed category unique to Federal Governmentaccounting and auditing standards. It refers to certaininformation for which FASAB expects OMB and GAO in collaborationto agree upon appropriate auditing procedures. It will beregarded as essential for "fair presentation."


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STATEMENT OF FEDERAL FINANCIALACCOUNTING STANDARDS NUMBER 7

PREFACE .............................. i

EXECUTIVE SUMMARY .................... 1

ACCOUNTING STANDARDS FOR REVENUE AND OTHER FINANCING SOURCES .. 1SCOPE .................................................... 1CLASSIFICATION, RECOGNITION, AND MEASUREMENT ............. 1DISCLOSURES, SUPPLEMENTARY INFORMATION, AND OTHER

INFORMATION ......................................... 4

CONCEPTS FOR RECONCILING BUDGETARY AND FINANCIAL ACCOUNTING ... 4

PART I: ACCOUNTINGFOR REVENUE AND


INTRODUCTION ....................... 6

BACKGROUND ................................................... 6

MATERIALITY ................................................... 10

EFFECTIVE DATE ................................................ 10

ACCOUNTING STANDARDS ................. 11

SCOPE ......................................................... 11

EXCHANGE REVENUE .............................................. 11RECOGNITION AND MEASUREMENT OF EXCHANGE REVENUE .......... 12DISCLOSURES AND OTHER ACCOMPANYING INFORMATION ........... 16

NONEXCHANGE REVENUE ........................................... 17RECOGNITION AND MEASUREMENTOF NONEXCHANGE REVENUE ................................... 17

The General Standard ................................ 17Taxes and Duties .................................... 17Fines and Penalties ................................. 23Donations ........................................... 24Other Nonexchange Revenue ........................... 24

DISCLOSURES, SUPPLEMENTARY INFORMATION, AND OTHERACCOMPANYING INFORMATION ............................ 24Disclosures ......................................... 24


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Supplementary Information ........................... 26Other Accompanying Information ..................... 27

OTHER FINANCING SOURCES ....................................... 28RECOGNITION AND MEASUREMENT OF OTHER FINANCING SOURCES ... 29

Appropriations ...................................... 29Financing Imputed for Cost Subsidies ................ 29Transfers of Assets ................................. 30

PRIOR PERIOD ADJUSTMENTS ...................................... 30

BUDGETARY INFORMATION ........................................ 31

ACCOUNTABILITY FOR DEDICATED COLLECTIONS ...................... 33

PART II: CONCEPTS FOR RECONCILING BUDGETARY AND FINANCIALACCOUNTING ........................ 36

INTRODUCTION .................................................. 36

AMENDMENTS TO SFFAC No. 2, ENTITY AND DISPLAY ................. 36RECONCILIATION STATEMENT--BUDGETARY AND FINANCIAL

ACCOUNTING .......................................... 37STATEMENT OF FINANCING ................................... 37

Entity and Display, Appendix 1-G .................... 39

APPENDICES ........................... 40

APPENDIX A: BASIS FOR CONCLUSIONS ............................. 40

EXCHANGE REVENUE ......................................... 42Special Nature of Government Exchange Transactions .. 42Recognition: General Considerations ................. 43Recognition: Special Cases .......................... 49Measurement ......................................... 58

NONEXCHANGE REVENUE ...................................... 61Inherent Limitations ............................... 61Practical Limitations .............................. 62Modified Cash Basis for Taxes and Duties ............ 63Cash Basis Information Needed ...................... 63Potential Changes .................................. 63Entities Responsible for Measuring and Recognizing

Revenue ....................................... 64Possible Over- and Under-funding of Trust Funds .... 64Conceptual Criteria for Accrual and Limitations on

Their Application ............................. 65Limitations on the Scope of Accounting ............. 67Some Benefits of this Standard ..................... 67Some Things this Standard Does Not Accomplish ...... 68Accounting Systems Changes ......................... 69Disclosures, Supplementary Information, and Other


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Accompanying Information ...................... 70Tax Gap ............................................ 73Tax Expenditures .................................... 75Directed Flows of Resources ......................... 76

OTHER FINANCING SOURCES AND BUDGETARY RESOURCES ............... 78General Principles .................................. 78Reducing Differences ................................ 79The Budgetary Process and Its Linkage to

Accounting ..................................... 80Implications of the term "Net Results of

Operations" .................................... 85

DEDICATED COLLECTIONS ......................................... 86

APPENDIX B: GUIDANCE FOR THE CLASSIFICATION OF TRANSACTIONS ... 90INTRODUCTION ............................................. 90TABLE OF TRANSACTIONS. . . . . . . . . . . . . . . . . . 93TRANSACTIONS WITH THE PUBLIC ............................. 97

Nonexchange Transactions With The Public ............ 97Exchange Transactions With The Public: Revenue ......107Exchange Transactions With The Public: Gains And

Losses .........................................115Other Financing Sources From The Public .............118

INTRAGOVERNMENTAL TRANSACTIONS ...........................119Nonexchange Transactions--Intragovernmental:

Revenue ........................................119Nonexchange Transactions--Intragovernmental: Gains

And Losses .....................................121Exchange Transactions--Intragovernmental: Revenue ...122Exchange Transactions--Intragovernmental: Gains

And Losses .....................................127Other Financing Sources--Intragovernmental ..........128

REVALUATIONS .............................................133TRANSACTIONS NOT RECOGNIZED AS REVENUES, GAINS, OR

OTHER FINANCING SOURCES .............................134

APPENDIX C: GLOSSARY ..........................................141

INDEX OF TRANSACTIONS .........................................149

LIST OF ABBREVIATIONS .........................................151


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PREFACE

This document contains two separate parts. The first, on revenueand other financing sources, is composed of the introduction,accounting standards, and appendices. After the standardsrecommended by FASAB are approved by the Secretary of theTreasury, the Director of the Office of Management and Budget,and the Comptroller General and are published, the standardsprovide authoritative guidance to those who prepare and auditgeneral purpose financial reports of U.S. Government entities.

The second part of this document amends Statement of FederalFinancial Accounting Concepts No. 2, Entity and Display, byadding a new concept to satisfy users' needs for information thatreconciles budgetary and financial accounting. This concept ispresented in the section of this document that begins on pageError! Bookmark not defined.. Statements of Federal FinancialAccounting Concepts articulate the framework within which theBoard considers and recommends accounting standards. Statementsof concepts do not provide authoritative guidance to preparersand auditors.


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EXECUTIVE SUMMARY

ACCOUNTING STANDARDS FOR REVENUE AND OTHERFINANCING SOURCES

SCOPE

1. This Statement presents standards toaccount for inflows of resources from revenueand other financing sources. It providesstandards for classifying, recognizing, andmeasuring resource inflows. These financial(proprietary) accounting standards differfrom those used for budgetary accounting onlyto the extent essential to meet theObjectives of Federal Financial Reporting.

CLASSIFICATION, RECOGNITION, ANDMEASUREMENT

2. Revenue is an inflow of resources that theGovernment demands, earns, or receives bydonation. Revenue comes from two sources:exchange transactions and nonexchangetransactions. Exchange revenues arise when aGovernment entity provides goods and servicesto the public or to another Government entityfor a price. Another term for "exchangerevenue" is "earned revenue." Nonexchangerevenues arise primarily from exercise of theGovernment's power to demand payments fromthe public (e.g., taxes, duties, fines, andpenalties) but also include donations. Theterm "revenue" does not encompass allfinancing sources of Government reportingentities, such as most of the appropriationsthey receive. These other sources offinancing do, however, provide resourceinflows to Government reporting entities, sothis Statement includes accounting standardsfor them.

3. These accounting standards recognizeexchange revenue at the time that aGovernment entity provides goods or servicesto the public or to another Governmententity. The revenue is measured at the price


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likely to be received. Thus, with somedifferences that are explained in thestandard, the accounting for earned revenueis comparable to the private sector's accrualaccounting for earned revenue. Exchangerevenue includes most user charges other thantaxes. Such user charges include regulatoryuser charges, in which the exchange is notwholly voluntary but the revenue isgenerally, but not always, related to thecost of providing service to identifiablegroups. One example is the revenue derivedfrom the Securities and Exchange Commission'sregistration fees. Exchange transactions alsoinclude those intragovernmental transactionswhere the price serves as a full or partialreimbursement for the costs incurred.

4. Distinguishing exchange revenue from non-exchange revenue and other financing sourcesenables the entity to report the net cost ofoperations of its programs (and the cost ofthe entity to the taxpayer) and provides theaccounting foundation to report unit cost ofoutput measures for performance evaluations.Requiring that exchange revenue be matchedwith the cost of outputs of goods andservices sold to the public enables theentity to report the cost to the taxpayer ofnot charging the full cost of those goods andservices.

5. Nonexchange revenues include income taxes,excise taxes, duties, fines, penalties, andother inflows of resources arising from theGovernment's power to demand payments, aswell as voluntary donations. Nonexchangerevenue is recognized when a reporting entityestablishes a specifically identifiable,legally enforceable claim to cash or otherassets. It is recognized to the extent thatthe collection is probable (i.e., more likelythan not) and the amount is measurable (i.e.,reasonably estimable).

1

6. In the case of taxes and duties, inherent and practical limitationson the assessment process serve to delay the time when the power


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to demand payment becomes a legally enforceable claim to cash orother assets. For this reason, the method of accounting for taxesand duties can best be characterized as a modified cash basis ofaccounting, rather than an accrual basis. This basis of accountingamends the standard for the recognition of accounts receivable fortaxes and duties. Cash basis tax revenue will continue to beaccounted for as well, because of the fiscal importance of theinformation. The accrual accounting required will provide moreaccurate and complete information about receivables and refundslegally receivable and payable and about the components of theGovernment's revenue stream. The Board may review the standardfor accrual of taxes and duties after several years. The Board hasprovided that in the interim the IRS and Customs may on their owninitiative modify this standard so that it reflects a fuller applicationof the accrual concept.

7. Budgetary resources are recognized from two perspectives: theproprietary accounting perspective and the budgetary perspective.From the proprietary perspective, appropriations are accounted foras a financing source when used. Appropriations are used when anentity has acquired goods and services or has provided benefits andgrants that are authorized to be paid by an appropriation. Theremaining amount of appropriations enacted into law, but not yetrecognized as "appropriations used," is treated as capital, i.e.,"unexpended appropriations." This treatment parallels therecognition of expended appropriations during budgetaryexecution.

8. To the extent that other standards require that costs not on theentity's books be imputed to the entity, the standards for otherfinancing sources require recognition of the corresponding imputedfinancing.

9. Financial statements have not previously presented budgetexecution information needed by users of those reports.Furthermore, concerns have been expressed about whether thebudget is being properly executed in all cases. The standardspresented in this document require the presentation and,consequently, the audit of information about budgetary resources,the status of those resources, and outlays. The standards alsorequire a reconciliation of proprietary and budgetary information in


4 SFFAS No. 7-----------------------------------------------------------------

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a way that helps users relate the two.

DISCLOSURES, SUPPLEMENTARYINFORMATION, AND OTHER INFORMATION

10. The different types of revenue, and the complexity ofaccounting for revenue and other financing sources, increase theimportance of certain disclosures and other information.

11. Extensive disclosures and other information about taxes andduties compensate to some extent for the limited accruals under themodified cash basis of accounting. Such disclosures and otherinformation also provide a better basis for estimating future cashflows, overseeing the custodial responsibilities given to the taxcollecting entities, and understanding how the tax burden is shared.

12. Certain disclosures are required about exchange transactionswhere the full cost of goods and services sold is not recovered.

13. Limited disclosure concerning accountability for dedicatedcollections is required for reporting entities responsible foradministering such funds. Supplementary information is requiredfrom those entities and the entities that make the collections incases where trust funds may be over- or under-funded in terms ofapplicable law.

14. Disclosures are required about the use of borrowing authorityand the status of budgetary resources that may affect futurespending by the entity.

CONCEPTS FOR RECONCILING BUDGETARY ANDFINANCIAL ACCOUNTING

15. This statement amends Statement of Federal FinancialAccounting Concepts No. 2, Entity and Display, by adding acategory of financial information to further satisfy users' needs andthe objectives of financial reporting. More specifically, theamendment is designed to meet users' need to understand "how


EXECUTIVE SUMMARY 5-----------------------------------------------------------------

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information on the use of budgetary resources relates toinformation on the cost of program operations . . ." (sub-objective1C). The objective of this new category of information is toprovide an explanation of the differences between budgetary andfinancial (proprietary) accounting. This is accomplished by meansof a reconciliation of budgetary obligations and nonbudgetaryresources available to the reporting entity with its net cost ofoperations.


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6 PART I: ACCOUNTINGFOR REVENUE AND


INTRODUCTION


REVENUE AND OTHER FINANCING SOURCES 7-------------------------------------------------------------------

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BACKGROUND

16. The essential differences among exchangerevenues, nonexchange revenues, and otherfinancing sources affect the way they arerecognized and measured under the accrual methodof accounting. Properly classifying these inflowsaccording to their nature, therefore, provides thebasis for applying different accrual accountingprinciples. In addition, proper classification isessential to constructing financial statementsthat meet the federal financial reportingobjectives,

2 as they have been described in Statement of Federal

Financial Accounting Concepts No. 2, Entity and Display.

17. To help meet those objectives, classifications were developed todetermine what specific kinds of revenue should be deducted from the costof providing goods and services by the reporting entities. Only revenueclassified as exchange revenue should be matched with costs.Nonexchange revenue and other financing sources are not matched withcosts because they are not earned in the operations process. Because theyare inflows that finance operations, nonexchange revenues and otherfinancing sources should be classified in accordance with other rules andshould be recognized only in determining the overall financial results ofoperations for the period. This differs from the focus used in the privatesector, where the focus is on net income for business organizations, and onchanges in net assets for not-for-profit organizations. It is also a differentfocus from that used previously in reporting on U.S. Governmentoperations. Under the old federal accounting standards, the focus was onmatching all of an entity's financing with incurred expenses to report "netresults of operations" which generally was not useful in evaluatingperformance. The new focus is on costs --both gross and net--which areuseful in evaluating performance on many levels.


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18. The concept of matching costs and revenue has little relevance ingovernment except where there is an exchange transaction. An exchangetransaction occurs when one party sacrifices value and receives a valuablegood or service in return. The operations of an entity engaged in exchangetransactions produce the revenue earned as well as the associated costincurred. Therefore, financial accounting should relate the revenue to thecost for these transactions. The net effect--the gross cost minus therevenue, or the net cost--generally determines the extent to whichtaxpayers bear the cost of the operations.

33

19. Information about the net cost of exchangetransactions serves other purposes as well. Netcost gives one indication of the extent to whichpeople are willing to make voluntary payments toacquire goods or services of the kinds that aresold. It thus can give an indication of the extentto which people judge the products to have value.Net cost also can be used in evaluating anentity's pricing policy.

20. Most importantly of all, both net cost andgross cost can be compared with outputs andoutcomes in assessing the effectiveness andefficiency with which resources are used toachieve results. Such comparisons can be used byagency management, the President, and the Congressin making decisions about allocating resources.These standards, together with those in SFFAS No.4, Managerial Cost Accounting Concepts andStandards, provide information essential toeffective implementation of the GovernmentManagement Reform Act, which requires agencies toreport performance measures such as unit cost.These standards, when applied in the context ofapplicable entity and display concepts, will makefederal financial reporting more meaningful tothose concerned with performance measurement.

33The only major exception is for intragovernmental sales of goods and

services. The extent to which taxpayers bear the costs of these goods andservices depends on whether the goods and services are sold to entities that inturn sell goods and services to the public, or to entities that are financed bytaxes. The net cost of operations may also be financed by other nonexchangerevenue such as fines, forfeitures, and donations.



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21. Nonexchange revenue transactions do notrequire a Government entity to give value directlyin exchange for the inflow of resources. TheGovernment does not "earn" the nonexchangerevenue. The cost that nonexchange revenuefinances falls on those who pay the taxes and makethe other nonexchange payments to the Government.The different character of nonexchange revenuesrequires that they be distinguished from exchangerevenues. They should, therefore, be shown in away that does not obscure the entity's net cost ofoperations.

22. Although Board Members have differing views onwhether social insurance programs result inexchange or nonexchange transactions, they agreethat social insurance tax revenues should be shownin the same way as other tax revenues for thepurposes of financial reporting.

34 Social insurance

taxes, like other taxes, are determined by theGovernment's power to compel payment. Individualsand businesses that pay social insurance taxes aresubject to them as a byproduct of their decisionto enter covered employment or engage in a coveredbusiness. Especially for the major, broad-basedsocial insurance programs-- Social Security,Medicare (hospital insurance), and unemploymentcompensation--the individuals and businesses havevirtually no option except to pay.23. The main sources of financing for theGovernment as a whole are exchange and nonexchangerevenues and borrowing from the public. Forcomponent reporting entities, however, the sourcesof financing are provided through the budget andare largely financing sources other than revenue.Appropriations and other budget authority providean agency with the authority to incur obligationsto acquire goods and services or to providebenefits and grants. These other financing sourcesare not earned by an entity's operations.Therefore, as with nonexchange revenue, theyshould be accounted for in a way that does notobscure the entity's net cost.

34See discussion of social insurance programs in FASAB's Exposure Draft,Supplementary Stewardship Reporting.


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24. Budgetary resources have a different characterthan both exchange revenue and nonexchangerevenue. Budgetary inflows should be shown in away that reflects two different perspectives: theproprietary effect and the budgetary effect.Proprietary accounting treats these resources muchas capital and lines of credit are treated inprivate sector accounting, and providesinformation about their availability in theBalance Sheet or in notes. Appropriations arerecognized as capital when enacted into law, whileborrowing authority is disclosed in notes. BecauseGovernment entities are expected to expend capitalfrom appropriations rather than maintain it, theaccounting for the use of appropriations differsin this respect from the private sector'saccounting for capital. The accounting for"appropriations used" has been simplified andparallels their budgetary effect.

25. The budget provides the principal basis forplanning and controlling obligations andexpenditures by Government entities. Budgetexecution tracks the flow of budgetary resourcesfrom the congressional authorizing andappropriating process, to the apportionment,allotment, and obligation of the budgetaryresources, to the outlay of cash to satisfy thoseobligations. For the most part, obligations andcash, rather than accrual accounting, are thebases for budgeting and reporting on budgetexecution.



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26. Those who prepare financial statements haverecognized that accrual accounting and the budgetare complementary. Accrual-basis accounting oftenprovides better information than cash-basisaccounting for evaluating performance. It canprovide more information for planning and controlof operations. Accrual accounting provides anunderstanding of a reporting entity's net positionand cost of operations. U.S. Government financialstatements have not been used for planning andcontrol as well as they might have been. In part,this is because accounting standards have not beenfully attuned to the Government's needs andcircumstances. Another important reason is thecontinuing primacy of the budget as a financialplanning and control tool. General purposefinancial reports have not presented budgetexecution information with the financialstatements in a way that helped users relate thesetwo important, but different, types of financialinformation. The standards presented in thisdocument provide the basis for reports that candeal with this problem.

MATERIALITY

27. Except as otherwise noted, the provisions of the accounting standardsin this statement need not be applied to items that are qualitatively andquantitatively immaterial.

28. The determination of whether an item is material depends on thedegree to which omitting or misstating information about the item makes itprobable that the judgment of a reasonable person relying on theinformation would have been changed or influenced by the omission or themisstatement.

EFFECTIVE DATE

29. The provisions of this statement are effective for reporting periods thatbegin after September 30, 1997. Earlier application is encouraged.


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12

ACCOUNTING STANDARDS

SCOPE

30. These standards determine how a Government reporting entity shouldaccount for inflows of resources from revenue and other financing sourcesin its general purpose financial reports. Revenue is an inflow of resourcesthat the Government demands, earns, or receives by donation. Revenuecomes from two sources: exchange transactions and nonexchangetransactions. Exchange revenues arise when a Government entity providesgoods and services to the public or to another Government entity for aprice. Another term for "exchange revenue" is "earned revenue."Nonexchange revenues arise primarily from exercise of the Government'spower to demand payments from the public, such as taxes, duties, fines,and penalties. Nonexchange revenue also includes donations.

31. The term "revenue" does not encompass all financing sources ofGovernment reporting entities, such as most of the appropriations theyreceive. These other sources of financing do, however, provide resourceinflows to Government reporting entities, although not to the Governmentas a whole. Accordingly, standards for accounting for these inflows arealso provided.

32. Appendix B, "Guidance for the Classification of Transactions,"provides authoritative guidance on which transactions should be classifiedas exchange transactions and which should be classified as nonexchangetransactions or other financing sources.

EXCHANGE REVENUE

33. Exchange revenue and gains are inflows of resources to a Governmententity that the entity has earned. They arise from exchange transactions,which occur when each party to the transaction sacrifices value andreceives value in return. That is, exchange revenue arises when aGovernment entity provides something of value to the public or anotherGovernment entity at a price.


EXCHANGE REVENUE 13-------------------------------------------------------------------

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RECOGNITION AND MEASUREMENT OFEXCHANGE REVENUE

34. Revenue from exchange transactions should be recognized when goodsor services are provided to the public or another Government entity at aprice.

35. When a transaction with the public or another Government entity at aprice is unusual or nonrecurring, a gain or loss should be recognized ratherthan revenue or expense so as to differentiate such transactions.

36. Revenue from specific types of exchange transactions should berecognized as follows:

(a) When services are provided to the public or another Governmententity (except for specific services produced to order under acontract), revenue should be recognized when the services areperformed.

(b) When specific goods are made to order under a contract (eithershort- or long-term), or specific services are produced to orderunder a contract (either short- or long-term), revenue should berecognized in proportion to estimated total cost when goods andservices are acquired to fulfill the contract. If a loss is probable(more likely than not), revenue should continue to be recognized inproportion to the estimated total cost and costs should continue tobe recognized when goods and services are acquired to fulfill thecontract. Thus, the loss should be recognized in proportion to totalcost over the life of the contract.

3

(c) When goods are kept in inventory so that theyare available to customers when ordered,revenue should be recognized when the goodsare delivered to the customer.


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(d) When services are rendered continuously overtime or the right to use an asset extendscontinuously over time, such as the use ofborrowed money or the rental of space in abuilding, the revenue should be recognized inproportion to the passage of time or the useof the asset. The interest received on moneyborrowed in an intragovernmental transactionis an exchange revenue when the source of theborrowed funds is predominantly exchangerevenue and is a nonexchange revenue when thesource of the borrowed funds is predominantlynonexchange revenue or other financingsources.

(e) When an asset other than inventory is sold,any gain (or loss) should be recognized whenthe asset is delivered to the purchaser.



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37. When advance fees or payments are received,such as for large-scale, long-term projects,revenue should not be recognized until costs areincurred from providing the goods and services(regardless of whether the fee or payment isrefundable). An increase in cash and an increasein liabilities, such as "unearned revenue," shouldbe recorded when the cash is received. "Unearnedrevenue" should also be recorded if an agencyrequests advances or progress payments prior tothe receipt of cash and records the amount.

35

38. The measurement basis for revenue fromexchange transactions should be the actual pricethat is received or receivable under theestablished pricing arrangements.

39. When cash has not yet been received at thetime revenue is recognized, a receivable should berecorded. An appropriate allowance for estimatedbad debts should be established.

40. To the extent that realization of the fullamount of revenue is not probable due to creditlosses (caused by the failure of the debtor to paythe established or negotiated price), an expenseshould be recognized and the allowance for baddebts increased if the bad debts can be reasonablyestimated.

36 The amount of the bad debt expense

should be separately shown.

35SFFAS No. 1, para. 41, provides that such request should be recorded if a

claim to cash is established based on legal provisions, such as a payment duedate. 36

SFFAS No. 1, Accounting for Selected Assets and Liabilities, paragraphs 40-52, is the standard for estimating bad debts. The standard is further explainedin SFFAS No.1's Basis for Conclusions, paragraphs 116-133.



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41. To the extent that realization of the fullamount of revenue is not probable due to returns,allowances, price redeterminations, or otherreasons apart from credit losses, the revenue thatis recognized should be reduced by separateprovisions if the amounts can be reasonablyestimated. The amounts of such provisions shouldbe reflected as revenue adjustments, rather thancosts of operations, and should be separatelyshown.

42. The recognition and measurement of revenue andcredit losses due to direct loans and loanguarantees is determined by SFFAS No. 2,Accounting for Direct Loans and Loan Guarantees.Appropriate allowances should be established asdetermined by those standards.

43. Exchange revenue should be recognized indetermining the net cost of operations of thereporting entity during the period. The exchangerevenue should be recognized regardless of whetherthe entity retains the revenue for its own use ortransfers it to other entities. Gross and net costshould be calculated as appropriate to determinethe costs of outputs and the total net cost ofoperations of the reporting entity. The componentsof the net cost calculation should separatelyinclude the gross cost of providing goods orservices that earned exchange revenue, less theexchange revenue earned, and the resultingdifference. The components of net cost should alsoinclude separately the gross cost of providinggoods, services, benefit payments, or grants thatdid not earn exchange revenue.



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44. The net amount of gains (or losses) should besubtracted from (or added to) gross cost todetermine net cost in the same manner as exchangerevenue is subtracted. Exchange revenue that isimmaterial or cannot be associated with particularoutputs should be deducted separately incalculating the net cost of the program,suborganization, or reporting entity as a whole asappropriate. Nonexchange revenues and otherfinancing sources should not be deducted from thegross cost in determining the net cost ofoperations for the reporting entity.

45. Under exceptional circumstances, such as rentsand royalties on the Outer Continental Shelf, anentity recognizes virtually no costs (eitherduring the current period or during past periods)in connection with earning revenue that itcollects.

45.1. The collecting entity should not offsetits gross costs by such exchange revenue indetermining its net cost of operations. If suchexchange revenue is retained by the entity, itshould be recognized as a financing source indetermining the entity’s operating results. If,instead, such revenue is collected on behalf ofother entities (including the U.S. Government as awhole), the entity that collects the revenueshould account for that revenue as a custodialactivity, i.e., an amount collected for others.

45.2. If the collecting entity transfers theexchange revenue to other entities, similarrecognition by other entities is appropriate.

a. If the other entities to which therevenue is transferred also recognizevirtually no costs in connection withthe Government earning the revenue, theamounts transferred to them should notoffset their gross cost in determiningtheir net cost of operations but rathershould be recognized as a financingsource in determining their operatingresults.



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b. If the other entities to which therevenue is transferred do recognizecosts in connection with the Governmentearning the revenue, the amountstransferred to them should offset theirgross cost in determining their net costof operations.

45.3. Because the revenue is exchange revenueregardless of whether related costs arerecognized, it should be recognized and measuredunder the exchange revenue standards.

DISCLOSURES AND OTHER ACCOMPANYINGINFORMATION

46. Each reporting entity that provides goods or services to the public oranother Government entity should disclose the following:

(a) differences in pricing policy from the full cost or market pricingguidance for exchange transactions with the public as set forth inOMB Circular No. A-25, User Charges (July 8, 1993), or insubsequent amendments in circulars that set forth pricing guidance;

(b) exchange transactions with the public in which prices are set bylaw or executive order and are not based on full cost or on marketprice;

4

(c) the nature of intragovernmental exchangetransactions in which the entity providesgoods or services at a price less than thefull cost or does not charge a price at all,with explanations of the amount and reasonfor disparities between the billing (if any)and the full cost; and

(d) the full amount of the expected loss whenspecific goods are made to order under acontract, or specific services are producedto order under a contract, and a loss on thecontract is probable (more likely than not)and measurable (reasonably estimable).



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47. When making the disclosures called for by (a)and (b) in paragraph 0, cautionary language shouldbe added to the effect that higher prices based onfull cost or market price might reduce thequantity of goods or services demanded and,therefore, the difference between revenue receivedand such higher prices does not necessarilyprovide an indication of revenue forgone. If areasonable estimate is practicable to make, theentity should provide as other accompanyinginformation the amount of revenue forgone andshould explain whether, and to what extent, thequantity demanded was assumed to change as aresult of a change in price.

NONEXCHANGE REVENUE

RECOGNITION AND MEASUREMENTOF NONEXCHANGE REVENUE

The General Standard

48. Nonexchange revenues are inflows of resourcesthat the Government demands or receives bydonation. Such revenue should be recognized when aspecifically identifiable, legally enforceableclaim to resources arises, to the extent thatcollection is probable (more likely than not) andthe amount is reasonably estimable. Nonexchangerevenue should be measured by the collectingentities, but should be recognized by the entitieslegally entitled to the revenue (the recipiententities). Paragraphs 0 through 0 describe theapplication of this general standard.

Taxes and Duties

49. Revenue measured by the collecting entities.Taxes and duties also should be measured on thecash basis, and the cash basis amount(s) should beshown in conjunction with the accrual amountsrecognized. The source and disposition of revenue



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from taxes, duties (which are a type of tax), andrelated fines, penalties and interest should bemeasured by the collecting entities in a mannerthat enables reporting of (1) cash collections,refunds, and the "accrual adjustment" necessary todetermine the total revenue and (2) cash or cashequivalents transferred to each of the recipiententities and the revenue amounts to be recognizedby each of them. The collecting entities functionin a custodial capacity with respect to revenuetransferred or transferable to the recipiententities. The collecting entities should notrecognize such revenue, but should account for andreport upon the above mentioned custodialactivities. The entities that collect taxes andduties may change the general standard (para. 0)to accrue amounts now required to be presented assupplementary information (paragraphs 0 and 0) andmake other changes that would result in a fullerand more complete application of accrualaccounting.

50. Cash collections should be based on amountsactually received during the fiscal period,including withholdings, estimated payments, finalpayments, and collections of receivables. Cashcollections include any amounts paid in advance ofdue dates unless they are deposits.

51. Cash refunds should be based on repayments oftaxes and duties during the period. Refundsinclude refund offsets and drawbacks. Refundoffsets are amounts withheld from refunds onbehalf of other agencies and paid to suchagencies. Drawbacks are refunds of duties paid onimported goods that are subsequently exported ordestroyed.


NONEXCHANGE REVENUE 21-------------------------------------------------------------------

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52. The "accrual adjustment," which modifies thenet of cash collections and refunds to determinethe amount of revenue recognized, should be thenet increase or decrease during the reportingperiod in net revenue-related assets andliabilities. The net revenue-related assets andliabilities include accounts receivable, theallowance for uncollectible accounts, and amountspayable for refunds. Recognition standards forthese accounts of the collecting entities aredescribed in paragraphs 0 to 0.



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53. Accounts receivable should be recognized whena collecting entity establishes a specificallyidentifiable, legally enforceable claim to cash orother assets through its established assessmentprocesses to the extent the amount is measurable.This definition of accounts receivable fromnonexchange transactions requires the standard forrecognition of accounts receivable to be amendedso that such receivables are not recognized on thebasis of payment due dates but rather on the basisof the completion of the assessment processes.

5

Under such processes, assessments are enforceable claims for whichspecific amounts due have been determined and the person(s) or entitiesfrom whom the tax or duty is due have been identified. Assessmentsinclude both self-assessments made by persons filing tax returns or entrydocuments and assessments made by the collecting entities.

54. Assessments recognized as accounts receivable include tax returnsfiled by the taxpayer (or customs documents filed by the importer) withoutsufficient payments, taxpayer agreements to assessments at the conclusionof an audit or to a substitute for a return (or importer agreements tosupplemental assessments), court actions determining an assessment, andtaxpayer (or importer) agreements to pay through an installment agreementor through accepted offers in compromise. Receivables determined to becurrently not collectable are included, but assessments where there is nofuture collection potential such as where the taxpayer (or importer) hasbeen either insolvent or deceased for specified periods are not included.Accounts receivable, therefore, include only unpaid assessments madethrough the end of the period plus related fines, penalties, and interest.Accounts receivable do not include amounts received or due with taxreturns received after the close of the reporting period or amounts that arecompliance assessments

37 or pre-assessment work in

process.

55. Compliance assessments and pre-assessment workin process. Compliance assessments and pre-assessment work in process may or may not belegally assessed depending on the resolution ofsubsequent events.

37Customs refers to "compliance assessments" as protested assessment

amounts.



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55.1. Compliance assessments are proposedassessments by the collecting entity in definitiveamounts, but the taxpayer (or importer) still hasthe right to disagree or object, such as in thecase of assessments made at the conclusion of anaudit (or at the conclusion of a review by animport specialist or when a violation ofapplicable law is discovered), or the issuance byIRS of a substitute for a return, or whereassessment is in appeals or in the tax court.These compliance assessments may become accountsreceivable if the taxpayer files an amended return(or Customs' protest/retention period lapses), oran appeal or court action finally determines theassessment, or the taxpayer (importer) agrees topay currently or through an installment agreement,or an offer in compromise is accepted.

55.2. Pre-assessment work in process isassessments not yet officially asserted by thecollecting entity which are subject to ataxpayer's right to conference in response toinitial information notices, e.g., revenue agentreports (or are unasserted assessments onmerchandise released into commerce for which theimporter did not submit an entry summary documentor for projected revenues due as a result ofCustoms' compliance measurement programs). Theamount or range of amounts that will ultimately beassessed or the duration of the notice period maybe reasonably estimable, but there are no amountsfor pre-assessment work in process presentlyincluded in the dollar based accounting systems.Estimates of the amount or range of amounts ofpre-assessment work in process that may ultimatelybe collectable are not presently sufficientlyreliable to be recognized.

56. Allowance for uncollectible amounts should berecognized based on an analysis of both individualaccounts receivable and groups of accountsreceivable, as prescribed by other standards.

38 A

38

SFFAS No. 1, Accounting for Selected Assets and Liabilities, para. 44 to 51,provides the basis for determining this allowance.



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provision to increase or decrease the allowancewill result in an adjustment of nonexchangerevenue, rather than a bad debt expense.

57. Amounts payable for refunds (including refundoffsets and drawbacks) should be recognized whenmeasurable and legally payable under establishedprocesses of the collecting entities. The amountsinclude those refunds, where returns (or claimsfor refund) have been filed by the taxpayer andthe Government has determined the specific amountsrefundable and has identified the payee. Refundswith respect to returns or claims filed as of theend of the reporting period that do not requirespecific approval before payment are included inaccounts payable for refunds.

58. Other claims for refunds. Claims filed forwhich specific administrative actions are requiredbefore payments can be made and unasserted claimsfor refund by taxpayers or importers that may ormay not become payable depending upon theresolution of subsequent events.

58.1. Claims filed for refunds where requiredadministrative actions are not yet complete as ofthe close of the reporting period are notrecognized. The refunds, however, may bereasonably estimable.

58.2. Unasserted claims for refund such asunfiled claims for refunds or drawbacks for whichno claim has been filed, are not recognized.

39

These amounts may be reasonably estimable, but arenot presently included in dollar-based accountingsystems.

39

Future income taxes from corporations may be reduced by more than $100billion dollars as a result of net operating loss carryforwards and tax creditcarryforwards. Information in returns filed by corporations and in theirfinancial statements appears to provide the basis for a reasonable estimate ofthe amount of potential reduced future income tax revenue attributable to theseprovisions of tax law. Information about net operating loss carryforwards isnot an unasserted claim, as defined here.



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59. Deposits. Amounts voluntarily paid to thereporting entities as deposits, such as those madeto stop the accrual of interest or those madepending settlements and judgments, are separatelyrecognized as deposit liabilities.

60. Revenue recognized by the recipient entitiesshould equal the sum of (a) cash or cashequivalents transferred to them by collectingentities and (b) the net change in any relatedinter-entity balances between the collecting andreceiving entities (i.e., the amount to betransferred to the recipient entities from thecollecting entity or vice versa). Equivalents arenormally special Treasury securities issued by theTreasury Department acting in conjunction with thecollecting entities. Inter-entity balances ofamounts to be transferred normally should berecognized when (1) a legally enforceable claimexists between a collecting entity and a recipiententity for the transfer or repayment of taxes orduties, and (2) payment of such claim is probableand measurable. Inter-entity balances typicallyrepresent estimated settlements of transfers madeduring the period and revenue received by thecollecting entity at year end but not yettransferred. Revenue should be recognized as afinancing source in calculating the results ofoperations and not as a deduction in determiningnet cost of operations. Principles for theapplication of this standard to major groups ofrecipient entities are described in paragraphs 0through 0.

60.1. Trust funds legally entitled to excisetaxes collected. Certain trust funds are legallyentitled to receive only excise taxes that areactually collected by the collecting entity.However, transfers to such trust funds currentlyare based on assessed excise taxes, because dataon the components of cash collections by type oftax are not currently obtained from taxpayers.This standard affirms that revenues may berecognized on the basis of assessed excise taxesin lieu of excise taxes actually collected.



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60.2. Trust funds legally entitled to receiveSocial Security taxes accrued. By law, the trustfunds are to receive Social Security taxes on thebasis of the earnings of participants and theapplicable tax rates. Social Security taxesaccrued are presently determined by the assessmentprocesses of the Internal Revenue Service (IRS).Non-compliance by taxpayers may result in suchamounts being less than taxes based on actualearnings of participants. Amounts for individualparticipants are separately reported to the SocialSecurity Administration (SSA), but because ofemployer reporting deficiencies these amounts arecurrently even less than amounts determined by theIRS. SSA is legally entitled to retain the higheramounts actually transferred by the IRS. Thisstandard affirms that revenue should be recognizedon the basis of the best available information,i.e., on the basis of the higher of the amountdetermined by the IRS assessment process or theindividual participant amounts based on reports toSSA of participants' earnings, subject to anylater adjustments necessary to bring the amountstransferred to the trust funds up to the amount oftaxes due based on the actual earnings history ofthe participants.

60.3. Collecting entities entitled to retainrevenue. When legally retained by the collectingentity as a reimbursement of the cost ofcollection, revenue should be recognized as anexchange revenue and deducted in determining thecollecting entity's net cost of operations.

60.4. General Fund. The General Fund recognizesall nonexchange revenue not recognized by trustfunds and other recipient entities. Interest ondelinquent taxes should be recognized as exchangerevenue. The General Fund should recognize insucceeding periods revenue adjustments for anyrecognized revenue that is determined after thebooks are closed for the period to have beenproperly transferable (or improperly transferred)to other recipient entities.



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Fines and Penalties

61. Fines and penalties are monetary requirementsimposed on those who violate laws oradministrative rules. They may be imposed by theentities collecting taxes and duties, or by othergovernment entities. The time when a claim toresources arises will depend on the nature of thefine and the associated legal and administrativeprocesses. Some examples of conditions that,depending on the circumstances, could establish alegally enforceable and measurable claim include(1) the date by which an individual may contest acourt summons expires, (2) the offender pays thefine before a court date, or (3) the court imposesthe fine. An allowance for uncollectible accountsshould, as in the case of taxes and duties, berecognized as a revenue adjustment and determinedin accordance with other standards.

6 The allowance

should reduce the gross amount of the receivable and revenue to its netrealizable value, based on the criterion that losses should be recognized tothe extent it is probable (more likely than not) that some or all of thereceivables will not be totally collected.

Donations

62. Donations are contributions to the government,i.e., voluntary gifts of resources to a governmententity by a nonfederal entity. Donations may befinancial resources, such as cash or securities,or nonfinancial resources such as land orbuildings. Revenue arising from donations shouldbe recognized for those inflows of resources whichmeet recognition criteria for assets

7 and should be

measured at the estimated fair value of the contribution.

Other Nonexchange Revenue



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63. The various types of nonexchange revenue aredescribed in Appendix B: Guidance for theClassification of Transactions. Some of these arenot specifically mentioned in this standard. Theyshould be recognized and measured in accordancewith the general rule (see para. 0) except whereother Board standards apply.

DISCLOSURES, SUPPLEMENTARYINFORMATION, AND OTHER ACCOMPANYINGINFORMATION

Disclosures

64. Basis of Accounting. Collecting entitiesshould disclose the basis of accounting when theapplication of the general rule of paragraph 0results in a modified cash basis of accounting.The disclosure should point out the specificpotential accruals which are not made as a resultof this practice and the practical and inherentlimitations affecting the accrual of taxes andduties. The disclosure should refer to the relatedother required disclosures and to thesupplementary information and should mention thatother accompanying information also providesrelated information. If a collecting entity adoptsaccounting standards that embody a fullerapplication of accrual accounting concepts, aspermitted in paragraph 0, then the disclosureshould describe that change in accounting andpoint out how it differs from that prescribed bythis standard.

65. Entities that collect taxes and duties shoulddisclose the following relating to future cashflows, revenue-related transactions, and custodialresponsibilities:

65.1. Accounts receivable. Factors affectingcollectability and timing of categories ofaccounts receivable and the amounts involved.



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65.2. Material revenue-related transactions.Revenue-related transactions affecting thebeginning and end-of-period balances of accountsreceivable, accounts payable for refunds, and theallowance for uncollectible amounts should bedisclosed. All material types of revenuetransactions which relate to the custodialresponsibilities of the collecting entities shouldbe disclosed. The disclosure should becomprehensive enough to include as a minimum: self-assessments by taxpayers (or importers);assessments by the entity; penalties; interest;cash collections applied to taxpayer accounts andunapplied collections; refunds, refund offsets,and drawbacks; abatements; accounts receivablewritten off during the reporting period asuncollectible; and provisions made to theallowance for uncollectible amounts.

65.3. Cumulative cash collections and refundsby tax year and type of tax. Cash collections andrefunds by tax year and type of tax should includecash collections and cash refunds for thereporting period and for sufficient prior periodsto illustrate (1) the historical timing of taxcollections and refunds, and (2) any materialtrends in collection and refund patterns. Sufficient prior periods for each type of tax arethe periods which end when the statutory periodfor collection ends. Collecting entities mayshorten these periods if evidence for prior taxyears indicates that a shorter period wouldreflect at least 99 percent of the collectibletaxes.

66. If trust fund revenues are not recorded inaccordance with applicable law, both thecollecting and recipient entities should disclosethe reasons.

Supplementary Information

67. Entities that collect taxes and duties shouldprovide the following supplementary informationrelating to their potential revenue and custodial



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responsibilities:

67.1. The estimated realizable value, as of theend of the reporting period, of complianceassessments and, if reasonably estimable, pre-assessment work in process. The amounts furnishedshould represent management's best estimate ofadditional revenues likely to be collected fromcompliance assessments and from pre-assessmentwork in process, appropriately qualified as totheir reliability. A range of amounts may beprovided for pre-assessment work in process ifestimable. The change in the total(s) of compliance assessments and of pre-assessment workin process during the reporting period also shouldbe provided.

67.2. If reasonably estimable, other claims forrefunds that are not yet accrued but are likely tobe paid when administrative actions are completed.If estimated, unasserted claims for refunds shouldbe provided separately from claims filed and maybe expressed as a range of amounts. The amountsfurnished should represent management's bestestimates, appropriately qualified as to theirreliability. The change in the total of theseamounts during the reporting period also should beprovided.

67.3. The amount of assessments that the entitystill has statutory authority to collect at theend of the period, but that have been written offand thus excluded from accounts receivable.

67.4. If reasonably estimable, the amounts bywhich trust funds may be over- or under-funded incomparison with the requirements of law.

68. Recipient entities that are trust funds shouldprovide the same information as required forcollecting entities in para. 0.



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Other Accompanying Information

69. The following guidance for other accompanying information is intended to provide flexibility toenable preparers to present the most relevantinformation with respect to these topics,considering the needs and interests of users andthe availability of data.

69.1. A perspective on the income tax burden.The IRS should provide a perspective on the incometax burden. This could take the form of a summaryof the latest available information on the incometax and on related income, deductions, exemptions,and credits for individuals by income level andfor corporations by size of assets. The objectiveis to show the tax burden borne by differentclasses of individuals and corporations and howthat burden is affected by the tax rates,deductions, credits, etc., provided by the taxlaws.

69.2. Available information on the size of thetax gap. Collecting entities should provide anyrelevant estimates of the annual tax gap thatbecome available as a result of federal governmentsurveys or studies. The tax gap is defined astaxes or duties due from non-compliant taxpayersor importers. Amounts reported should bespecifically defined, e.g., whether the tax gapincludes or excludes estimates of taxes due onillegally earned revenue. Appropriate explanationsof the limited reliability of the estimates alsoshould be provided. Cross references should bemade to portions of the tax gap due fromidentified non-compliant taxpayers which are shownas supplementary information, i.e., complianceassessments and pre-assessment work in process(para. 0).

69.3. Tax expenditures related to entityprograms. Information on tax expenditures that areporting entity considers relevant to theperformance of its programs may be presented, butshould be qualified and explained appropriately to



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help the reader assess the possible impact of specific tax expenditures on the success of therelated programs.

69.4. Directed flows of resources related toentity programs. Information on directed flows ofresources related to an entity's programs may bepresented, but if this information is presentedthe estimated amounts should be accompanied by adescription of the basis for the estimates andappropriate cautionary language about theirreliability. Information should also beappropriately qualified and explained to help thereader assess the possible impact on the successof the programs.



OTHER FINANCING SOURCES 33-------------------------------------------------------------------

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70. Financing sources, other than exchange andnonexchange revenues, that provide inflows ofresources that increase results of operationsduring the reporting period include appropriationsused, transfers of assets from other Governmententities, and financing imputed with respect toany cost subsidies.

8 Financing outflows may result from transfers

of the reporting entity's assets to other Government entities or fromexchange revenues earned by the entity but required to be transferred tothe General Fund or another Government entity. Unexpendedappropriations are recognized separately in determining net position butare not financing sources until used.

RECOGNITION AND MEASUREMENT OF OTHERFINANCING SOURCES

Appropriations

71. Unexpended Appropriations. Appropriations,until used, are not a financing source. Theyshould be recognized in capital as "unexpendedappropriations" (and among assets as "funds withTreasury") when made available for apportionment,even if a Treasury Warrant has not yet beenreceived, or the amount has not been fullyapportioned. Unexpended appropriations should bereduced for appropriations used and adjusted forother changes in budgetary resources, such asrescissions and transfers. The net increase ordecrease in unexpended appropriations for theperiod should be recognized as a change in netposition of the entity.



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72. Appropriations Used. When used, appropriationsshould be recognized as a financing source indetermining net results of operations.

9 Appropriations

are used in operations when goods and services are received or benefitsand grants are provided. Goods and services (including amountscapitalized) are considered received when a liability is established.Benefits are considered to be provided when the related liability isestablished. Grants are considered to be provided when grantees meet therequirements that allow them to use the grants.

40

Financing Imputed for Cost Subsidies

73. Government entities often receive goods andservices from other Government entities withoutreimbursing the providing entity for all therelated costs. In addition, Government entitiesoften incur costs, such as for pensions, that arepaid in total or in part by other entities. Theseconstitute subsidized costs to be recognized bythe receiving entity to the extent required byother accounting standards. An imputed financingsource should be recognized equal to the imputedcost. This offsets any effect of imputed cost onnet results of operations for the period.

Transfers of Assets

74. An intragovernmental transfer of cash or ofanother capitalized asset without reimbursementchanges the resources available to both thereceiving entity and the transferring entity. Thereceiving entity should recognize a transfer-in asan additional financing source in its result ofoperations for the period. Similarly, thetransferring entity should recognize the transfer-out as a decrease in its result of operations. Thevalue recorded should be the transferring entity'sbook value of the asset. If the receiving entitydoes not know the book value, the asset should berecorded at its estimated fair value as of thedate of transfer.

40FASAB plans to undertake a project on accounting for grants.


OTHER FINANCING SOURCES 35-------------------------------------------------------------------

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75. To the extent that a Government entity'sexchange revenue that is included in calculatingnet cost of operations is required to betransferred to the Treasury or another Governmententity, the amount should be recognized as atransfer-out in determining the net result ofoperations.

10

PRIOR PERIOD ADJUSTMENTS

76. Prior period adjustments should be limited to corrections of errors andaccounting changes with retroactive effect, including those occasioned bythe adoption of new federal financial accounting standards, and should berecognized and measured under applicable standards. Adjustments shouldbe recognized as a change in cumulative results of operations (rather thanas an element of net results of operations for the period). Prior periodfinancial statements should not be restated for prior period adjustmentsrecognized in the current period.

BUDGETARY INFORMATION

77. The budget is the primary financial planning and control tool of thegovernment. For this reason, and because of the importance of thisinformation to users of federal financial information, the followingmaterial budgetary information should be presented by reporting entitieswhose financing comes wholly or partially from the budget:

(a) total budgetary resources available to the reporting entity duringthe period;

(b) the status of those resources (including "obligations incurred");

(c) outlays.

78. Recognition and measurement of budgetary resources should be basedon budget concepts and definitions contained in OMB Circulars A-11 and A-34. In addition, the reporting entity should provide this information foreach of its major budget accounts as supplementary information. Smallbudget accounts may be aggregated.



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79. The following information about the status of budgetary resourcesshould be disclosed.

(a) the amount of budgetary resources obligated for undelivered ordersat the end of the period;

(b) available borrowing and contract authority at the end of the period;

(c) repayment requirements, financing sources for repayment, andother terms of borrowing authority used;

(d) material adjustments during the reporting period to budgetaryresources available at the beginning of the year and an explanationthereof;

(e) existence, purpose, and availability of permanent indefiniteappropriations;

(f) information about legal arrangements affecting the use ofunobligated balances of budget authority such as time limits,purpose, and obligation limitations;

(g) explanations of any material differences between the informationrequired by paragraph 0 and the amounts described as "actual" inthe Budget of the United States Government;

(h) the amount, and an explanation that includes identification ofbalance sheet components, when recognized unfunded liabilities donot equal the total financing sources yet to be provided; and

(i) the amount of any capital infusion received during the reportingperiod.


BUDGETARY RESOURCES 37-------------------------------------------------------------------

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80. Budgetary and financial accounting information are complementary,but both the types of information and the timing of their recognition aredifferent, causing differences in the basis of accounting. To betterunderstand these differences, a reconciliation should explain therelationship between budgetary resources obligated by the entity during theperiod and the net cost of operations. It should reference the reported"obligations incurred" and related adjustments as defined by OMBCircular A-34. It also should include other financing sources not includedin "obligations incurred" such as imputed financing, transfers of assets,and donations of assets not included in budget receipts. Further, it shouldinclude decreases (increases) in receivables from the public related toexchange revenue when only the cash amount is included in budgetaryresources. The total of these items comprises obligations andnonbudgetary resources.

81. This total should then be adjusted by:

(a) Resources that do not fund net cost of operations (e.g., changes inundelivered orders, appropriations received to pay for prior periodcosts, capitalized assets),

(b) Costs included in net cost of operations that do not requireresources (e.g., depreciation and amortization expenses of assetspreviously capitalized), and

(c) Financing sources yet to be provided (those becoming available infuture periods which will be used to finance costs recognized indetermining net cost for the present reporting period).

82. The adjustments should be presented and explained in appropriatedetail and in a manner that best clarifies the relationship between theobligations basis used in the budget and the accrual basis used in financial(proprietary) accounting.

ACCOUNTABILITY FOR DEDICATED COLLECTIONS



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83. A reporting entity may be responsible for funds financed withdedicated collections that are held for later use to accomplish the fund'spurpose. Some of these are held in a fiduciary capacity. Specialaccountability is required for the sake of the taxpayers or othercontributors who make payments to the fund with the expectation that thecollections will be used for the purposes for which they were dedicated,and for the sake of those who expect to benefit from the fund's futureexpenditures. Such funds include all funds within the budget classified astrust funds, those funds within the budget that are classified as "specialfunds" but that are similar in nature to trust funds, and those funds withinthe Federal universe (inside or outside the budget) that are fiduciary innature. Management should, therefore, identify those special funds that aresimilar in nature to trust funds and those funds inside and outside thebudget that are fiduciary in nature. Identification of funds that are similarin nature to trust funds is a judgmental matter; management is bestqualified to make this judgment.

84. Separate financial information about these dedicated collections shouldbe provided if they are material either to the reporting entity or to thebeneficiary or contributors. The separate information may be reported onthe face of the entity's general purpose financial statements, or theinformation may be disclosed in the notes to the financial statements.When not material to the reporting entity, this information may beprovided separately in special reports to the contributors and beneficiaries(or their representatives) rather than separately in the reporting entity'sgeneral purpose financial statements or notes thereto.

85. The following information, at a minimum, should be reported forindividual funds that account for dedicated collections.

(a) A description of each fund's purpose, how the administrative entityaccounts for and reports the fund, and its authority to use those collections.

(b) The sources of revenue or other financing for the period and anexplanation of the extent to which they are inflows of resources to the Government or theresult of intragovernmental flows.

(c) Condensed information about assets and liabilities showing


DEDICATED COLLECTIONS 39-------------------------------------------------------------------

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investments in Treasury securities, other assets, liabilities due and payable to beneficiaries,other liabilities, and fund balance.

(d) Condensed information on net cost and changes to fund balanceshowing revenues by type (exchange/nonexchange), program expenses, other expenses, otherfinancing sources, and other changes in fund balance.

(e) Any revenues, other financing sources, or costs attributable to thefund under accounting standards, but not legally allowable as credits or charges to the fund.

When the above information is provided separately in special reports, asdescribed in paragraph 0, the financial information required in (c) and (d)above should be combined for all such funds and the informationdescribed as "amounts for immaterial funds not presented separately in thisgeneral purpose report."



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86. The law may require the accounting for a fund to be done in aparticular way. The disclosures called for by item (e) are required if thefund's recognition requirements, as determined by law, are contrary toapplicable accounting standards with respect to certain revenue, otherfinancing sources, or costs. For example, a trust fund may be required torecognize revenue based on cash collected by the Government during thereporting period rather than the accruals due the Government. In the caseof some funds, payments from the fund are also subject to legallimitations. Although the accounting used within the fund itself should bein accordance with the applicable legal requirements, the larger reportingentity of which the fund is a component, the administrative entity, or thenext higher level of the Government (e.g., a department or thegovernmentwide entity), should recognize the revenues, other financingsources, or costs associated with but not legally allowable to the fund.

11

87. Most dedicated collections are included in thefinancial statements of the entity carrying outthe program and responsible for administration ofthe fund. However, this may not be the case wherecollections are outside the budget or are nototherwise included in the reporting entity underthe concepts of Entity and Display. In eithercase, the information is required to be disclosed.If more than one reporting entity is responsiblefor carrying out the program financed with thededicated collections, then the entity with thelargest share of the activity should beresponsible for reporting all revenues, otherfinancing sources, assets, liabilities, and costsof the fund.


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41

PART II: CONCEPTS FOR RECONCILING BUDGETARY AND FINANCIAL

ACCOUNTING

INTRODUCTION


42 ENTITY AND DISPLAY-------------------------------------------------------------------

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88. The Statement of Federal Financial AccountingConcepts (SFFAC) No. 2, Entity and Display, wasissued to provide conceptual guidance as to whatwould be encompassed by a federal entity'sfinancial report. It identifies the types offinancial information to be communicated to usersand suggests the types of information to beincluded in an entity's report to help meet theobjectives of federal financial reporting. Amongother things, SFFAC No. 2 supports reporting bothbudget information and operating performance(i.e., proprietary) information to meet the needsof users and the objectives of reporting. Thebudget information focuses on the obligation andoutlay of financial resources to acquire orprovide goods and services as defined by budgetconcepts. Operating performance informationfocuses on the cost of resources used as definedby accrual accounting standards.

89. Budgetary and financial accounting informationare complementary, but both the types ofinformation and the timing of their recognition isnecessarily different because of the difference infocus. To better understand the differences andmake better use of the complementary informationprovided, information needs to be provided toreconcile the use of budgetary resources toacquire or provide goods and services with the netcost of using those goods and services. Anapproach to doing this was explored in theexposure draft, Accounting for Revenue and OtherFinancing Sources, and received substantialsupport from respondents. Therefore, Entity andDisplay is being amended to include in itsconcepts the need to communicate information aboutthe differences between the use of resources asreported in the budget and in the net cost ofoperations.

AMENDMENTS TO SFFAC No. 2, ENTITY AND DISPLAY

90. The following heading and two paragraphs(numbered 0 and 0 in this document) are added tothe section of SFFAC No. 2 titled "DisplayingFinancial Information."


CONCEPTS 43-------------------------------------------------------------------

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RECONCILIATION STATEMENT--BUDGETARYAND FINANCIAL ACCOUNTING

91. Subobjective 1C of the budgetary integrity objectivestates that information is needed to help the reader todetermine "how information on the use of budgetary resourcesrelates to information on the costs of program operationsand whether information on the status of budgetary resourcesis consistent with other accounting information on assetsand liabilities." This objective arises because accrual-based expense measures used in financial statements differfrom the obligation-based measures used in the budgetaryreports.

92. To satisfy this objective, information is needed aboutthe differences between budgetary and financial (i.e.,proprietary) accounting that arise as a result of thedifferent measures. This could be accomplished through aStatement of Financing that reconciles the budgetaryresources obligated for a federal entity's programs andoperations to the net cost of operating that entity. Thedata presented could be for the reporting entity as a whole,for the major suborganization units, for major budgetaccounts, or for aggregations of budget accounts, ratherthan for each individual budget account of the entity.

93. The Statement of Financing is added to SFFACNo. 2's suggested list of items included in thesection titled "Financial Reporting for anOrganizational Entity." In addition, a footnote(referenced to the Statement of Financing) shallbe added stating:

OMB will provide guidance regarding details of the displayfor the Statement of Financing, including whether it shallbe presented as a basic financial statement or as a schedulein the notes to the basic financial statements.

94. The following heading and paragraphs (numbered0 through 0 in this document) are added to thesection of SFFAC No. 2 titled "RecommendedContents for the Recommended Displays."

STATEMENT OF FINANCING

95. The purpose of the Statement of Financing is to explainhow budgetary resources obligated during the period relateto the net cost of operations for that reporting entity.This information should be presented in a way that clarifiesthe relationship between the obligation basis of budgetary


44 ENTITY AND DISPLAY-------------------------------------------------------------------

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accounting and the accrual basis of financial (i.e.,proprietary) accounting. By explaining this relationshipthrough a reconciliation, the statement provides informationnecessary to understand how the budgetary (and somenonbudgetary) resources finance the cost of operations andaffect the assets and liabilities of the reporting entity.The appropriate elements for the Statement of Financingwould be as indicated in the following paragraphs. Theyprovide logical groupings of reconciling items that help thereader move from obligations to net cost of operations.

96. Obligations incurred are amounts of new orders placed,contracts awarded, services received, and other similartransactions during the period that will require paymentsduring the same or a future period. A deduction is neededfor spending authority from offsetting collections andrecoveries of prior period obligations.

97. Nonbudgetary resources represent the net amount ofresources received by the entity that are not included inbudgetary resources. These items could include donations ofassets, transfers of assets from (to) other federalentities, and financing imputed for cost subsidies. Thisamount would also include decreases (increases) inreceivables related to revenue accrued from the publicbecause, while the cash collected for exchange revenue is abudgetary resource, the accrual amount is not.

98. Resources that do not fund net cost of operations areprimarily (a) the change in amount of goods, services, andbenefits ordered but not yet received or provided, (b)amounts provided in the current reporting period that fundcosts incurred in prior years, and (c) amounts incurred forgoods or services that have been capitalized on the balancesheet.

99. Costs that do not require resources are most commonlythe result of allocating assets to expenses over more thanone reporting period (e.g., depreciation) and the write-downof assets (due to revaluations).

100. Financing sources yet to be provided are the financingamounts needed in a future period to cover cost incurred inthe current period.

101. The bottom line of this reconciliation would be the netcost of operations.

102. The following example financial statementformat will be added to the appendices of SFFACNo. 2:


CONCEPTS 45-------------------------------------------------------------------

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Entity and Display, Appendix 1-G

EXAMPLE FINANCIAL STATEMENT FORMATSSTATEMENT OF FINANCING

For the year ended September 30, 19X4

Obligations and Nonbudgetary Resources Obligations incurred $XXX Spending authority for offsetting collections

and othDonations not in the budget XFinancing imputed for cost subsidies XTransfers-in (out) XExchange revenue not in the budget (X)Other X Obligations, as adjusted,

and Non

Resources That Do Not Fund Net Cost of OperationsChange in amount of goods, services, and benefits

ordered but not yet received or provided (X)Cost capitalized on the balance sheet (X)Financing sources that fund costs of prior periods (X)Other (X)

Costs That Do Not Require ResourcesDepreciation and amortization XRevaluation of assets and liabilities XOther X

Financing Sources Yet to be Provided X

Net Cost of Operations $XXX


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46

APPENDICES

APPENDIX A: BASIS FOR CONCLUSIONS

103. This appendix does not constituteauthoritative guidance for those who prepare andaudit general purpose federal financial reports.It summarizes important considerations that FASABmembers considered as they deliberated on thisStatement. It includes reasons for acceptingcertain approaches and rejecting others.Individual Board members gave greater weight tosome factors than to others.

104. FASAB published the exposure draft Accountingfor Revenue and Other Financing Sources in July1995. The exposure draft included 18 specificquestions for respondents and invited comments onother topics. The Board received 42 letters ofcomment from the following sources:

SOURCE

USERS, ACADEMICS & OTH

AUDITORS

PREPARERS

TOTALS


BASIS FOR CONCLUSIONS 47-------------------------------------------------------------------

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105. FASAB also held a public hearing on theexposure draft on September 20, 1995. Oneindividual (a professor of accounting),representatives of four federal organizations thatprepare financial statements, and representativesof one federal audit organization presentedcomments and discussed the exposure draft with theBoard. Most of those who commented orally or inwriting supported most of the provisions of theexposure draft. Most responses did suggestwidening the proposed disclosures for trust fundsto include other funds with similar specialaccountability for dedicated collections. Also,most respondents suggested retaining the customarybusiness practice of recognizing bad debt expensefor credit losses from exchange transactions. TheBoard made these changes. (See paragraph 0 fordetails on the change regarding credit losses. Seeparagraphs 0 and following for details on thechange regarding disclosures for trust funds andsimilar funds). Concurrently with the widening ofdisclosures about funds, the Board requireddisclosures and supplementary information aboutany over- and under-funding of the trust funds(see para. 0, 0 and 0). The Board also made otherless material changes in the exposure draft as aresult of considering the comments it received.

106. As a result of further information receivedfrom IRS following the exposure draft, the Boardmade terminology changes with respect to "pre-assessments," now referred to as "complianceassessments," and "proposed assessments, nowcalled "pre-assessment work in process." Moreimportantly, the Board provided for thepossibility that amounts for pre-assessment workin process might not be reasonably estimable (seepara. 0). As a result of further information fromCustoms following the exposure draft, the Boardadded a supplementary information requirement forunasserted claims for refund (see para. 0. (Theseinclude potential drawbacks that may approximate20% of Customs reported revenue.)

107. After some deliberation, the Board also


48 APPENDIX A-------------------------------------------------------------------

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concluded that it would permit a fullerapplication of accrual accounting for taxes andduties than is required by the general rule (seepara. 0). This would apply in the interim periodbetween the issuance date of the Statement and anyreconsideration of the standard by the Board.Coincident with extending the effective date ofthe standard for one year beyond that proposed inthe exposure draft, and because of the importanceof accurate information, the Board decided torequire that material revenue-related transactionsshould be accounted for under a double entryaccounting system (rather than estimated) andchanged the designation of this information fromsupplementary to disclosure information (see para.0 and 0).

108. Finally, the Board recognized that, undercertain circumstances, reporting entities mayappropriately report information about taxexpenditures and directed flows of resources thatare related to their programs. However, thestandard only permits this information to bepresented as other accompanying information if itis properly qualified and explained (see para. 0and 0).



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EXCHANGE REVENUE

Special Nature of GovernmentExchange Transactions

109. Revenue from exchange transactions plays adifferent role in Government than in privatebusiness. Most Government output is providedto the public directly as the result of politicaldecisions rather than in exchange for revenue.This is regardless of whether the output is theprovision of services, transfer paymentsto individuals, or grants to state and localgovernments. Likewise, most of the Government'sreceipts are collected as a result of exercisingits power to compel tax payments rather thanearned by providing goods and services to thepublic at a price.

110. Where Government goods and services areprovided in exchange for revenue, prices may beset to cover cost. Sometimes they may be set inthe market as they would be set by a business(such as auctioning the right to drill for oil onGovernment land). However, law or policy sets manyprices below the amount that might be obtained inan auction or other market transaction (such asfees for grazing rights). In some of these cases,prices may be set with little or no regard to therelated cost (such as fees to visit nationalparks).

111. Exchange transactions also occur betweenentities within the Government, sometimesas stipulated by law and in other cases by mutualagreement. These exchange transactions, also, areoften not conducted at fair market prices.Services are often provided to a program free,such as the litigation the Department of Justicedoes for the Internal Revenue Service. Anothercommon example is a central computer used withoutcharge by several programs within an agency. Wherecharges are imposed, the internal sales price orreimbursement is not necessarily based on the full


50 APPENDIX A-------------------------------------------------------------------

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cost of providing the goods or services or oncompetitive market equivalents.

112. Some exchange transactions within theGovernment are carried out by intragovernmentalrevolving funds. In many instances, these fundshave been established with the goal of recoveringtheir full cost by selling their output. Thiswould allow them to be self-sustaining from theirsales, including the maintenance of their capital,without the need for additional appropriations.Goods and services must be priced at full cost toachieve this goal, but full cost is not alwayscharged. As a result, revolving funds have oftenfailed to be self-sustaining and have requiredextra appropriations.

13

Recognition: General Considerations

113. Matching revenue with cost. It is often saidthat private sector accounting matches expensewith revenue to measure the net income of thebusiness. This provides a measure of effortcompared with accomplishment that cannot be usedfor most government activities. Most governmentactivity either provides collective goods andservice (such as national defense and justice) orredistributes income and wealth (as in benefitpayments and grants). Therefore, the Government'soutput--its goods, services, transfers, andgrants--is usually not provided in exchange forvoluntary payments. In such cases, directlymeasuring the value that the Government's activityadds to society's welfare is difficult.

114. The Objectives of Federal Financial Reportingfocuses on cost in relationship to accomplishmentas the main objective in reporting an entity'soperating performance. This is because of thefundamental importance of cost information. It isimportant to program managers in operating theiractivities efficiently and effectively. It isequally important to Executive and Congressionaldecision makers in making resource allocations.Subobjectives 2A and 2B declare that:



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Federal financial reporting should provideinformation that helps the reader to determine ...the costs of providing specific programs andactivities and the components of, and changes in,these costs...[and] the efforts andaccomplishments associated with federal programsand the changes over time and in relation tocosts.

14

115. The Board�s explanation of the operating performance objectivedefines more exactly what this means:


52 APPENDIX A-------------------------------------------------------------------

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...expenses can be matched against the provisionof services year by year. The resulting cost canthen be analyzed in relationship to a variety ofmeasures of the achievement of results.

41

116. SFFAS 4, Managerial Cost Accounting Concepts and Standards,discusses the need for Government accounting to emphasize cost as a wayto improve decision making and program management. It says that goodcost information can be used for: (1) budgeting and cost control, (2)performance measurement, (3) determining reimbursements and settingfees, (4) program evaluations, and (5) economic choice decisions (such aswhether to contract-out a project).

42

117. To meet these goals, cost must be matchedwith the provision of goods and services to thepublic or other Government entities. To determinethe net cost of an exchange activity--i.e., thepart of the cost that is not offset by revenueearned from the goods and services provided--therelated revenue must be matched with the cost.

41

Ibid., page 38, para. 124. For more extended discussion, see ibid., chapter8. As explained there, difficulties arise in practice for many reasons, e.g.,the specific measures that are appropriate and feasible will vary from programto program, outcomes are influenced by external factors as well as actions ofgovernment, focusing attention on selected measures can have unintended--andsometimes undesired--consequences, etc. 42

SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for theFederal Government, pp. 11-14.



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118. Matching revenue with cost in a uniformmanner is essential in evaluating agencyperformance and setting price. Cost and revenuemust pertain to the same output in order toestimate the extent to which the revenue coversthe cost. Therefore, costs should be matchedagainst the provision of goods and services withrevenue matched against those costs and thus withrevenue also matched against the same provision ofgoods and services. When this is done, the grossand net cost of an entity can be compared with therelated outputs and outcomes to evaluate itsoperating performance, pricing policy, andeconomic decisions. Similarly, when this is done,the net cost to the taxpayer can be estimated forthe entity’s related outputs provided to thepublic.

119. The standards in this Statement therefore usethe accrual basis for recognizing exchange revenueand provide for matching exchange revenue againstrelated cost as closely as practicable. Thestandards specify how the matching is to beachieved for different types of transactions.

120. Assigning revenue to the costs of earning it.Determining the net cost of producing outputs,providing programs, or carrying out missions willoften be more important than determining the netcost for the reporting entity as a whole. Areporting entity may have several missions carriedout by different suborganizations, all of themhaving component programs and outputs. For each ofthese, both gross and net cost are important inevaluating performance and managing cost.Furthermore, either an entity as a whole or itssuborganizations and programs may have materialcosts that are not incurred to earn revenue, aswell as material costs that are incurred for thatpurpose. Therefore, the revenue-earning andnonrevenue-earning components need to beseparately evaluated in order to assess the netcost of particular activities. Additionally,various components may earn revenue but covercosts to different degrees.


54 APPENDIX A-------------------------------------------------------------------

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121. In all these cases, the net cost of thereporting entity as a whole does not show theextent to which earned revenue covers the cost ofproviding a particular output. This can only becalculated for the entity’s components.Determining the net cost for components istherefore essential to achieve the goals of thestandards in this Statement: to match exchangerevenue with the gross cost of outputs and tooffset exchange revenue against that related grosscost.

122. To be most useful, therefore, the gross costsand net cost of operations should be calculated bysuborganization, program, or output.Suborganizations are generally equivalent toresponsibility segments as defined by thestandards on managerial cost accounting.

43 Each

responsibility segment must be able to assign fullcosts to the measurable outputs of its programs.

44

As a result, users of general purpose federalfinancial reports will be able to relate the netcosts of a program to program outputs andoutcomes.

123. Preparers should decide the exactclassification of suborganizations and programsbased on the nature of the entity, the missionsand outputs for its GPRA strategic and annualperformance plans, the concepts in Entity andDisplay, Federal accounting standards, and OMB'sbulletin prescribing the form and content ofagency financial statements. Exchange revenueshould be assigned to the costs of outputs unlessit is not reasonably possible to do so. If thatcannot be done, exchange revenue should beassigned to the costs of programs, or, if thatalso is not reasonably possible, to the costs ofsuborganizations. Assigning exchange revenue tothe components of an entity in this way is more

43See ibid., pp. 31-35. Also see SFFAC No. 2, Entity and Display, pp. 25-26,

para. 75 and footnote 14. 44

SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for theFederal Government, pp. 36-42 and 51-59.



______________________________________________________

effective for performance evaluation, pricesetting, and other purposes than assigning it tothe reporting entity as a whole.

124. The gross cost, the exchange revenue, and thedifference or net cost should be determined foreach such component. The net cost and gross costfor each component could be used for such purposesas comparison with the outputs and outcomes ofthat component in order to assess the efficiencyand effectiveness with which resources were usedto achieve results.

45

125. Good information on gross cost and net cost,determined and analyzed in this manner, isessential to the success of the GovernmentPerformance and Results Act of 1993 (GPRA)

46 in

relating costs to accomplishments. GPRA requiresagencies to set performance goals for programactivity and establish performance indicators tomeasure outputs and outcomes of the programactivity. Performance measurement under GPRA is tobegin in FY 1999, and pilot projects started in FY1994. Under the OMB plan to carry out GPRA,performance reports will show the results of whatwas actually accomplished (outputs and outcomes)with the resources used. The net cost ofoperations (as well as gross cost) should be afundamental measure of these resources.

45

As noted previously, the specific measures of program economy, efficiency,and effectiveness that are feasible and appropriate will vary among programs. 46

Public Law 103-62.


56 APPENDIX A-------------------------------------------------------------------

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126. Uncollectible amounts. When realization ofthe full amount of recognized revenue is notprobable, the standards require that a separateprovision be made if the uncollectible amount canbe reasonably estimated. The Board defines"probable" as "more likely than not." Thisdefinition, and measurability, are the criteriafor recognizing losses due to uncollectibleamounts of accounts receivable under Federalaccounting standards.

47

127. Government entities have an extraordinaryresponsibility to be accountable--to thePresident, the Congress, and the public. Becauseof this, it is appropriate to show separately (1)the full revenue due under their establishedpricing arrangements, and (2) the amount of thisrevenue that they estimate will not be realized.

128. The Exposure Draft proposed that the entireprovision for estimated uncollectible amounts berecognized as a revenue adjustment. It reasonedthat, if some of the potential revenue is notlikely to be received, this should be viewed asthe failure to realize revenue or the absence ofan inflow of resources. Some of the respondentsalso viewed the entire uncollectible amount as ashortfall in revenue, but a majority believed thatcredit losses were a cost of doing business.Businesses extend credit in order to finance theircustomers, and any losses in this line of activityare another kind of expense. Such treatment isrequired for direct loans and loan guarantees thatfollow the credit reform accounting standards ofSFFAS No. 2. A particularly telling argument, madeby some, was that credit losses should be acomponent of full cost when establishing pricesfor the sale of goods and services. This would befacilitated by recognizing credit losses as a baddebt expense rather than a revenue adjustment. Forthese reasons, the Board concluded that creditlosses should be recognized as an expense.

47

SFFAS No. 1, Accounting for Selected Assets and Liabilities, pp. 12 and 33-34, paragraphs 44-45 and 124-30.



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129. Uncollectible amounts due to other reasons--such as returns, allowances, and priceredeterminations--would, however, be recognized asrevenue adjustments. This treatment is parallelwith the treatment in this Statement of taxes andother nonexchange revenue, where refunds,adjustments, and abatements are deducted fromgross revenue rather than recognized as anexpense. Under current practice and private sectorstandards, these uncollectible amounts arecommonly treated as revenue adjustments but arenot always separately disclosed.

130. The bad debt expense and the revenueadjustment each needs to be separately shown inorder for the entity to be accountable for thedifferent reasons why revenue is not collectible.

131. The allowance for bad debts should be basedon an analysis of both individual accounts andgroups of accounts, as appropriate under thecircumstances. This principle is explained in thestandard for accounts receivable.

48 For

intragovernmental transactions, allowances for baddebts may not always be needed, because fullpayment can often be assumed.

Recognition: Special Cases

132. The general principles underlying exchangerevenue recognition are supplemented for specialcases.

133. Gains and losses. Gains and losses arerecognized rather than revenues and expenses inorder to differentiate unusual or nonrecurringtransactions for evaluating an entity’sperformance or setting its prices. Material gainsand losses are expected to be infrequent. Theywould normally be of a type that management wouldwant to be considered in appraisals of itsoperations.

48

Ibid., pp. 12-13 and 34-35.


58 APPENDIX A-------------------------------------------------------------------

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134. Direct loans and loan guarantees. Standardsfor direct loans and loan guarantees wereestablished in SFFAS No. 2, Accounting for DirectLoans and Loan Guarantees. The basic principle isto recognize the subsidy cost of the direct loanor loan guarantee as an expense when the loan ismade. Subsidy cost is inherently a net concept:the present value of estimated cash outflows lessthe present value of estimated cash inflows overthe life of the loan. This requires that thepresent value of estimated fees be recognized as adeduction in calculating subsidy cost, and thatthe present value of estimated defaults beincluded in calculating the subsidy cost. Thestandards for direct loans and loan guaranteesthat follow credit reform accounting thus differfrom the standards in the present Statement inthree respects: revenue is deducted in calculatingthe subsidy cost, bad debts are included incalculating the subsidy cost, and both revenue andbad debts are measured as present values.

135. Determining the subsidy cost in this way is amethod of matching revenue with cost, and it isalso a method of matching the subsidy cost withthe provision of the subsidy to the public. SFFASNo. 2 is therefore consistent with the objectivesof this Statement for exchange revenue, and thestandards in this Statement do not apply to therecognition and measurement of revenue and creditlosses for direct loans and loan guarantees thatfollow credit reform accounting. This exceptionincludes pre-1992 direct loans and loan guaranteesthat have been restated on a present value basis.The guidance for classifying transactions inAppendix B reflects the provisions of SFFAS No. 2.



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136. Exchange revenue collected for others. Manyentities that collect exchange revenue keep thatrevenue for their own use. Revolving funds keepthe revenue they earn. By their nature, they areexpected to finance at least a material part oftheir cost by selling goods and services in acontinuing cycle of business-type activity. Othercollecting entities may also keep the revenue theyearn. Sometimes, however, the exchange revenue istransferred to the General Fund or to otherentities in whole or in part. For example, theSoutheastern and Southwestern PowerAdministrations transfer the revenue they collectfrom the public to the General Fund of theTreasury; similarly the Western Area PowerAdministration, while retaining some of therevenue that it collects, transfers the rest tothe General Fund and various special fundsdesignated by law.

137. As a general rule, exchange revenuetransferred to others must be offset against thecollecting entity's gross cost to determine itsnet cost of operations. Exchange revenue reducesthe net cost of operations incurred by the entityin producing outputs, regardless of whether theentity keeps the exchange revenue for its own useor transfers it to another operating entity or theGeneral Fund. Likewise, exchange revenue reducesthe net cost of the entity’s operations to thetaxpayer regardless of its disposition. Therefore,all exchange revenue related to the cost ofoperations must be deducted from gross cost todetermine the net cost of operations for theentity.

138. Any exchange revenue that is transferred toothers, however, does not affect the collectingentity's net position. Therefore, as required bythe standards for other financing sources, suchexchange revenue is recognized as a transfer-outin calculating the entity's operating results.

139. The only exception to the general rule occurswhen the entity recognizes virtually no cost in


60 APPENDIX A-------------------------------------------------------------------

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earning the exchange revenue, as explained in thefollowing section.

140. Exchange revenue unrelated to recognizedcost. In exceptional cases, an entity mayrecognize virtually no costs in connection withearning exchange revenue that it collects. A majorexample for many years has been the MineralsManagement Service (MMS) of the Department of theInterior. It manages energy and other mineralresources on the Outer Continental Shelf (OCS) andcollects rents, royalties, and bonuses due theGovernment and Indian tribes from mineralsproduced on the OCS and other Federal and Indianlands. The rents, royalties, and bonuses areexchange revenues, earned by sales in the market.If the value of natural resources were recognizedas an asset by MMS, then depletion could berecognized as a cost according to the units ofproduction method as minerals were extracted.

15 The

revenue from rents, royalties, and bonuses could then be matched againstMMS�s gross cost, including depletion and minor other costs, to determineits net cost of operations.

141. MMS does not recognize a depletion cost for various reasons,including the fact that under present accounting standards the value ofnatural resources is not recognized as an asset. As a result, this exchangerevenue cannot be matched against the economic cost of operations andbears little relationship to the recognized cost of MMS. Therefore, itshould not be subtracted from MMS's gross cost in determining its net costof operations. If it were subtracted, the relationship between MMS�s netcost of operations and its measures of performance would be distorted.The net cost of operations of the Department of the Interior would likewisebe distorted.

142. MMS collects this revenue acting as an agent for the recipientsdesignated by law: the Treasury, certain entities within the Government towhich amounts are earmarked, the states, and Indian tribes and allottees.Therefore, MMS should account for the exchange revenue as a custodialactivity, which is an amount collected for others, in the same way as theInternal Revenue Service accounts for the nonexchange revenue that itcollects. Because the revenue collected by MMS is exchange revenue, it



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should be recognized and measured under the exchange revenue standardswhen the rents, royalties, and bonuses are due pursuant to the contractualagreements.

143. The rents, royalties, and bonuses transferred to Treasury for theGeneral Fund or to other Government reporting entities should berecognized similarly by these recipient entities. The revenue is exchangerevenue and should be recognized and measured under the exchangerevenue standards. However, neither the Government as a whole nor theother recipient entities recognize the natural resources as an asset anddepletion as a cost. Therefore, the revenue should not offset the cost ofoperations for the U.S. Government as a whole or for these entities. As inthe case of MMS, offsetting cost by this revenue would distort therelationship between the net cost of operations and the measures of theperformance of these entities. The exchange revenue should instead be afinancing source in determining the operating results and change in netposition.

144. The Board is addressing the accounting for natural resources in aseparate project. If it concludes that the value of mineral rights should berecognized as an asset and depletion as a cost, it would be appropriate torecognize the exchange revenue from rents, royalties, and bonuses indetermining the net cost of operations.

145. Although MMS is the most prominent case of an entity collectingexchange revenue for which it recognizes virtually no cost, there can beother instances. The Federal Communications Commission collectsexchange revenue from the auction of the radio spectrum. Such revenueshould be accounted for in the same way as the revenue collected byMMS.

146. One respondent to the Exposure Draft asked about the meaning of theterm �virtually no costs.� If an entity sells scrap metal or fully depreciatedequipment, the exchange revenue or gain is not related to any cost that isrecognized at the time of sale. These assets are recorded on the balancesheet as having no value at the time of sale, so the gross proceeds from thesale are not offset by any remaining book value in calculating the entity�sgain. However, unlike the auctions of petroleum rights or the radiospectrum, costs were recognized in past periods for the purchase of the


62 APPENDIX A-------------------------------------------------------------------

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materials or the use of the equipment. Therefore, offsetting the entity�scost by its gains from sale provides a more accurate measure of its net costof operations over time for comparison with measures of its performanceover time. The standard has been clarified to say that the term �virtually nocosts� means that virtually no costs are recognized during past periods aswell as during the current period.

147. It is also possible that an entity�s cost accounting may not assign anycosts to byproducts of its major goods or services. However, cost isrecognized for the activities that produced both the major products and thebyproducts. All revenue earned in connection with these activities needs tobe offset against the cost of these activities in determining the entity�s netcost for the purpose of making comparisons with its measures ofperformance.

148. Specific goods (or services) made to order compared with goodsmade for inventory. When an entity produces goods for sale, revenue canbe matched with cost in either of two ways: (1) revenue and expense canbe recognized as costs are incurred, or (2) the expenditures can berecorded in inventory, with the revenue and expense recognizedsubsequently when the goods are delivered to the customer.

149. For specific goods made to order under a contract (or specificservices produced to order), the standard requires that revenue berecognized as goods and services are acquired to fulfill the contract. Moreprecisely, the standard requires that revenue, as determined by the contractprice, be recognized in proportion to the estimated total cost as goods andservices are acquired to fulfill the contract. This means that thepercentage-of-completion method must be used and the amounts ofrevenue must be calculated based on the costs of the goods and servicesacquired to date to fulfill the contract in relationship to the estimated totalcost under the contract. If the time period and estimated total cost areuncertain, revenue recognition should be deferred until a firm basis can beestablished to assign cost. Goods and services made (or produced) to orderinclude such projects as building construction and ship repair, where costsare incurred over a period of time to provide a particular good or service toa specific customer according to characteristics determined by contract.They do not include the sale of standard services, such as electricity, undera contract.



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150. Recognizing revenue and cost in this way provides an up-to-datemeasure of the entity�s operations in providing goods and services. Therevenue and cost are generated by the entity�s activities during the currentreporting period, unlike alternative recognition standards. In particular,this is unlike the completed contract method, under which the revenue andcost recognized in a period may have been generated substantially duringprevious periods. Because the revenue and cost recognized in the reportingperiod are up-to-date, they can more readily be compared with each otherand with current outputs in evaluating the entity�s performance and pricingpolicy in that period.

151. In some instances, however, there may be no material differencebetween the percentage-of-completion method and the completed contractmethod. This is especially likely for small or short-term contracts. In suchinstances, the completed contract method could be followed.

152. The standard also requires that when a loss on a contract is probable(more likely than not) and measurable (reasonably estimable), it should berecognized over the life of the contract in proportion to the estimated totalcost instead of immediately. This will come about by continuing torecognize revenue in proportion to estimated total cost and by continuingto recognize costs as goods and services are acquired to fulfill the contract.This requirement is an exception to SFFAS No. 5, Accounting forLiabilities of the Federal Government, under which a loss on a contract isrecognized at the time when expected costs exceed expected revenue. TheBoard believes this exception is appropriate, because it provides a moreaccurate measure of the entity's net cost of operations during eachreporting period than if the entire estimated loss were recognized in thesingle period when it was concluded that the loss was probable andmeasurable. The entire estimated loss, however, would be disclosed.

153. The standard is different when an entity produces goods to be kept"on the shelf" until ordered. It requires that manufacturing costs becharged to inventory and that revenue not be recognized until the goodsare delivered to the customer. Costs and revenue are recognized later thanwhen goods and services are made to order, because there is less assuranceof revenue at the time when the costs are incurred. The term "delivery tothe customer� includes instances in which the sale has taken place and the


64 APPENDIX A-------------------------------------------------------------------

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goods have been segregated or set aside for delivery.

154. Classification of interest on intragovernmental balances. Largeamounts of interest are paid and received on intragovernmental balances.Most trust funds and some special funds and revolving funds haveinvested in special Treasury securities on which they earn interest duefrom the Treasury. Treasury and the Federal Financing Bank have madeloans to a number of funds, on which those funds incur interest expenseand on which interest is due to the Treasury or the Bank. The recordedinterest revenue should be classified as exchange or nonexchangedepending on the predominant source of funds upon which the interestpayment is based. Other intragovernmental balances bear no interest. TheBoard is considering a project that might result in imputing interest wherethe balances bear no interest or the interest does not reflect the cost ofborrowing by the Treasury.

155. The interest on these intragovernmental liabilities has the form of anexchange transaction, but often it does not also have the substance of anexchange. The standards in this Statement and the guidance in AppendixB, �Guidance on the Classification of Transactions,� differentiate amonginflows of resources according to whether or not they should be deductedfrom an entity�s gross cost in determining its net cost of operations. Thisdifferentiation depends fundamentally on whether the inflow of resourcesis related to costs that the entity incurs and recognizes in order to produceoutputs and the inflow of resources.



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156. When applied to the receipt of interest by a Government account fromthe Treasury, this criterion implies that interest should be classified in thesame way as the predominant source of revenue to the fund: as exchangerevenue, if the predominant source is exchange revenue; and asnonexchange revenue, if the predominant source is nonexchange revenue.If the invested funds come from exchange revenue, the interest on thesefunds derives from exchange revenue and the costs incurred to earn thatrevenue; if the invested funds come from nonexchange revenue, theinterest on these funds is based ultimately on the government�s power tocompel payment rather than on a market transaction. With certainexceptions, this means that interest received by trust funds and specialfunds should be classified as nonexchange revenue, whereas interestreceived by revolving funds and trust revolving funds should be classifiedas exchange revenue. This is explained below, together with theexceptions and certain analogous transactions.

157. Invested balances of trust funds (and special funds) predominantlyderive from earmarked taxes, which are nonexchange transactions with thepublic (e.g., employment taxes and gasoline taxes). To a lesser extent theyderive from other financing sources (e.g., the General Fund paymentappropriated to the Supplementary Medical Insurance fund). The balancesare not earned in exchange transactions by the entity's operations. Mostfundamentally, they are not produced by operations in which the entityincurs any costs. Therefore, the interest on Treasury securities should notbe deducted from the gross costs of the trust fund (or special fund) indetermining its net cost of operations. As a result, that interest should notbe classified as an exchange revenue. It should instead have the sameclassification as the predominant source of the invested balances, whichfor most trust funds (and special funds) is nonexchange revenue.

158. The invested balances of revolving funds, on the other hand,predominantly derive from the funds' business-type operations. Revolvingfunds need capital in their operations and may invest some of that capitalin Treasury securities. Since the holding of invested balances and the saleof goods and services are both integral to the funds� operations, theinterest on their securities is related to the funds� costs of operations just asis the revenue earned from selling goods and services. Furthermore, thesource of the invested balances is predominantly revenue previouslyearned from the sales of goods and services, for which the funds incurred


66 APPENDIX A-------------------------------------------------------------------

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costs of operations when that revenue was earned. The interest theyreceive should therefore be classified in the same way as their revenueearned from selling goods and services and should likewise be deductedfrom gross cost in determining the net cost of operations. For this reason,interest earned by revolving funds should be classified as exchangerevenue.

159. A few revolving funds are classified by law as trust funds. Trustrevolving funds need capital in their operations, just like other revolvingfunds, the source of which is predominantly the revenue they have earned.When some of their capital is invested in Treasury securities, the interest isrelated to their cost of operations in the same way as the revenue earnedfrom selling services; and the source is predominantly revenue previouslyearned from the sales of services, for which they incurred costs ofoperations. Their interest should therefore be classified in the same way asfor other revolving funds, which is exchange revenue.

160. The three previous paragraphs explain the rationale for the normalclassification of interest received by trust funds, special funds, revolvingfunds, and trust revolving funds. However, in some cases, the source ofbalances for trust funds and special funds may not be predominantlynonexchange revenue, and the source of balances for revolving funds andtrust revolving funds may not be predominantly exchange revenue. Forexample, the main source of balances for two major trust funds, the CivilService Retirement and Disability Fund and the Military Retirement Fund,consists of exchange revenue and other financing sources. In suchexceptional cases, interest should be classified in the same way as thepredominant source of balances rather than according to the normal rule.

161. Agencies may receive authority to borrow from Treasury (or theFederal Financing Bank), and they pay interest on their borrowings. Theinterest is a cost to the agency and an inflow of resources to the Treasury.The Treasury may be deemed to have borrowed from the public to financethe outlays for which the agency borrowed, and thus to have incurred acorresponding interest cost of its own. The interest received by Treasuryfrom the agency is therefore related to Treasury�s cost of borrowing fromthe public and should be classified as an exchange revenue.

162. When debt securities are retired before maturity, there may be a



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difference between the reacquisition price and the net carrying value of theextinguished debt. This difference is a gain or loss that should be classifiedin the same category as the interest on the extinguished debt.

Measurement

163. Exchange transactions with the publicordinarily take place at prices set by the agencyor the Congress, such as electricity rates, bookprices, and interest on delinquent taxes.Sometimes the market sets the price, as with therents and royalties from companies that bid toexplore and produce oil and gas on the OuterContinental Shelf. In either case the actualprices represent the inflow of resources to theentity and, therefore, are the appropriate basisfor measuring revenue.

164. Except for prices set by law, OMB CircularNo. A-25 and other regulations generally providethat user charges for transactions with the publicshould be set at full cost or market price.

16

However, compliance with these regulations is partial, and potentialrevenue is not realized in many cases. To help report users understand howthe entity's operations are financed, disclosures are needed about (1)differences in pricing policy from the guidance in OMB's circular on usercharges and (2) transactions where prices are set by law or executive orderand are not based on full cost or market pricing. Other accompanyinginformation is needed about the revenue forgone in these transactions butonly if a reasonable estimate is practicable. The other accompanyinginformation should explain whether, and to what extent, the quantitydemanded was assumed to change as a result of the change in price.

165. Circular A-25 defines "full cost" as �all direct and indirect costs toany part of the Federal Government of providing a good, resource, orservice.�

49 This generic definition and the

accompanying examples in the circular aregenerally consistent with the definition of “fullcost” in the managerial cost accounting standards

50

49

Circular A-25, section 6(d)(1). 50

SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for the


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and the recognition and measurement of manyparticular expenses in other Federal accountingstandards.

51 However, unlike those standards,

Circular A-25 also includes as part of thedefinition of full cost an annual rate of returnon land, structures, equipment, and other capitalresources (unless they are rented);

52 and it

includes depreciation not only on structures andequipment that are classified as general PP&E(property, plant, and equipment), which isrequired by Federal accounting standards, but alsoon structures and equipment classified asstewardship PP&E, which in a few cases may be usedin connection with the production of goods orservices for sale.

53 Aside from these differences,

the cost accounting and other accounting standardsshould enable the Circular A-25 definition of fullcost to be measured more accurately than has beenpossible heretofore.

54

Federal Government, pp. 38-44. 51

For example, the standards for expenses related to credit are stated inSFFAS No. 2, Accounting for Direct Loans and Loan Guarantees; and numerousstandards for expense are stated in SFFAS No. 5, Accounting for Liabilities ofthe Federal Government. 52

The Board currently has a project to consider whether the rate of return oncapital should be recognized as a cost in financial accounting statements. 53

The extent of differences between Circular A-25 and Federal accountingstandards can be found by comparing Circular A-25, section 6(d)(1)(b), withSFFAS No. 6, Accounting for Property, Plant, and Equipment. 54

Circular A-25 says that “full cost shall be determined or estimated from thebest available records of the agency, and new cost accounting systems need notbe established solely for this purpose.” See section 6(d)(1)(e). The costaccounting and other standards should improve agency records and specify thenature of costs more precisely and comprehensively.



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166. The appropriate basis for measuring revenuefrom intragovernmental exchange transactions islikewise the actual price (or reimbursement) thatthe seller receives from the buyer. Accountingsystems should be able to provide the informationneeded to set the reimbursement at full cost, butoften the full cost is not charged. In thesecases, the amount of the reimbursement is anincomplete measure of the economic value of thetransaction. When one entity receives goods orservices from another without paying all relatedcosts, the net operating cost of the receivingentity is understated if it does not recognize (byimputation) the additional cost paid by theproviding entity.

167. Other Federal financial accounting standardsrequire such inter-entity cost subsidies to berecognized by the receiving entity in certaincases.

55 This Statement, in the section on "Other

Financing Sources," provides standards torecognize other financing sources that are imputedto offset whatever subsidy costs those otherstandards require to be recognized and imputed.Accounting for the imputed cost of goods andservices provided by one Government entity toanother requires the exercise of judgment, basedon the specific circumstances of each case.Therefore, whether costs are imputed or not, theproviding entity should disclose an explanation ofthe amount and reason for material disparitiesbetween the billing (if any) and the full cost.

55

The general principles for recognizing imputed cost are stated in SFFAS No.4, Managerial Cost Accounting Concepts and Standards for the FederalGovernment, pp. 43-50. The accounting is similar to the accounting for employeepensions and retirement health benefits, where the entity administering theplan does not provide goods or services to the reporting entity but does paysome or all of the cost. See SFFAS No. 5, Accounting for Liabilities of theFederal Government, pp. 20-36 and 56-63.


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NONEXCHANGE REVENUE

Inherent Limitations

168. Inherent limitations on the ability toperform accrual accounting for nonexchangerevenue. Accrual accounting recognizes thefinancial effects of transactions and events whenthey occur, whether or not cash changes hands atthat time. As it does with respect to exchangerevenue, full accrual accounting for nonexchangerevenue would enhance financial planning, control,and accountability. Full accrual accounting could provide important data with respect to futurecash flows and tax policy and could improve theability to evaluate the performance of thecollecting entities and the exercise of theircustodial responsibilities.

169. Unfortunately, the degree of accrualaccounting that is practicable to perform fortaxes and duties is limited by difficulties inascertaining the amount of revenue arising fromthe underlying events and by the assessmentprocesses used to manage the collecting functions.Taxpayers may not ascertain taxable income untilafter the underlying events. They may not filereturns on their due dates, and due dates aregenerally set by the administrative processesafter the occurrence of the underlying event.Also, the extent of non-compliance is a functionof the laws establishing these entities and theexpectations by the Congress and theAdministration about how diligently the collectingentities should perform their collectionfunctions. These inherent limitations on theability to perform accrual accounting wereconsidered by the Board.

Practical Limitations

170. Practical limitations were also considered bythe Board. The Board's standards for accrualaccounting require that accruals mirror the



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established assessment processes of the collectingentities. As such, they do not require, forexample, the accrual of taxes or duties which arelikely to be assessed under established processes,but only those that are actually assessed underthe defined processes of the collecting entities.Having accounting mirror the established processby which collecting entities interact withtaxpayers has value, though arguably accountingfor revenue should not be so limited.

171. At the time the Board began deliberations onthis standard, accounting systems necessary todetermine even the limited revenue accruals thatare now required for taxes did not exist. Thechanges in systems required by this standard arelimited to those necessary to mirror theestablished assessment processes. The Boardunderstands that the Internal Revenue Service isattempting to improve its collection function andthe related management information systems.Because such systems must also provide accountinginformation, the Board decided not to imposeaccounting standards at this time that mightconflict with systems changes needed to improvethe efficiency and effectiveness of the collectionprocess or go beyond the minimum changesconsidered necessary to enable the collectingentities to properly discharge theirresponsibilities.

Modified Cash Basis for Taxes and Duties

172. As a result of both the inherent limitationsand the practical limitations accepted by theBoard, the accrual standard, as it applies totaxes and duties, might be best characterized as a"modified cash" basis of accounting. Theselimitations on full accrual accounting requiredthe amendment of the accounting standard onrecognition of receivables as provided inparagraph 41 of SFFAS No. 1, which said, ineffect, that taxes should be recognized asreceivables when they are due from taxpayers.


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173. In the future, the general standard foraccrual as it applies to taxes and duties could betightened to produce a fuller application of theaccrual concept. For fines, penalties anddonations, no accountable event precedes therecognition point established by this standard.Therefore, the general standard for recognition asit applies to these sources of revenue results infull accrual accounting for them.

Cash Basis Information Needed 174. Cash basis information on taxes and dutiescontinues to be very important because it iswidely used for planning purposes at present andis a component of the budget. It is also availablesoon after the close of the reporting period andis needed to comply with laws that require cash-basis accounting in particular instances.Unfortunately, accurate cash-basis information tomeet certain legal requirements and otherinformation needs is not presently available. Thisstandard accepts the importance of both types ofinformation and requires entities that collecttaxes and duties to provide both types ofinformation.



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Potential Changes

175. Requirements for disclosures, supplementaryinformation, and other accompanying informationcompensate to some extent for the modified cashbasis of accounting for taxes and duties beingapproved at this time. In the future, the Boardplans to evaluate users' satisfaction with reportsprepared on the basis of the standard and to giveconsideration to improvements being made in IRSprocesses and related management informationsystems. Based on this evaluation andconsideration, it may propose to extend the degreeof application of accrual accounting in severalyears time. In the interim, the Board will permitchanges in accounting made at the initiative of acollecting entity if the changes represent afuller application of accrual accounting than thatprescribed by the standard. For example,compliance assessments for taxes or unassertedclaims for drawbacks may be recognized rather thanshown as supplementary information if the amountsare both probable and reasonably estimable.

Entities Responsible for Measuring andRecognizing Revenue

176. Collecting entities, e.g., the InternalRevenue Service and the Customs Service, collectcash and administer the assessment processes thatprovide the basis for adjusting those collectionsto an accrual basis. They, therefore, havemeasurement and reporting responsibilities forthese inflows of resources. They also, at thedirection of the Treasury Department, account forthe disposition of these inflows to recipiententities. The Treasury determines the amountspayable to the recipient entities and, inconjunction with the collecting entities, makesthe actual cash payments, or issues specialTreasury securities, as necessary, to fund theamounts transferred. Because the recipiententities are designated by law to receive theinflows and make ultimate disposition of thefunds, they, rather than the collecting entities,


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must recognize the inflows as revenues in order toprovide financial statements which are meaningfulto users.

Possible Over- and Under-funding of TrustFunds

177. The standard provides that trust funds shouldrecognize the amounts transferred (and the changeduring the period of the amounts to betransferred) from the collecting entity as revenuedespite the fact that those transfers may not bemade on the basis of applicable law. In the caseof excise taxes, transferring more than theamounts actually collected may cause these trustfunds to be over-funded. The Board is advised byits legal counsel that this is a violation of lawby the IRS. Such violations cannot be remediedunless, and until, the IRS adopts methods tocollect the needed data from taxpayers. In thecase of Social Security, weaknesses in the datacollection methods may cause these trust funds tobe under-funded. The Board is advised by its legalcounsel that so long as IRS and SSA act on thebasis of the best available information there isno violation of law. In considering these twosituations, the Board concluded that it should notset an accounting standard with which therecipient entities could not comply and,therefore, accepted the present basis of makingtransfers to them as the basis of recognition ofrevenue by them. However, the Board believes thatboth the collecting entity and the recipiententity have the responsibility to disclose anyviolation of law and to provide, as supplementaryinformation, if estimable, amounts by which thetrust funds may be over- or under-funded.



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Conceptual Criteria for Accrual andLimitations on Their Application

178. As mentioned earlier, this standardrecognizes both inherent and certain practicallimitations on the application of the accrualconcept to taxes and duties. The conceptualcriteria for full accrual accounting for taxes andduties are the underlying taxable events, aprecondition for the government to assert a demandfor payment, and a demand date itself. A demanddate conceivably could be as early as a datecontemporaneous with the underlying events.

179. The underlying taxable events. Conceptually,certain Government taxes and duties could beaccrued based on particular events, and certainothers on events that take place over a period.Excise taxes and customs duties are examples oftaxes based on particular events (sales orimporting goods). Individual and corporationincome taxes are examples of taxes based on eventsthat take place over a period (e.g., income earnedover the course of a year). Indeed, some taxpayerswho prepare accrual-basis financial statements forthemselves normally accrue taxes due to thegovernment based on the underlying events.

180. Data about underlying events is supplied tocollecting entities through returns required to befiled by taxpayers. Unfortunately, non-compliancewith return requirements is estimated to accountfor more than $100 billion annually in uncollectedtaxes. Only a relatively small portion of thisamount is ultimately collected through theenforcement processes of the collecting entities.Estimates of this tax gap made from time-to-timehave provided some information to guideenforcement efforts with respect to particulargroups of tax payers, but do not providesufficient information to establish claims againstindividual non-compliant taxpayers or definedgroups of non-compliant taxpayers. Therefore, theunderlying-event criterion for recognition canonly be applied to the extent that taxpayers file


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tax returns17

or the collecting entities determine through theirenforcement processes that specific non-compliant taxpayers owe or mightowe taxes.

181. The demand date. To obtain taxes and duties, the government mustdemand the payment. The criterion for revenue recognition under thisconcept could be that the demand date for taxes and duties is the same asthe date the underlying taxable event occurs or over the period that theunderlying taxable event occurs, e.g., as taxable income is earned by thetaxpayer. However, demand dates presently defined by establishedassessment processes are the dates payments are required to be received bythe collecting entities. They include dates for withholding and estimatedtax payment as well as the final due dates for tax returns. These datesprovide administrative convenience for taxpayers and generally lag theunderlying events. Because of the emphasis on cash, those payments madein advance of due dates for payment are not deferred for accountingpurposes. Past-due taxes as a result of taxpayer failure to comply withestablished payment dates are not accrued until the collecting entitiesreceive late tax returns from such taxpayers, or until the collecting entitiesdetermine through their enforcement processes that the Government has alegally enforceable claim. Only then are accounting accruals triggeredunder this standard. Those dates lag the underlying events by more thannecessary to determine an accrual. The aforementioned limitations on theapplication of the demand criterion, which are arguably practical ones,further constrain the conceptual basis for accrual.

Limitations on the Scope of Accounting

182. Although relevant to the cost of theGovernment from an economic perspective, toGovernment fiscal policies, and to performanceevaluation of Government reporting entities, theBoard concluded not to require information on "taxexpenditures" or expenditures that federal lawsrequire others to make, i.e., "directed flows ofresources." There were a variety of opinions amongBoard members on the need for this information anddifferent reasons given for not requiring someform of disclosure, but all Board members agreedthat relevant amounts are not normally measuredunder present accounting concepts. However,



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information may be provided under certaincircumstances, but outside the financialstatements themselves.

Some Benefits of this Standard

183. Some of the benefits of the accrualrequirements of this standard:

! Reporting the "accrual adjustment" as aseparately identified adjustment of taxes andduties collected. This preserves needed cash-basis information.

! Improving the data for both accrual- andcash-basis information. The standardaccomplishes this because all transactionsfor which accounting could be performed underthe standard will need to be processed. Someof these have not been accounted for in pastfinancial reports because of delays inprocessing transactions at the end of theyear.

! Accrual of assessments. Accounts receivablewould be accrued based on returns filed orenforcement actions taken through the end ofthe period where such returns or actions havenot yet resulted in cash receipts. Astatistical estimate of the effect of thisstandard, as of September 30, 1993, disclosedapproximately $29 billion of net accountsreceivable after deducting an allowance foruncollectible amounts of $42 billion.Heretofore, net accounts receivable werethought to be in excess of $100 billion. Theaccounting requirements for accrual shouldfurther improve the accuracy of the amount ofaccounts receivable.

! Recognition of refunds payable will providesome indication of the lag in making refundsto taxpayers.


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Some Things this Standard Does Not Accomplish

184. Some of the things this standard does notaccomplish:

! Recognizing events after the close of thereporting period, such as cash received onlater due dates, even if the receipt resultsfrom the underlying taxable events of theperiod. For example, unemployment taxes forthe September 30 quarter are due in Octoberand will be recognized in October if receivedon the October due date.

! Deferring recognition of revenue for taxpayments that may be received before thedemand or underlying event. For example,voluntary over-withholding by taxpayers willbe treated as revenue.

! Recognizing compliance assessments and pre-assessment work in process or refunds beforecompletion of the assessment processes. As aresult, variations in the speed andeffectiveness of the assessment processeswill affect the amount accrued at the end ofa fiscal period. Another result is thataccounting information relative tomeasurement of the performance of thecompliance functions by the collectingentities will not be available.

! Recognizing the tax gap, i.e., taxes (whichinclude duties) due from unidentified non-compliant taxpayers and importers. As aresult, this large potential source ofrevenue will not receive as much attention asit would if it could be made a formal part ofthe collecting entity's accountability.



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! Accounting for "tax expenditures," which maycontribute to the programs of reportingentities, or "directed flows of resources,"which may substitute for program costs whichmight otherwise need to be incurred byreporting entities. These amounts are verylarge in relation to the "on budget" programamounts which are measured by accounting. Asa result, these materially importantperformance and cost related data may not befully considered.

Accounting Systems Changes

185. The IRS accounting system at present does notaccount for revenue transactions on an accrualbasis and, therefore, does not establish accountsreceivable, refunds payable, and the allowance foruncollectible accounts on the basis of the flow ofall the various events and transactions affectingthese balances. Instead of being an accrualaccounting system, all assessments are recorded inan operating file not designed to do accountingand not operated under a double entry conceptwhere the revenue effects of assessments aredetermined. That operating file, for example,includes multiple assessments made for the sametax claim so that the IRS can pursue all potentialsources for the payment of that claim. As a resultof the present limitations of this operating file,to determine the accounts receivable at any pointin time, the IRS must make a statisticalprojection of a representative sample of valid taxclaims. The potential error in the estimates madeto date have been material, i.e., in excess of $5billion.

186. This standard contemplates that systems andaccounting records will be put in place to permitthe accurate determination and disclosure of allrevenue and cash transactions which are reflectedin the formal assessment process. By treatinginformation relating to compliance assessments,pre-assessment work in process, and refunds beforethe completion of the assessment process as


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supplementary information, this standardcontemplates that statistical estimates, ratherthan transaction-driven accounting systems andauditable subsidiary accounting records forindividual taxpayers, may be used to provide thedollar values for these important revenue-relateditems.

Disclosures, Supplementary Information, andOther Accompanying Information

187. This additional information will help usersof federal financial reports in understanding thefollowing:

187.1. Components of the revenue stream.By disclosing the dollar amounts of thematerial types of transactions reflected inthe required "modified cash basis" revenuestream (from initial recognition by theestablished assessment process through cashcollections and refunds), importantaccountability information for oversight andperformance evaluation will be provided aboutthe tax collection function. Providing asmuch accurate and detailed information aspossible about the annual flow of taxpayerfunds (now over $1 trillion) is importantbecause the administration of the collectionfunction is to some degree discretionary.

18

187.2. Cash flows. By disclosing cash flows by type of tax and taxyear, accurate historical information will be provided about thesource and timing of the annual flow. Material trends in collectionand refund patterns may be apparent from the comparative financialstatements presented and by reference to financial statements ofprior periods. Both the ability to accurately forecast future flows andto understand the speed and effectiveness of the collection functionshould be enhanced by this information. Also, an indication of thedegree of potentially correctable "error" from the use of a modifiedcash basis of accounting should be provided by this cumulative cashflow data.



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187.3. Other future-oriented information. Disclosuresabout categories of accounts receivable provide additionalinformation about collection problems and timing of futurecash flows. At IRS, different categories of receivables varyconsiderably in terms of ultimate collectability and timing ofcollection. 187.4. Other potentially reportable revenue. Supplementaryinformation on compliance assessments and pre-assessment work inprocess and on refunds before the completion of the assessmentprocesses provides indications of the amounts of potentiallyaccruable revenue. If such amounts were ultimately accrued, the"accrual adjustment" on a modified cash basis would be convertedto an "accrual adjustment" that came closer to an estimate of theeffect of full accrual accounting. Some or all of these potentialaccounts receivable and payable may become measurable by thecollecting entities, and the Board may require their accrual when thecollecting entities' management systems are improved.

187.5. Sharing of the income tax burden. Otheraccompanying information about the tax gap and IRShistorical information showing income, deductions, andcredits by income level (assets for corporations) responds tothose concerned with the extent of non-compliance with thelaws and how the income tax burden is shared amongcompliant taxpayers.

187.6. Administration of the tax laws by the collectingagencies. Disclosures, supplementary information, and otheraccompanying information provide a more complete picture ofhow the collecting agencies are functioning. This informationmay be relevant to allocation of resources to collectingagencies, to their performance appraisal, and to theiroversight.

o Supplementary information on compliance assessments andpre-assessment work in process and on refunds before thecompletion of the assessment process shows the backlog inprocessing assessments and refunds.


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o The disclosure and supplementary information with respectto over- and under-funding of the trust funds identifiesadministrative problems to be overcome.

o Disclosure of abatement of assessed taxes with respect tonon-compliant taxpayers ($37 billion by the IRS in 1993)provides some information about the administrativediscretion exercised by collecting entities. However, noinformation is required about reductions of possibly materialamounts in compliance assessments and pre-assessmentwork in process as a result of the resolution of examinations,investigations, protests, and litigation. Therefore, accountingreports will not include data about these processes, whichinvolve an even higher degree of administrative discretionthan the formal assessment process. Nor will they providedata, e.g., compliance assessments made during thereporting period, that might be related to the cost ofcompliance, e.g., salaries of revenue agents and relatedadministrative costs, that might be relevant to evaluating theperformance of the collecting entities' compliance function.



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Tax Gap

188. The exposure draft proposed that availableinformation about the nonexchange revenue gap,including the tax gap, be provided as "otheraccompanying information." This information wouldnot have been subject to audit, and the auditor'sresponsibility would have been limited toreporting if it was materially misleading in lightof the information gathered during the audit.Substantially all of the revenue gap is the taxgap because duties are technically a type of tax,so the Board decided to deal only with the taxgap. The sources of non-compliance that cause thetax gap include unreported income, overstatedexemptions, and overstated deductions. The largestcomponent of the tax gap relates to income taxes.IRS originally estimated the gross income tax gapat $94 billion for tax year 1987. The net incometax gap for 1987, which is the gross income taxgap less the estimated amount that has been orwill be collected through IRS's enforcementefforts, is now estimated at $72 billion. Thus,with respect to 1987, later collections from non-compliant taxpayers are about $22 billion.Estimates of the income tax gap cover only taxeson legally earned income of individuals andcorporations--not taxes owed from illegal sourcesof income such as drugs and prostitution.

19

189. Estimates of the tax gap by IRS have been made from time to time.Congress recently concluded not to authorize a current study

56 and

there is no present plan to conduct another one.On the other hand, Customs makes estimates ofamounts due from unknown non-compliant importers.The Board concluded, therefore, that the standardshould require only that any estimates by theGovernment of the tax gap be presented when theywere relevant, i.e., provided reasonably currentinformation is available.

56

The Tax Compliance Measurement Program (TCMP) planned for 1996.


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190. Some respondents to the exposure draftbelieved that tax gap information is important,but others believed it is too imprecise to be arequired disclosure. The Board consideredestablishing a new category of information"Required Supplementary Stewardship Information"(RSSI) for the "unidentified persons or entities"portion of the tax gap. This concept is also beingconsidered for application to certain "StewardshipInformation." The Board concluded that for thetime being this standard should say that availableinformation about the tax gap should be providedas other accompanying information. In addition tothe tax gap information requirements (see para.0), other accompanying information is required orpermitted under certain circumstances with respectto (a) the income tax burden (see para. 0), (b)tax expenditures (see para. 0), (c) directed flowsof resources (see para. 0), and (d) revenueforgone for exchange transactions (see para. 0).

191. The Board intends to review the requirementsin this standard to provide other accompanyinginformation when it considers standards for theManagement Discussion and Analysis (MD&A). TheBoard may decide to modify the informationrequirements when it considers the degree to whichthis information should be subject to some sort ofaudit scrutiny. Auditing standards for the MD&Ahave not been established by any auditing standardsetters, including the Comptroller General, whoestablishes standards for auditors who auditfederal organizations, programs, and activities.It is expected that audit standards for an MD&Awill be considered by the Comptroller General'sAdvisory Council and standards may be set later bythe Comptroller General. Particular auditrequirements for MD&A may be set by agreementbetween OMB and GAO if consistent with any suchstandards then existing. When the Board's projecton MD&A is considered, OMB and GAO plan to giveconsideration to the auditing requirements forMD&A and to the concept of RSSI.

Tax Expenditures



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192. Tax expenditures are estimates of the revenueforgone because of preferential provisions of thetax structure. They are due to special exclusions,exemptions, deductions, credits, deferrals, andtax rates that depart from a "baseline." Theseexceptions are generally intended to achievepublic policy objectives by providing benefits toqualifying individuals or entities or byencouraging particular activities. They also maybe intended to improve tax equity or offsetimperfections in other parts of the tax structure.Tax expenditures are not revenue. They are notinflows of resources to the reporting entity.

193. The following are some examples of taxexpenditures (with estimates from the TreasuryDepartment of the revenue forgone in FY 1995):

o the exclusion from gross income of thehousing and meals provided military personnel($2.0 billion);

o tax credits for expenditures to preserve andrestore historic structures ($0.1 billion)and to produce "alternative" fuels ($1.0billion);

o exclusion from gross income of employeecompensation in the form of health insurancepremiums and other medical care($59.4 billion); and

o deductions for mortgage interest($48.1 billion) and state and local propertytaxes ($15.3 billion) on owner-occupiedhomes.

194. The Board considered a proposal to requireeach reporting entity to provide supplementaryinformation on tax expenditures related to itsmissions. The amounts reported would have been theTreasury Department's estimates that are publishedin the President's budget.


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195. Those who supported that proposal believethat this information is relevant to evaluatingthe performance of Government programs that haverelated tax expenditures. Some of these taxexpenditures are very closely tied to programoperations. Others are less closely tied to anagency's operating activities but still relate toits mission. For example, the preferentialtreatment of owner-occupied homes can be relatedto HUD's mission to promote good housing for thenation.

196. Furthermore, policy makers may comparechanges in tax expenditures with changes in directbudgetary outlays. They did so, for example, in1983 and 1993 when they increased the taxation ofSocial Security benefits but alternatively couldhave reduced the cost-of-living adjustment. Inways such as these, the reporting on the costs andaccomplishments of an entity is incomplete unlessit includes the tax expenditures related to itsmissions.

197. The Board decided not to requiresupplementary information on tax expenditures incomponent entity financial statements for severalreasons. The definition of the baseline forcomparison is in part a matter of values andjudgment. In some cases the association withparticular programs is not sufficiently clear.Furthermore, the information is availableelsewhere now. However, the Board agreed to permitreporting entities to present, as otheraccompanying information, information on taxexpenditures that the reporting entity considersrelevant to its programs, if suitable explanationsand qualifications are provided.

Directed Flows of Resources

198. The Board considered a proposal to requireeach entity to provide supplementary estimates ofthe material annual expense to nonfederal entitiesof existing federal laws and regulationsassociated with its programs. The requirement



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would have been limited to regulations thatestablish standards for the characteristics ofproducts or for the methods of production, or thatmandate expenditures by state and localgovernments. These estimates would not necessarilyhave included nonpecuniary costs, althoughnonpecuniary costs might have been included to theextent identifiable. Each entity also would haveprovided any appropriate explanations aboutavailability of data and limitations on thereliability of the estimates.

199. Advocates of the proposal believe that theGovernment pursues some of its goals by requiringstates, local governments, and private entities tospend funds for specified public purposes. Forexample, the Government may require states toextend the coverage of Medicaid, communities tohave water treatment plants that meet Governmentsafety standards, firms to minimize their workers'exposure to asbestos, and automobile manufacturersto install air bags. When the regulations apply tostate and local governments, they are generallycalled "unfunded mandates."

200. The costs and financing of federalregulations do not flow through the Government,but their effects are similar to the effects ofdirect federal expenditures and revenue.Fundamentally, both regulation and federalexpenditure allocate resources to the purposesspecified by the Government. The cost ofregulation includes regulations imposed in thepast as well as newly issued regulations.Furthermore, expenditure required by regulationmay be an alternative means of achieving the samepublic policy goals as direct federal expenditureor other methods. For example, Medicaid coveragemay be extended with or without more federalgrants.

201. Advocates of this requirement believe thatfinancial reports that omit important financialeffects of Governmental action do not fairlypresent the results of the Government's


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operations. Such reports fail to achieve theobjectives of federal financial reporting. Theybelieve that the efforts and accomplishments withwhich an agency pursues its goals can be properlyassessed only if the financial reports include allmaterial information. This means that the reportsshould bring together information about the netcost of operations, the tax expenditures, and thedirected flows of resources that are intended toachieve the same or similar missions.

202. The Board decided not to requiresupplementary information on directed flows forseveral reasons. Much of this information is notavailable now and will not be available topreparers of financial reports without addedexpense. In some cases the estimates would be veryimprecise. Finally, most Board members believethat the scope of Government financial reportingshould not extend to flows of financial resources that are not inflows to, or outflows from,federal Government reporting entities. However,the Board agreed to permit reporting entities topresent, as other accompanying information,information on directed flows of resources thatthe reporting entity considers relevant to itsprograms, if suitable explanations andqualifications are provided.



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OTHER FINANCING SOURCES ANDBUDGETARY RESOURCES

General Principles

203. The standards for other financing sources andbudgetary resources should satisfy several of theobjectives of financial reporting such as: (1)explaining the relationship of budgetary resourcesobligated to the net cost of operations, (2)showing how budgetary resources were used and thestatus of budgetary resources at the end of theperiod, and (3) indicating the effect on the netresults of operations of the entity of all thefinancing sources used to finance the net cost ofoperations. However, financing from a financialaccounting (proprietary) perspective is differentthan the budgetary accounting perspective.

204. The budget is the primary financial planningand control tool of the Government. Itsobjectives, such as planning resource allocation,authorizing and controlling obligations, planningcash disbursements, and raising revenue, differfrom those of financial reporting where the focusis on net cost of the entity's programs andactivities and stewardship of its assets andliabilities. Differing objectives are responsiblefor some but not all of the many differences inthese two financial management tools. Differencesin standards for measuring and reporting budgetaryand financial information, coupled with unreliabledata, have caused financial statements to beunder-utilized by Government managers, the budgetcommunity, and others who might benefit fromfinancial information.


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Reducing Differences

205. The problem of unreliable data is beingaddressed through financial statement audits thatwill include both proprietary and budgetaryinformation and improvements in financialmanagement systems. These federal accountingstandards reduce unnecessary differences betweenthe information reported in these two tools offinancial management and require reconciliationsand data to explain necessary differences. Thisshould increase the utility of the financialplanning and control information provided by theflow statements in general purpose financialreports and enhance the usefulness of the otheraccountability information provided, e.g., theBalance Sheet. This should occur because those whofocus on the budget will better understand thefinancial statements and find them to be reliableand useful reports.

206. The new recognition and measurement standardsfor financial accounting adopt budgetary flowconcepts for appropriations and provide consistentflow standards for nonbudgetary resources. Asexplained earlier, standards for recognition ofnonexchange revenue reported by Governmententities reflect legal requirements. These changesmake the reporting on financing for entity netcosts more consistent among entities and morecomparable to the budget.

207. However, differences inherent in thedifferent objectives of the budget and thefinancial statements must remain. The obligationbasis for the budget differs from the costs-incurred basis for the financial statements.This difference must continue in order for bothtypes of information to serve their purposes.Some budgetary resources are used to invest inassets and therefore are not reflected inoperating costs. Also, an entity may incur coststhat were covered by previously provided budgetaryresources (e.g., depreciation), costs not yetcovered by budgetary resources (e.g., accrued



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annual leave), or costs covered by budgetaryresources of other entities (e.g., some pensioncosts). Continuing these differences in theaccounting reports is essential if financialstatements are to report cost information that canbe related to entities' outputs and if thestatements are to report other information on theresources over which the entities are accountable.These remaining differences need to be explainedin the financial statements to increase theutility of the financial statements.

The Budgetary Process and ItsLinkage to Accounting

208. The budget controls obligations and thusultimately controls expenditures by Governmententities. In this sense, it is about theiroutflows of resources. Conversely, the budgetmakes inflows of resources available to componententities to finance expenditures. The inflows arereported in the financial statements as revenuesand other financing sources (e.g.,appropriations).

209. The budgetary process provides a componententity with budgetary resources throughappropriations acts. Budget authority may beprovided in the form of appropriations, borrowingauthority, contract authority, or spendingauthority from offsetting collections. Anappropriation may make funds available from theGeneral Fund, special funds, or trust funds--including amounts received from earmarked taxes--or may authorize the spending of offsettingcollections credited to expenditure accounts.Budgetary resources also include unobligatedbalances remaining from prior reporting periodsand a number of adjustments (e.g., recoveries ofprior year obligations). Execution of the budgetincludes the obligation of budgetary resources andthe outlays to liquidate the obligations.


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210. Borrowing authority is sometimes used insteadof appropriations to incur obligations and makepayments to liquidate them out of borrowed money.However, borrowing money under this authority doesnot change the net position of the entity. Theliability created by the borrowing is recordedalong with the related asset (the cash borrowed).Repayment of the liability later will normallyrequire the use of an offsetting collection or anappropriation. Assets acquired as a result ofborrowing may be later amortized or written offand become part of an entity's costs. When thisoccurs, or in the unusual event that the borrowingfinances expenses rather than assets, the entity'snet position will be reduced.

211. Contract authority is not a reportablefinancing source because it only allows agenciesto incur obligations in advance of receiving fundsto pay for any resulting liabilities. The funds toliquidate any resulting liabilities will come froman appropriation or offsetting collections. Forfinancial statement purposes, a financing sourceis recognized in accordance with the appropriateaccounting standards for the type of financingreceived to liquidate the liability. Under pastpractice the financing was recognized at the timeliabilities were incurred, but under the newstandard the financing will not be recognizeduntil liquidating appropriations are madeavailable, which may be in the same reportingperiod as the liability is incurred or a laterperiod.



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212. Appropriations, including permanentindefinite appropriations, are the most widelyused form of budget authority. When obligated byorders for, or receipt or provision of, goods,services, or benefits, they are reflected asobligations incurred.

20 When used, appropriations are accounted

for as an inflow of resources (i.e., an other financing source) in calculatingnet results of operations for the reporting period.

213. From the budgetary perspective, appropriations include dedicated taxreceipts, such as Social Security taxes and Highway Trust Fund excisetaxes. From a proprietary perspective, on the other hand, unexpendedappropriations do not include dedicated tax receipts, because these receiptsare accounted for as nonexchange revenue. Therefore, appropriations useddo not include dedicated tax receipts, thus avoiding double counting ofthese amounts as financing sources.

214. The accounting treatment for recognizing "appropriations used" as afinancing source parallels the budgetary accounting for expendedappropriations. Expended appropriations are recognized when goods andservices ordered have been delivered, when benefits are payable torecipients, or when funds available under a grant agreement are payable,and there is an available appropriation to pay these amounts. Under thisstandard, this is also the time when "appropriations used" is recognized asa financing source in the proprietary accounts.

215. Thus, at the time a liability is established which will be paid by anavailable appropriation, appropriations are considered used. Liabilitiesshould be established in accordance with SFFAS No. 5. Under thatstandard, a liability can be established in several ways, and the type oftransaction that has occurred governs when a liability has occurred. Forexample, grants can be provided under different transactions. Some can beprovided without any required exchange of service with the federalgovernment, while others may require specific activities to occur beforethe funds are available.


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216. Providing funds from an appropriation does not necessarily cause therecognition of a financing source if that payment is an advance. Forexample, an entity may advance funds to a grantee under the grantagreement. This should not cause recognition of a financing source. Therecognition of appropriations used would not occur until the grantee meetsthe requirements that allow it to use the funds in accordance with the grantagreement.

217. The focus on net cost rather than on matching financing withexpenses as incurred provided an opportunity to simplify the accountingfor appropriations and to eliminate one of the differences betweenfinancial and budgetary accounting. Reporting entities will no longer haveto defer recognition of appropriations used nor accrue appropriationsbefore they become available.

o Recognition was previously deferred for appropriations used tofinance capitalized transactions, such as the purchase of a fixed assetor the making of a loan under pre-credit reform programs whichhave not converted their accounts to a present value basis. The useof financing was previously recognized at the same time and ratethat depreciation of the asset's cost was recognized as an expense orthat bad debts expense was recognized on pre-credit reformreceivables which had not been converted to present values.

o Accrual of appropriations as amounts receivable was sometimesallowed for costs incurred but not funded until after the period thecosts were incurred, such as subsidy reestimates under the CreditReform Act. Reestimates of subsidy cost for credit programs aremade at or after the end of a period for which the reestimate appliesand for which an expense is recognized, but the permanentindefinite authority is not available until the following period. Whena financing accrual was not used for unfunded expenses, theunfunded expenses were removed from cumulative results ofoperations and reported separately in net position as future fundingrequirements.



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218. These changes eliminate reporting invested capital and futurefinancing sources in equity. These two equity accounts did not provideaccurate information because invested capital was never expected to bereturned and future financing requirements did not cover all futurefinancing needed but only that amount which had been recognized asexpenses.

219. An appropriation may provide an agency with the authority toobligate and expend earmarked receipts to which it is legally entitled andits offsetting collections. Most of these inflows of resources are classifiedand accounted for as either exchange or nonexchange revenue in accordwith the accounting standards previously discussed. However, therelationship is not exact between these revenues and related new budgetauthority. For example, some offsetting collections are neither a revenuenor a financing source. They only change the form of a resource alreadyreported on the Balance Sheet (e.g., funds received from the sale of anasset at book value). Some offsetting collections are credited to receiptaccounts instead of expenditure accounts and cannot be obligated withoutspecific appropriation. Some of these revenues are precluded fromobligation in a fiscal year by a provision of law, such as a benefit formulathat determines obligations, or by a limit on the amount of obligations thatcan be incurred. Amounts precluded from obligation are not counted asbudget authority in that year.

220. By recognizing nonbudgetary resources, e.g., imputed financing andtransfers, the financial statements of the entity will show how its recordedcosts were financed by the budgetary resources of other entities as well asits own.

(a) "Imputed financing" sources are reported to offset budgeted costs ofanother entity that applicable accounting standards impute to thereporting entity.

57 The imputing process recognizes

these costs in the net cost of operations ofthe responsible entity. By reflecting"imputed financing" in the changes in netposition, the net position of the responsibleentity is not affected and there is no double

57

Imputed financing sources may be reported to recognize imputed costs thathave not yet been budgeted for other entities, such as for pensions andretirement health care.


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counting.

(b) "Transfers-in" and "Transfers-out" arenecessary to show transfers of assets orrevenue from one Government entity toanother. In the case of assets, thetransferor's budget reflected the originalexpenditure for the asset, but the budgetnormally does not reflect the subsequenttransfer of the asset. The transfer changesthe entity's financial position at the timeof transfer but not its net cost ofoperations. Therefore, it is recognized indetermining the net results of operations forthe reporting period but not net cost.

221. In the case of earned revenue, the budget mayrequire the earned revenue inflow related to theentity's costs to be paid to the General Fund oranother entity. Reporting the transfer-out of suchrevenue as a reduction in net results ofoperations lets the responsible entity properlyreport its earnings in net cost of operationswithout increasing its net position.

222. Donations are not included as receipts in thebudget, except for cash and near-cash items.However, some other kinds of donations are alsorecognized as revenue. Such revenues are permanentdifferences between the budget and the financialstatements. Donation revenue will increase netresults of operations under these standards. Underthe standard, accounting for donations isconsistent with current practice in the privatesector where contributions are recognized asrevenue.

223. Costs that are not yet covered by budgetaryresources are "permanent" differences untilCongress acts to finance them in the budget oruntil permanent budget authority becomesavailable. Under the new standards, financing yetto be provided for recorded costs will not beaccrued. Accordingly, it will not increasecumulative results of operations.



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Implications of the term "Net Results ofOperations"

224. Some of those who commented on the exposuredraft expressed concern that some readers mightinfer that the amount of "net results ofoperations" reported on the new Statement ofChanges in Net Position was a relevant performancemeasure. Some financial statement users might drawsuch an inference because, in the private sector,the term "net results of operations" is synonymouswith net income and net income is the "bottomline" performance measure. Similarly, thestatement of operations used by federal reportingentities prior to implementation of SFFAS No. 7focused on a similar bottom line, net results ofoperations. This was the result of showing theflow of all operating activities on a singlestatement. For most governmental entities,however, no single bottom line can accuratelymeasure performance, and "net results ofoperations" normally provides little informationon either the costs or the benefits of an entity'soperations.

225. The new reporting model, illustrated inEntity and Display, focuses on measuring costs andreporting on performance. Both gross and net costare key financial performance measures that can berelated to outputs and outcomes of the entity'sprograms and activities.

DEDICATED COLLECTIONS

226. The exposure draft proposed disclosurerequirements for trust funds that were includedwithin the reporting entity's financial statementsin total and for material individual fund. Theinformation was proposed to provide users a basisfor understanding these funds and for holding theGovernment accountable for the use and dispositionof earmarked collections. Based on commentsreceived, this standard changes what was proposed


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as follows.

226.1. The proposed standard did not coverfunds administered by a federal entity in afiduciary relationship with beneficiaries thatwere not included in the entity's financialstatement. In addition, it did not cover otherfunds which are of the same nature as many trustfunds. The standard now requires disclosures forthese funds also.

226.2. The requirement for a total for allfunds was modified. If the fund is not material tothe reporting entity, disclosure may be made in aspecial report to the contributors andbeneficiaries (or their representatives) and onlydisclosure of the total of these funds isrequired.

227. User needs. Funds that account for dedicatedcollections are of great interest to users offederal financial statements. First and foremostare the contributors and beneficiaries to whichthe Government needs to be accountable for thereceipt and disposition of earmarked collectionsand for the balances that remain available to paybeneficiaries in the future or serve otherpurposes determined by law. Other users areinterested in the financing of other governmentoperations with these fund balances.

228. External users of federal financial reportssometimes misunderstand the relationship of thesefunds, especially trust funds, to the Government.Very few Government trust funds are held "intrust" in a fiduciary relationship as iscustomarily the meaning of this term outside theGovernment. Also, some of the trust fundscurrently spend less than the receipts theycollect each year. Most of the cash surplus thatarises when receipts are greater than outlays isinvested in Treasury securities until the amountsare needed for the trust fund to use in accordancewith benefit formulas or other provisions of thelaw.



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229. The Treasury uses these additional receiptsto meet the cash needs of general operations, thusreducing the need to borrow from the public, raisetaxes, or reduce spending. In the consolidatedfinancial statements of the Government, theinvestments in Treasury securities held by trustfunds and other fund entities and thecorresponding debt owed by the Treasury to thesefunds cancel out. They are eliminated from theamounts reported in the consolidated Balance Sheetbut footnote disclosure of these amounts normallyhas been included.

230. Funds covered by the standard. As pointed outby respondents, trust funds are not the only typeof fund that collects dedicated moneys. However,the exposure draft did not specifically delineatewhich funds might be included in the wider scope.The Board decided to limit these disclosures tofunds where there was a need to show accountability to contributors and expectedbeneficiaries. Therefore, the funds that arecovered by this standard are all trust funds, allspecial funds that are similar to trust funds, andall fiduciary funds whether or not in the budget.

231. The federal government does not use aconsistent fund designation for these types ofcollections. Funds classified by law as trustfunds are established by specific legislation tocarry out activities stipulated by law andfrequently are financed by taxes. While theGovernment's use of the term "trust funds"ordinarily differs from use of the term in theprivate sector, a few trust funds within thefederal universe have the stringent fiduciarycharacteristics similar to those of trust funds inthe private sector. Furthermore, some funds withinthe budget are classified as special funds and aresimilar in nature to non-fiduciary trust fundswithin the budget. Providing precise criteria forwhich non-trust funds are covered by thisrequirement is difficult. The Board realized thatit will not always be easy for management to


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identify accountability expectations ofcontributors and beneficiaries.

232. On the other hand, no special accountabilityof a fund is needed for the sake of those who makevoluntary payments in contemporaneous exchange forgoods or services. Once goods and services havebeen rendered for the payment made, the purchasergenerally does not expect the fund to provideadditional accountability. For this reason thespecial reporting requirements do not apply torevolving funds or other funds financed similarly.However, special accountability may exist for arevolving fund that collects receipts for goodsand services that are expected to be provided at alater period, such as long-term insurancecontracts, and preparers are encouraged to providethe needed information in such cases.

233. Funds not part of the reporting entity'sfinancial statements. In most cases, therequirement will apply to a fund that is includedin the financial statements of the reportingentity. In the case of most fiduciaries, however,the fund is administered by a reporting entity butis not part of the reporting entity itself orincluded in its own general purpose financialstatements. The disclosure requirement applies tosuch funds as well.

234. Special reports. Since the primary purpose ofthis requirement is accountability to thecontributors and expected beneficiaries, all fundsthat meet the stated criteria are deemed materialin this respect. Therefore, information needs tobe provided regardless of whether it is materialto the reporting entity. However, to minimize theamount of additional information required infinancial statements, where the disclosures fordedicated collections are made to the contributorsand beneficiaries in special reports and theinformation required is not material to thereporting entity, minimal disclosures are includedin the reporting entity's general purposefinancial statements or notes thereto. Special



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reports provided to representatives ofcontributors or beneficiaries may satisfy thisrequirement (for example, a report to an Indiantribal government).


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APPENDIX B: GUIDANCE FOR THE CLASSIFICATIONOF TRANSACTIONS

INTRODUCTION

235. The Government of the United States has agreat many types of transactions that financeits cost of operations, and they must beclassified in various ways for revenueaccounting in order to achieve the objectivesof the standards in this Statement. The type oftransaction may be an exchange transaction, anonexchange transaction, or an other financingsource; the transaction may be made between aGovernment reporting entity and the public orbetween two reporting entities within theGovernment (i.e., an intragovernmentaltransaction). If it is an exchange transaction,it will normally produce revenue but mayproduce gains and losses. This appendixprovides guidance for the classification ofspecific transactions based on the standardsfor accounting for revenue and other financingsources, and the reasoning behind thesestandards as explained in the Introduction andthe Basis for Conclusions.

236. To serve that purpose, this appendixprovides guidance for classifying all majortransactions that finance the Government's costof operations and a significant number oflesser transactions. It is intended that theseclassifications--together with the explanationof these classifications, interpreted in thelight of the Standards, the Basis forConclusions, and the Introduction--will provideguidance for classifying all the financingtransactions of the Government, including thosethat are not specifically listed. It should beunderstood that while some classifications areunequivocal, others are the result of balancing


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different considerations.

237. The transactions in this appendix aredivided into several groups. Transactions recognized in the financial statements have atwo-fold division: first, whether they are withthe public or intragovernmental; and second,whether they are nonexchange transactions,exchange transactions that produce revenue,exchange transactions that produce gains orlosses, or other financing sources. A separategroup consists of gains and losses due torevaluation.

238. Exchange transactions are classified asproducing gains or losses if they are likely tobe unusual or nonrecurring. If the transactionsclassified in this appendix as gains or lossesare usual and recurring for a particularreporting entity, that entity should classifythem as producing exchange revenue or expenseinstead of gains or losses.

239. The final group of transactions in thisappendix consists of transactions that produceamounts not recognized as revenues, gains, orother financing sources. Although in someinstances there is overlap with other groups,they are presented together as a convenientreference to amounts not classified in any ofthe other categories. They include:

o A number of transactions in which there isno net inflow of resources (or the netinflow is less than the full amount of thetransaction) because one asset is exchangedfor another or there is an increase in bothassets and liabilities.

o Certain transfers and donations that do notaffect net cost or net position.

o A number of transactions involving directloans and loan guarantees, which arerecognized as expenses or reductions in


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expenses according to the standards inSFFAS No. 2, Accounting for Direct Loansand Loan Guarantees.

o Deposit fund transactions.

240. As a guide to this appendix, the followingtable lists in order the transactions that areillustrated, group by group, and cites thepage. Unless otherwise stated:

o Revenue from nonexchange transactions isincluded in determining the net operatingresults and hence the change in netposition.

o Revenue from exchange transactions issubtracted from gross cost in determiningthe net cost of operations. (Gains andlosses from exchange transactions alsoaffect net cost.)

o Other financing sources are included indetermining the net operating results andhence the change in net position.

241. In addition, the collection anddisposition of most nonexchange revenue and asmall part of exchange revenue is accounted foras a custodial activity of the collectingentity.



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TABLE OF TRANSACTIONS

TRANSACTIONS WITH THE PUBLIC ............................. 97

Nonexchange transactions with the public ................. 97

Individual income taxes, corporation income taxes, social insurance taxes andcontributions, excise taxes, estate and gift taxes, and customs duties (97)

Social insurance taxes and contributions paid by Federal employees (99)Deposits by states for unemployment trust fund (99)User fees, Harbor Maintenance trust fund (100)Customs Service fees (101)Deposits of earnings, Federal Reserve System (102)

Donations: except types of property, plant, and equipment that are expensed (103)

Fines and penalties (104)Penalties due to delinquent taxes in connection with custodial activity (104)Forfeitures (105)

Exchange transactions with the public: revenue ...........107

Sales of goods and services (107)Sales of goods and services in undercover operations (107)

Interest (unless classified elsewhere), dividends, and rents (except for mineral rights) on Government property (108)

Rents, royalties, and bonuses on Outer Continental Shelf (OCS) and other petroleum and mineral rights. (108)

Proceeds from the auction of the radio spectrum (109)Interest on post-1991 direct loans (110)

Interest on delinquent taxes and other receivables that arise as the resultof custodial operations (111)Regulatory user fees such as patent and copyright fees; immigration and

consular fees; SEC registration and filing fees; and NuclearRegulatory Commission fees (111)

Diversion fees, Department of Justice (112)Premiums for SMI (Supplementary Medical Insurance), bank deposit insurance,

pension benefit guarantees, crop insurance, life insurance,and other insurance (112)

Federal employee contributions to pension and other retirement benefit plans (112)Federal employee contributions to health benefits plan for current coverage(113)

Reimbursement for collecting revenue (114)Reimbursement for cleanup costs (115)

Exchange transactions with the public: gains and losses ..115

Sales of Government assets: other than property, plant, and equipment andforfeited and foreclosed property (115)

Sales of property, plant, and equipment (115)Acquisition of property, plant, and equipment through exchange (116)Sales of foreclosed property: associated with pre-1992 direct loans and loanguarantees (117)Sales of receivables: except direct loans (117)Sales of direct loans (117)


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Retirement of debt securities prior to maturity (118)

Other financing sources from the public ..................118

Seigniorage (118)

INTRAGOVERNMENTAL TRANSACTIONS ...........................119

Nonexchange transactions--intragovernmental: revenue .....119

Interest on Treasury securities held by trust funds and special funds (excepttrust revolving funds) (119)

Interest received by one fund from another (120)Employer entity contributions to social insurance programs (120)

Nonexchange transactions--intragovernmental: gains andlosses ...................................................121

Retirement of debt securities prior to maturity: trust funds and specialfunds (except trust revolving funds) (121)

Cancellation of debt (122)

Exchange transactions--intragovernmental: revenue ........122

Intragovernmental sales of goods and services by a revolving fund (122)Intragovernmental sales of goods and services by a fund other than arevolving fund (122)Employer entity contributions to pension and other retirement benefit plans

for Federal employees (123)Employer entity contributions to health benefit plans for current coverage of

Federal employees (123)Employer entity payments for unemployment benefits and workers compensation

(124)Interest on Treasury securities held by revolving funds (124)Interest on Treasury securities held by trust revolving funds (125)Interest on uninvested funds received by direct loan and guaranteed loan

financing accounts (126)Interest received by Treasury (126)

Exchange transactions--intragovernmental: gains and losses127

Retirement of debt securities prior to maturity: revolving funds and trustrevolving funds (127)

Other financing sources--intragovernmental ...............128

Appropriations (128)Cost subsidies: difference between internal sales price (reimbursement) and

full cost (128)Cost subsidies: difference between the service cost of pensions (and other

retirement benefits), less the employee contributions, if any, and theemployer entity contributions (129)



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Contribution by the General Fund to the SMI trust fund (130)Transfer by CCC to Federal Crop Insurance Corporation (131)Interchange between the Railroad Retirement Board and the Social Security and

Hospital Insurance trust funds (131)Transfer of cash and other capitalized assets without reimbursement (132)

Transfer of property, plant, and equipment without reimbursement: types thatare expensed (132)

REVALUATIONS .............................................133

Revaluation of capitalized property, plant, and equipment (133)Revaluation of inventory and related property (133)

TRANSACTIONS NOT RECOGNIZED AS REVENUES, GAINS, OR OTHERFINANCING SOURCES ........................................134

Borrowing from the public (134)Borrowing from Treasury, the Federal Financing Bank, or other Government

accounts (134)Disposition of revenue to other entities: custodial transfers (134)Sales of different types of Government assets (135)Acquisition of property, plant, and equipment through exchange (135)

Transfer of property, plant, and equipment without reimbursement: types thatare expensed (136)

Donation of property, plant, and equipment: types that are expensed (137)Negative subsidies on post-1991 direct loans and loan guarantees (137)

Downward subsidy reestimates for post-1991 direct loans and loan guarantees (137)

Fees on post-1991 direct loans and loan guarantees.-- (138)Repayment of post-1991 direct loans (138)Repayment of pre-1992 direct loans (139)Repayment of receivables: except direct loans (139)Sales of direct loans (139)

Sales of foreclosed property: associated with post-1991 direct loans and loanguarantees (140)

Deposit fund transactions (140)


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TRANSACTIONS WITH THE PUBLIC

Nonexchange transactions with the public

242. Individual income taxes, corporationincome taxes, social insurance taxes andcontributions,

1 excise taxes, estate and gift

taxes, and customs duties.--Taxes (includingcustoms duties) are levied through the exerciseof the power of the Government to compelpayment. In broad terms, taxes are "the pricewe pay for civilization." More specificallythey finance spending of many types to promotethe general welfare, provide for the commondefense, and ensure domestic tranquillity:national defense, a judicial system, aid to theelderly, construction of infrastructure,education and training, and so forth. Therelationship between the tax paid and the valuereceived is too indirect and disproportionateto relate the revenue that is received from anyidentifiable taxpayer to the cost that isincurred for providing that identifiabletaxpayer with benefits. This is especially thecase where the benefits are of a collective orpublic nature, such as national defense, inwhich case consumption by one taxpayer does notreduce the consumption available for another;or where the benefits are designed toredistribute income from one group of people toanother. Therefore, tax revenue is nonexchangerevenue.

243. All excise taxes, like other taxes, areclassified as resulting in nonexchange revenue.Some excise taxes (considered to be benefittaxes) are levied on bases that are related tothe use of publicly provided goods and servicesor the public provision of other benefits, suchas the gasoline tax; certain other excise taxesare levied on bases related to a cause of somedamage and are dedicated to pay down costs,such as the tax on domestically mined coal,which is dedicated to the black lung disability



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trust fund. Even in these cases, however, therelationship between the tax and the benefitreceived by an identifiable recipient isrelatively indirect and disproportionate.Moreover, these excise taxes, like other taxes,are determined through the exercise of thepower of the Government to compel payment.Therefore, like other taxes, they areclassified as producing nonexchange revenue.

244. Board members have differing views onwhether social insurance programs result inexchange or nonexchange transactions.

21.--Taxes

(including customs duties) are levied through the exercise of the powerof the Government to compel payment. In broad terms, taxes are "theprice we pay for civilization." More specifically they finance spendingof many types to promote the general welfare, provide for the commondefense, and ensure domestic tranquillity: national defense, a judicialsystem, aid to the elderly, construction of infrastructure, education andtraining, and so forth. The relationship between the tax paid and thevalue received is too indirect and disproportionate to relate the revenuethat is received from any identifiable taxpayer to the cost that isincurred for providing that identifiable taxpayer with benefits. This isespecially the case where the benefits are of a collective or publicnature, such as national defense, in which case consumption by onetaxpayer does not reduce the consumption available for another; orwhere the benefits are designed to redistribute income from one groupof people to another. Therefore, tax revenue is nonexchange revenue.

243. All excise taxes, like other taxes, are classified as resulting innonexchange revenue. Some excise taxes (considered to be benefittaxes) are levied on bases that are related to the use of publiclyprovided goods and services or the public provision of other benefits,such as the gasoline tax; certain other excise taxes are levied on basesrelated to a cause of some damage and are dedicated to pay downcosts, such as the tax on domestically mined coal, which is dedicatedto the black lung disability trust fund. Even in these cases, however,the relationship between the tax and the benefit received by anidentifiable recipient is relatively indirect and disproportionate.Moreover, these excise taxes, like other taxes, are determined throughthe exercise of the power of the Government to compel payment.


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Therefore, like other taxes, they are classified as producingnonexchange revenue.

244. Board members have differing views on whether social insuranceprograms result in exchange or nonexchange transactions.

58

However, they agree that social insurance taxrevenue should be reported in the same way asother tax revenue for the purposes of financialreporting. This is because social insurancetaxes, like other taxes, are determined throughthe exercise of the power of the Government tocompel payment. Furthermore, individuals andbusinesses subject to social insurance taxesare subject to them as a byproduct of theirdecision to enter covered employment or engagein a covered business, so especially for themajor, broad-based social insurance programs--Social Security, Medicare (hospital insurance),and unemployment compensation--they havevirtually no legal option except to pay.

245. Tax receipts are generally collected fromthe public by the IRS (Internal RevenueService) and, to a lesser extent, by theCustoms Service and other entities acting asagents for the recipient entities rather thanon their own behalf. The collecting entityreceives the cash and then transfers it to theGeneral Fund, trust fund, or special fund onwhose behalf it was collected. The amount socollected should be accounted for as acustodial activity by the collecting entity.The tax is recognized as a nonexchange revenueby the entity that is legally entitled to theamount. This would be a trust fund or specialfund in the case of an earmarked (i.e.,dedicated) tax. If collected on behalf of theGovernment as a whole, it would be recognizedin the Government-wide consolidated financialstatements.

58

See discussion of social insurance programs in FASAB, Exposure Draft,Supplementary Stewardship Reporting (August 1995).



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246. Social insurance taxes and contributionspaid by Federal employees.

22--Federal employees

may be covered by social insurance programssuch as Social Security

59 and Medicare under the

same terms and conditions as the remainder ofthe covered population. The payments made byFederal employees are in the nature of taxes,compulsory payments demanded by the Governmentthrough the exercise of its power to compelpayment. Insofar as the social insuranceprogram applies to employees of the UnitedStates government, the terms and conditions aregenerally the same as the program for privateemployees. The employer and employeecontributions are generally calculated in thesame way; the employee contribution is notearned by the social insurance program; and thebenefits are generally calculated in the sameway. The employee does not obtain particularbenefits under the plan from rendering servicein Federal employment, because he or she wouldhave been similarly covered by the program ifprivately employed and would have obtainedsimilar benefits. For these reasons, theemployee contribution should have the sameclassification as contributions by non-Federalemployees, which is nonexchange revenue.

247. Deposits by states for unemployment trust fund.--States depositthe receipts from the state unemployment tax to the U.S. Treasury forthe unemployment trust fund in order to finance most of the benefitsunder the unemployment compensation system. The stateunemployment tax differs from state to state in terms of the tax rate,tax base, and certain other characteristics, and unemployment benefitsalso differ from state to state. Nevertheless, the deposit has long beenconstrued as a Federal budget receipt (a governmental receipt), and theunemployment trust fund has long been included as an account in theFederal budget.

59

Most Federal civilian employees hired before 1984 are not covered by SocialSecurity.


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248. This is for a combination of reasons taken together: (a) theunemployment compensation system--including the system of taxes,the system of benefits, and the trust fund--was established by theSocial Security Act of 1935 and has been amended by Federal lawmany times; (b) deposits are held in a trust fund operated by the U.S.Government; (c) Federal law specifies extensive requirements for thestate unemployment tax and unemployment benefits; (d) the Federalunemployment tax finances grants to states to cover their entire cost ofadministering the unemployment system; and (e) Federal laweffectively coerces states to participate in the system, with participationrequiring them to levy the state unemployment tax and deposit thecollections in the U.S. Treasury. If a state does not participate (or is notcertified by the Department of Labor as meeting Federal requirements):(i) the Federal unemployment tax is levied within the state at itsmaximum rate, (ii) the system does not pay any unemploymentcompensation benefits within the state, and (iii) the FederalGovernment provides no grants to state governments to pay for thecosts of administration. The deposits of the state tax are thereforenonexchange revenue of the unemployment trust fund. (The Federalunemployment tax is levied and collected separately from the stateunemployment tax.)

249. User fees, Harbor Maintenance trust fund. --This is an example ofa tax that is termed a "user fee" by law while classified in the budget asa governmental receipt together with other taxes and duties. It is an advalorem tax of 0.125 percent imposed on commercial cargo loaded andunloaded at specified U.S. ports open to public navigation. The receiptis earmarked to the Harbor Maintenance trust fund. It is similar innature to other excise taxes that result from the Government�s power tocompel payment and that are dedicated to a trust fund or special fundto be spent for a designated purpose (for example, the gasoline excisetax, which is dedicated to the Highway Trust Fund). It therefore shouldbe recognized as nonexchange revenue by the Harbor Maintenancetrust fund.

250. Customs Service fees.--The Customs Service collects revenueprimarily from duties on imported merchandise but also from twotypes of fees: the merchandise processing fee and a group of feescalled "user fees."



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251. The merchandise processing fee is primarily an ad valorem chargeon formal merchandise entries into the United States (at 0.19 percent)subject to a maximum and minimum charge. It also includes flat feeson informally entered goods. The collections are earmarked by law to aspecial fund from which receipts are made available to financeCustoms Service operations to the extent provided by currentappropriations.

252. The merchandise processing fee is associated with the cost of theCustoms Service's operations. The fee as originally enacted wasmodified by the Customs and Trade Act of 1990 to make it consistentwith U.S. obligations under GATT (the General Agreement on Tariffsand Trade) after a GATT panel had ruled that the original fee (astraight ad valorem fee) exceeded the cost of services rendered andwas a tax on imports that discriminated against imports in favor ofdomestic production. The maximum and minimum fees and the flatfees were enacted to meet the U.S. obligation.

253. However, the associated cost is primarily some of the costs ofassessing and collecting duties on imported merchandise, such as thesalaries of import specialists (who classify merchandise) and the costsof processing paperwork. The importer pays duties that are required bylaw; it does not receive anything of value from the Government in thenature of an exchange. Furthermore, these costs are not likely todepend significantly on the value of the merchandise, and the fee islevied through the power of the Government to compel payment. Therefore, for the purpose of a classification system for financialreporting, the fee is akin to dedicated taxes that are also related in theaggregate to associated costs and that are classified as nonexchangerevenue (e.g., the excise tax on gasoline). The merchandise processingfee is therefore classified as a nonexchange revenue.

254. The user fees consist of a group of flat fees charged on passengersand conveyances entering the country.

23 The collections are

dedicated by law to a special fund whosereceipts are made available by permanentindefinite appropriation to finance CustomsService operations.


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255. These fees are intended to offset certaininspection costs that relate to the processingof passengers and conveyances entering thecountry. They are levied through the power ofthe Government to compel payment, and theperson or entity that pays these fees does notreceive anything of value from the Governmentin exchange. The inspection activities are fora variety of purposes: to ensure that dutiablemerchandise is declared, to seize contraband(such as narcotics and illegal drugs), todetect infringements of patent and copyrightlaws, and so forth. Some of these purposes arerelated to the Government's powers to raisetaxes, which are nonexchange revenue, and toenforce laws. Only to a limited extent are theylike regulatory user fees, based on theGovernment's power to regulate particularbusinesses or activities. Therefore, like themerchandise processing fee, the user fees areclassified as nonexchange revenue.

256. Deposits of earnings, Federal Reserve System.--The FederalReserve System consists of the Board of Governors of the FederalReserve System and twelve regional Federal Reserve Banks. UnderFederal accounting concepts, it is not considered to be part of theGovernment-wide reporting entity. Therefore, payments made to orcollections received from the Federal Reserve System would bereported in the financial statements of the Federal Government and itscomponent reporting entities.

24 The Federal Reserve earns

large amounts of interest on its portfolio ofTreasury securities and deposits to theTreasury all net income after deductingdividends and the amount necessary to bring thesurplus of the Federal Reserve Banks to thelevel of capital paid-in.



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257. The Federal Reserve was established by Actof Congress pursuant to the Government'ssovereign power over the nation's money, andits investment in Treasury securities isnecessary for carrying out its monetaryfunction. It does not receive anything of valuefrom the Government in exchange for its depositof earnings, and on occasion it has beenrequired by law to make extra payments. Therevenue from the deposits is thereforenonexchange.


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258. Donations: except types of property, plant, and equipment thatare expensed.-- Donations are contributions to the Government, i.e.,voluntary gifts of resources to a Government entity by a non-Federalentity.

25 The Government does not give anything of

value to the donor, and the donor receives onlypersonal satisfaction. The donation of cash,other financial resources, or nonfinancialresources (except stewardship property, plant,and equipment) is therefore a nonexchange revenue.

259. The exception, stewardship PP&E, consistsof Federal mission PP&E, heritage assets, andstewardship land. Such PP&E is expensed ifpurchased, but no amount is recognized if it isreceived as a donation.

60 Correspondingly, no

revenue is recognized for such donations.

260. Fines and penalties.--Fines and penalties are monetaryrequirements imposed on those who violate laws or administrativerules. The person or other entity that pays a fine or penalty does notreceive anything of value in exchange, nor does the Governmentsacrifice anything of value. The Government collects these amountsthrough the exercise of its power to compel payment. Fines andpenalties are therefore a nonexchange revenue.

261. Fines from judicial proceedings are collected by the entity actingas an agent for the Government as a whole rather than on its ownbehalf. They are therefore accounted for as a custodial activity of thecollecting entity and recognized as a nonexchange revenue in theGovernment-wide consolidated financial statements.

262. Fines and penalties produced by an entity's operations--such asinspections to ensure compliance with Federal law and withregulations that are the responsibility of the entity (e.g., inspections bythe Office of Surface Mining) or compliance with regulations for theconduct of a Federal program--are recognized as nonexchange revenueby whichever entity is legally entitled by law to the revenue. In somecases, but not all, this would be the collecting entity. If the collecting

60

SFFAS No.6, Accounting for Property, Plant, and Equipment, pp. 18 and 20.



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entity transfers the nonexchange revenue to the General Fund oranother entity, the amount is accounted for as a custodial activity bythe collecting entity. If transferred to the General Fund, the penaltiesare recognized as nonexchange revenue in the Government-wideconsolidated financial statements; if transferred to another entity, theyare recognized as nonexchange revenue by the entity that receives thetransfer.

263. Penalties due to delinquent taxes in connection with custodialactivity.--The person or other private entity that pays a penalty ondelinquent taxes does not receive anything in exchange, nor does theGovernment sacrifice anything of value. The Government collectsthese amounts through its power to compel payment. Penalties ondelinquent taxes are therefore a nonexchange revenue. The penaltiesare accounted for as a custodial activity. If transferred to the GeneralFund, the penalties are recognized as nonexchange revenue in theGovernment-wide consolidated financial statements; if transferred toanother entity, they are recognized as nonexchange revenue by theentity that receives the transfer.

264. Forfeitures.--Property may be seized as a consequence of variouslaws and regulations and forfeited to the Government. Forfeitedproperty may be acquired through forfeiture proceedings, be acquiredto satisfy a tax liability, or consist of unclaimed and abandonedmerchandise. Forfeited property is principally managed by the AssetForfeiture Fund of the Justice Department and the Treasury ForfeitureFund of the Treasury Department. Revenue is recognized fromforfeited property unless the property is distributed to state or local lawenforcement agencies or foreign governments or is received insatisfaction of a previously recognized revenue (e.g., accrued taxreceivables).

26

265. The timing of revenue recognition dependson how the property is forfeited and the natureof the property. In the case of unclaimed andabandoned merchandise, revenue is recognized inthe amount of the sales proceeds at the timethe property is sold. In the case of propertyacquired through forfeiture proceedings, thetiming of recognition depends on the nature and


118 APPENDIX B-------------------------------------------------------------------

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disposition of the property. For monetaryinstruments, the revenue is recognized at thetime of obtaining forfeiture judgment; forproperty that is sold, at the time of sale; andfor property that is held for internal use ortransferred to another Federal agency, at thetime of obtaining approval to use the propertyinternally or transfer it.

61

266. The method of measuring revenue depends onthe nature of the property. The amount ofrevenue recognized for monetary instruments isthe market value when the forfeiture judgmentis obtained. For property that is sold, it isthe sales proceeds. For property that is heldfor internal use or transferred to anotherFederal agency, it is the fair value of theproperty less a valuation allowance for anyliens or third party claims.

267. The revenue from forfeiture is nonexchangerevenue, because the Government seizes theproperty through the exercise of its power. TheGovernment does not sacrifice anything of valuein exchange and the entity that forfeits theproperty does not receive anything of value.More than half of the forfeiture revenue of thetwo funds mentioned above is from currency andother monetary instruments. Although othertypes of forfeited property must be sold inorder to recognize revenue, or constructivelysold (if transferred to another Federal agencyor placed into internal use), this is the laststep in a process that is inherentlynonexchange.

268. The disposition of the revenue fromforfeiture is determined by law. Revenue or the

61

SFFAS No. 3, 15-19. The standard also requires deferred revenue to berecognized when a forfeiture judgment is obtained, but the deferred revenue isreversed when revenue is recognized. The amount of revenue ordinarily differsfrom the amount of deferred revenue. In some cases, an adjustment subsequent tothe original forfeiture judgment may be necessary when it is later determinedthat a portion of the forfeiture is to be distributed to state or local lawenforcement agencies or foreign governments.



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property itself may ultimately be distributedto the seizing entity, state or local lawenforcement agencies, foreign governments, orthe general fund. Revenue is recognized asnonexchange revenue by the entity that islegally entitled to use the revenue or to usethe property itself. If the property isdistributed to a state or local law enforcementagency or a foreign government, revenue is notrecognized by a Federal Government reportingentity. If the revenue is transferred to theGeneral Fund, it is recognized as nonexchangerevenue in the Government-wide consolidatedfinancial statements.

269. Some entities may be involved in themanagement and liquidation of forfeitedproperty but not themselves be entitled to therevenue or to the use of the property. Forexample, a central fund created to support theseizure activities of multiple entities maymanage forfeited property and the collectionand disposition of the revenue from thatproperty. These entities should account for theproperty as a custodial activity. Revenue isshown when it is recognized, and it is shown astransferred to others when the cash isdisbursed or the property is delivered. Thedisposition of property to an entity outsidethe Federal Government is also accounted for.

Exchange transactions with the public:revenue

270. Sales of goods and services.--The cost ofproduction for goods and services such aselectricity, mail delivery, and maps isdefrayed in whole or in part by revenue fromselling the goods or services provided. Thesales may be made by a public enterpriserevolving fund (such as the Bonneville PowerAdministration), an intragovernmental revolvingfund (such as the Government Printing Office),or a fund that is not a revolving fund (such asthe Geological Survey). Each party receives and


120 APPENDIX B-------------------------------------------------------------------

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sacrifices something of value. The sale istherefore an exchange transaction, and therevenue is exchange revenue for the entitymaking the sale.

271. Sales of goods and services in undercoveroperations.--The cost of the Government’sundercover operations is defrayed in whole orin part from the proceeds of sales of goodsthat have been purchased (as opposed to goodsthat have been forfeited). Each party receivesand sacrifices something of value. Thesecharacteristics of the transaction are notaffected by whether the sale is illegal. Thesale is therefore an exchange transactions, andthe revenue is exchange revenue of the entitymaking the sale.

272. Interest (unless classified elsewhere),dividends, and rents (except for mineralrights) on Government property.--Each partyreceives and sacrifices something of value, sothe inflow of resources is an exchangetransaction.



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273. Interest is classified as exchange revenuenotwithstanding the fact that the entity maynot be charged a cost of capital for the assetsthat yield these inflows; or, if the entityborrowed from Treasury to acquire the assets,it may have been charged a below-marketinterest rate. The gross cost of the entity isunderstated in such cases; and to recognize anexchange revenue is to recognize a revenuewithout some or all of the related costs, andhence to understate the entity's net cost ofoperations. Nevertheless, in some cases theentity does pay the Treasury at least someinterest; and the Government's cost ofborrowing to acquire the assets is recognizedas a cost of the Government as a whole. Sincesome cost is recognized, even if not always thefull cost of the entity,

27 an exchange revenue is

recognized for the entity that receives the inflow of interest.

274. Rents, royalties, and bonuses on Outer Continental Shelf (OCS)and other petroleum and mineral rights.--Rents, royalties, and bonusesare exchange revenues, because each party receives and sacrificessomething of value. The amounts are earned by sales in the market andtherefore are exchange revenue. They are collected by the MineralsManagement Service (MMS) of the Department of the Interior, whichmanages the energy and minerals resources on the OCS and collectsthe amounts due the Government and Indian tribes from mineralsproduced on the OCS and other Federal and Indian lands.

275. MMS does not recognize a depletion cost for various reasons,including the fact that under present accounting standards naturalresources are not recognized as an asset and depletion is notrecognized as a cost. As a result, this exchange revenue bears littlerelationship to the recognized cost of MMS and cannot be matchedagainst its gross cost of operations. Therefore, although the inflows areexchange revenue, they should not be subtracted from MMS�s grosscost in determining its net cost of operations.


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276. MMS should instead account for the exchange revenue as acustodial activity. MMS collects rents, royalties, and bonuses acting asan agent on behalf of the recipients designated by law: the GeneralFund, certain entities within the Government to which amounts areearmarked, the states, and Indian tribes and allottees. The amounts ofrevenue should be recognized and measured under the exchangerevenue standards when they are due pursuant to the contractualagreement.

277. The rents, royalties, and bonuses transferred to Treasury for theGeneral Fund, or to other Government reporting entities, should berecognized by them as exchange revenue. However, neither theGovernment as a whole nor the other recipient entities recognize thenatural resources as an asset and depletion as a cost. Therefore, thisexchange revenue should not offset their gross cost in determiningtheir net cost of operations. It should instead be a financing source indetermining their operating results and change in net position.

278. Proceeds from the auction of the radio spectrum.--The proceedsfrom auctioning the right to use the radio spectrum are exchangerevenues, because each party receives and sacrifices something ofvalue. The amount of revenue is earned by sales in the market atauctions. It bears little relationship to the costs recognized by theFederal Communications Commission (FCC), which collects therevenue, or to the costs recognized by the U.S. Government as awhole. Therefore, it should not be offset against the costs of the FCCin determining its net cost of operations or against the costs of theGovernment as a whole in Government-wide consolidated financialstatements.

279. The FCC should therefore account for this exchange revenue as acustodial activity,acting as an agent on behalf of the General Fund; and it should beincluded as exchange revenue in the Government-wide consolidatedfinancial statements.



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280. Interest on post-19911 direct loans.28

.62--Interest on

direct loans is an exchange transaction,because it is part of a broader exchangetransaction in which the entity makes a loan tothe borrower and the entity and borrower eachreceives and sacrifices something of value.Interest on direct loans that are budgetedaccording to the provisions of the FederalCredit Reform Act of 1990 consists of twocomponents: the nominal interest (the statedinterest rate times the nominal principal) andthe amortized interest (change in present valueof the loans receivable due to the passage oftime). The combined effect of these componentsequals the effective interest, which isdirectly defined as the present value of theloans receivable times the Treasury interestrate applicable to the particular loans (i.e.,the interest rate used to calculate the presentvalue of the direct loans when the direct loanswere disbursed). The effective interest causesan equal increase in the aggregate value of theassets on the balance sheet, and therefore theeffective interest is the amount recognized asexchange revenue.

63

62

For interest on pre-1992 direct loans, see the preceding section on“interest (unless classified elsewhere) . . .” 63

See SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 11-12,paragraphs 30-31 and 37; for an illustrative case study, also see pp. 50-52 and59-60.


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281. Interest on delinquent taxes and other receivables that arise asthe result of custodial operations.--Receivables that arise as the resultof custodial operations are custodial (or non-entity) assets, held by theIRS or another entity as an agent for the Government as a whole ratherthan on its own behalf (e.g., IRS tax receivables on which thedelinquent taxpayer must pay interest). The interest is an exchangerevenue, because each party receives and sacrifices something of value,but it is not related to the costs incurred by the collecting entity. Theinterest is accounted for as a custodial activity by the collecting entity.If transferred to the General Fund, the interest is recognized asexchange revenue in the Government-wide consolidated financialstatements because it is related to the government's cost of borrowing;if transferred to another entity, it is recognized as nonexchangerevenue by the entity that receives the transfer.

282. Regulatory user fees such as patent and copyright fees;immigration and consular fees; SEC registration and filing fees; andNuclear Regulatory Commission fees.--Regulatory user fees arecharges based on the Government's power to regulate particularbusinesses or activities. The revenue is related to the cost in one of twoways. Special benefits may be provided to identifiable recipients whopay the fees, beyond the benefits, if any, that accrue to the generalpublic (e.g., passport fees); or the Government may incur costs in orderto regulate an identifiable entity for the benefit of the general public orsome other group, in which case the user charge compensates theGovernment for its regulatory costs that were caused by the activity ofthe party that pays the charge (e.g., SEC and Nuclear RegulatoryCommission fees). Because in general the revenue is closely related tothe cost of operations, these fees are classified as exchangetransactions and the revenue is an exchange revenue of the entity thatcharges the fee.



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283. Diversion fees, Department of Justice.--Registrants in theDiversion Control Program (e.g., physicians) pay fees to the DrugEnforcement Administration, in exchange for which the DEA providesthe registrants with the authority to prescribe controlled substances.The diversion fees are intended to cover the costs of the DiversionControl Program. Because the revenue is related to the cost and theregistrants both receive and sacrifice value, the payment of these feesis an exchange revenue of the Diversion Control Program.

284. Premiums for SMI (Supplementary Medical Insurance), bankdeposit insurance, pension benefit guarantees, crop insurance, lifeinsurance, and other insurance.--In exchange for a premium and otherconsiderations, the Government promises to make payments toprogram participants if specified events occur. The premium offsetsthe cost of the program in whole or in part. The degree to whichparticipation is voluntary differs from program to program. Becausethe revenue is related to the cost of the providing service, it is anexchange revenue of the insurance program.

285. Federal employee contributions to pension and other retirementbenefit plans.

29--Employees of the Federal Government

provide service to their employer in exchangefor compensation, of which some is receivedcurrently (the salary) and some is deferred(pensions, retirement health benefits, andother retirement benefits). This is an exchangetransaction, because each party sacrificesvalue and receives value in return. As part ofthis exchange transaction, the Governmentpromises a pension to its employees after theyretire. The Government also promises otherretirement benefits, notably health benefits.In return, the employee provides services and,under some plans, makes a contribution to theretirement fund out of his or her salary. Thefinancing of these benefits may includecontributions paid by the employee to theretirement fund.

286. In broad terms, the employee contributionis an inflow of resources to the retirementfund as part of this exchange transaction. More


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narrowly, it is a payment by the employee aspart of an exchange of money and services for afuture pension or other retirement benefit.Therefore, it is an exchange revenue of theentity that administers the retirement plan andthus is an offset to that entity's gross costin calculating its net cost of operations.

64

287. Federal employee contributions to health benefits plan forcurrent coverage.--Employees of the Federal Government provideservices to their employer in exchange for compensation, of whichsome is received currently in the form of money (the salary); some isreceived currently in the form of payments to a third party (theemployer entity contribution to the medical insurance plan for currentcoverage of its employees); and some is deferred (pensions and otherretirement benefits). This is an exchange transaction, because eachparty sacrifices value and receives value in return. As part of thisexchange transaction, the Government and its employees bothcontribute to a medical insurance plan that provides current coverageof the employees.

288. In broad terms, the employee contribution out of his or her salaryis an inflow of resources to the health benefits plan as part of thisexchange transaction. More narrowly, it is a payment in exchange forcurrent coverage by a health benefits plan. Therefore, it is an exchangerevenue of the entity that administers the health benefits plan and thusis an offset to that entity's gross cost in calculating its net cost ofoperations.

64

For further discussion of the accounting standards for pensions and otherretirement benefits of Federal employees, see SFFAS No. 5, Accounting forLiabilities of the Federal Government, pp. 20-36 and 56-63. The standards donot cover accounting for the plan per se as distinct from the administeringentity. Nor do they cover defined contribution plans, or administrativeentities that are not Federal reporting entities.



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289. Reimbursement for collecting revenue.--The Customs Servicecollects duties on goods imported by Puerto Rico and the VirginIslands. The Customs Service retains an amount equal to the estimatedcost of collecting these duties, including all costs of operations inPuerto Rico and the Virgin Islands and an allocation of overhead; ittransfers the remainder to the Treasury, which, in turn, transfers thecollections to Puerto Rico or the Virgin Islands.

290. The total amount of duties collected on these goods should beaccounted for as a custodial activity by the Customs Service.Notwithstanding that duties are a nonexchange revenue, theseparticular duties are a nonexchange revenue of an entity other than theUnited States and therefore are not recognized as a nonexchangerevenue of the U.S. Government.

291. The method of disposing of these collections combines twodistinct transactions into one. The entire amount of the duties could betransferred to Puerto Rico and the Virgin Islands, and thesegovernments could then pay the Customs Service to reimburse it for itsservices of collecting duties. The payment to Customs would beexchange revenue of the Customs Service. The actual procedure forreimbursement, whereby Customs retains an amount equal to theestimated cost, is simpler but equivalent in substance. Hence, thecustodial transfer to Treasury (for Puerto Rico and the Virgin Islands)and the amount retained by Customs should be shown as separatecomponents of the disposition of the revenue from customs duties. Theamount retained by Customs to reimburse itself for its costs isexchange revenue of the Customs Service and is offset against its grosscost in calculating its net cost of operations.

292. Reimbursement for cleanup costs.--The Coast Guard or otherFederal entities may incur costs to clean up environmental hazardscaused by private parties and, in some cases, require these privateparties to reimburse it for the costs incurred. Notwithstanding that theGovernment demands the revenue under its power to compel payment,the revenue arises from the action of the private parties and is closelyrelated to the cost of operations incurred as a result of that action.Therefore, the revenue is an exchange revenue of the entity that incursthe cost.


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Exchange transactions with the public:gains and losses

293. Note: As explained in the introduction tothis appendix, transactions that are classifiedas producing gains or losses should instead beclassified as producing revenue or expense ifthey are usual and recurring for a particularreporting entity.

294. Sales of Government assets: other thanproperty, plant, and equipment and forfeitedand foreclosed property.--The sale ofGovernment assets (other than property, plant,and equipment and forfeited and foreclosedproperty) is an exchange transaction, becauseeach party receives and sacrifices something ofvalue. If the sales price equals book value,there is no gain or loss, because a cash inflowequal to book value is the exchange of oneasset for another of equal recorded value andtherefore not a net inflow of resources. If thesales price is more or less than the book valueof the property, a gain or loss, respectively,is recognized to the extent of the difference.The amount of the difference between salesprice and book value is ordinarily a gain orloss rather than a revenue or expense, becausesales of property are ordinarily an unusual ornonrecurring inflow of resources.



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295. Sales of property, plant, and equipment.--The transaction is an exchange transaction,because each party receives and sacrificessomething of value. If the sales price

30 equals book

value, there is no gain or loss, because a cash inflow equal to bookvalue is the exchange of one asset for another of equal recorded valueand therefore not a net inflow of resources. If the sales price is more orless than book value, a gain or loss, respectively, is recognized to theextent of the difference. The amount of the difference is ordinarily again or loss rather than a revenue or an expense, because sales ofproperty, plant, and equipment are ordinarily an unusual ornonrecurring inflow of resources.

296. The entire sales price is a gain if the book value of the asset iszero. The book value is zero (a) if the asset is general property, plant,and equipment (PP&E) that is fully depreciated or written-off or (b) ifthe asset is stewardship PP&E, for which the entire cost is expensedwhen the asset is purchased.

65

297. Acquisition of property, plant, and equipment throughexchange.--The cost of property, plant, and equipment (PP&E)acquired through an exchange of assets with the public is the fair valueof the PP&E surrendered at the time of exchange. If the fair value ofthe PP&E acquired is more readily determinable than that of the PP&Esurrendered, the cost is the fair value of the PP&E acquired. If neitherfair value is determinable, the cost of the PP&E acquired is the costrecorded for the PP&E surrendered net of any accumulateddepreciation or amortization. In the event that cash consideration isincluded in the exchange, the cost of PP&E acquired is increased (ordecreased) by the amount of the cash surrendered (or received).

65

SFFAS No. 6, Accounting for Property, Plant, and Equipment, has dividedproperty, plant, and equipment (PP&E) into two basic categories: general PP&Eand stewardship PP&E (which consists of federal mission PP&E, heritage assets,and stewardship land). General PP&E is capitalized and recognized on thebalance sheet; stewardship PP&E is expensed and thus has no book value.(Stewardship PP&E is presented in a stewardship statement.)


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298. Any difference between the cost of the PP&E acquired and thebook value of the PP&E surrendered is recognized as a gain or loss.

31

It is a gain or loss rather than a revenue orexpense, because ordinarily the amount would bean unusual or nonrecurring inflow of resources.

299. If the fair value of the PP&E acquired isless than the fair value of the PP&Esurrendered, the PP&E acquired is recognized atits cost and subsequently reduced to its fairvalue. The difference between the cost of thePP&E acquired and its fair value is recognizedas a loss.

66

300. Sales of foreclosed property: associated with pre-1992 directloans and loan guarantees.--Foreclosed property associated with pre-1992 direct loans and loan guarantees is recognized as an asset at netrealizable value. The sale is an exchange transaction, and anydifference between the sales proceeds and book value is recognized asa gain or loss.

32

301. Sales of receivables: except direct loans.--The transaction is anexchange transaction, because each party receives and sacrificessomething of value. Upon sale, any difference between the salesproceeds and book value is recognized as a gain or loss. If the salesprice equals book value, there is no gain or loss, because the exchangeof one asset for another of equal value is not a net inflow of resources.

302. Sales of direct loans.--The sale of a direct loan is a modificationaccording to the Federal Credit Reform Act of 1990, regardless ofwhether the loan being sold was obligated after FY 1991 or before FY1992. The book value loss (or gain) on a sale of direct loans equals thebook value of the loans sold (prior to sale) minus the net proceeds ofthe sale. It normally differs from the cost of modification, which isrecognized as an expense.

33 Any difference between the

book value loss (or gain) and the cost ofmodification is recognized as a gain or loss.

67

66

Ibid., footnote 38. 67

See SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 17 and66-69.



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303. Retirement of debt securities prior to maturity.--Debt securitiesmay be retired prior to maturity if they have a call feature or if they areeligible for redemption by the holder on demand. Many Treasurybonds issued before 1985 are callable; savings bonds, the Governmentaccount series, the foreign series, and the state and local series ofTreasury securities are redeemable on demand, although sometimeswith a penalty or other adjustment or only after a specified period oftime.

304. Each party receives and sacrifices something of value in buyingand selling debt securities that may be retired prior to maturity. Thesales price reflects such features. Therefore, the transaction is anexchange transaction. The difference, if any, between the reacquisitionprice and the net carrying value of the extinguished debt is recognizedas a loss or gain.

34

Other financing sources from the public

305. Seigniorage.--Seigniorage is the facevalue of newly minted coins less the cost ofproduction (which includes the cost of themetal, manufacturing, and transportation). Itresults from the sovereign power of theGovernment to directly create money and,although not an inflow of resources from thepublic, does increase the Government's netposition in the same manner as an inflow ofresources. Because it is not demanded, earned,or donated, it is an other financing sourcerather than revenue. It should be recognized asan other financing source when coins aredelivered to the Federal Reserve Banks inreturn for deposits.


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INTRAGOVERNMENTAL TRANSACTIONS

Nonexchange transactions--intragovernmental: revenue

306. Interest on Treasury securities held bytrust funds and special funds (except trustrevolving funds).--Many trust funds and specialfunds hold Treasury securities on which theyreceive interest. In most cases the investedbalances of these funds derive predominantlyfrom the funds' earmarked taxes, which arenonexchange transactions with the public (e.g.,employment taxes and gasoline taxes), and to alesser extent from other financing sourcesreceived from other government entities (e.g.,the General Fund payment appropriated to theSupplementary Medical Insurance fund). Thebalances are not earned in exchangetransactions by the entity's operations. Mostfundamentally, they are not produced byoperations in which the entity incurs a cost.

307. Therefore, in such cases, the interest onTreasury securities should not be deducted fromthe gross costs of the trust fund (or specialfund), or the organization in which it isadministered, in determining its net cost ofoperations. As a result, that interest shouldnot be classified as exchange revenue. Itshould instead have the same classification asthe predominant source of the investedbalances, which for most trust funds (andspecial funds) is nonexchange revenue. Theinterest received from invested balances oftrust funds and special funds (except trustrevolving funds) is therefore normally anonexchange revenue.

308. The source of balances for some trustfunds and special funds may not bepredominantly nonexchange revenue. For example,the main source of balances for two major trustfunds, the Civil Service Retirement and



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Disability fund and the Military Retirementfund, consists of exchange revenue and otherfinancing sources. In such exceptional cases,as explained in the Basis for Conclusions, theinterest should be classified in the same wayas the predominant source of balances--in thesecases, as exchange revenue--rather thanaccording to the normal rule.

309. Interest received by one fund fromanother.--One fund within the Government mayborrow from another. For example, in 1983 theOld-Age and Survivors Insurance trust fundborrowed from the Disability Insurance andHospital Insurance trust funds. When thatoccurs, the lending fund sacrifices interestfrom Treasury securities on its investedbalances and instead receives interest from theborrowing fund on the amount of the loan. Sincethe predominant source of balances to thelending fund is the same regardless of whetherit invests in Treasury securities or lends toanother fund, the interest received from theother fund should be classified in the sameway--as nonexchange or exchange revenue--as theinterest received on Treasury securities.


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310. Employer entity contributions to socialinsurance programs.

35--Federal employees may be covered by

social insurance programs such as Social Security68 and Medicare

under the same terms and conditions as the restof the covered population. Intragovernmentalcontributions to social insurance programs suchas Social Security and Medicare are nonexchangetransactions, just as payments made by privateemployers to these programs are nonexchangetransactions. Contributions by privateemployers are in the nature of taxes; i.e.,compulsory payments demanded by the Governmentthrough the exercise of its power to compelpayment. Insofar as the social insuranceprogram applies to Federal employees, the termsand conditions are generally the same as theprogram for private employees. The employer andemployee contributions are generally calculatedin the same way; the employer entitycontribution is not earned by the socialinsurance program; and the benefits aregenerally calculated in the same way. Theemployee does not obtain particular benefitsunder the plan from rendering service inFederal employment, because he or she wouldhave been similarly covered by the program ifprivately employed and would have receivedsimilar benefits. For these reasons, theemployer entity contribution should have thesame classification as private employercontributions, which is nonexchange revenue.

Nonexchange transactions--intragovernmental: gains and losses

68

Most Federal civilian employees hired before 1984 are not covered by SocialSecurity.



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311. Retirement of debt securities prior tomaturity: trust funds and special funds (excepttrust revolving funds).--Treasury securitiesheld by trust funds and special funds areprimarily issued in the Government accountseries, which can generally be redeemed ondemand. Other Treasury securities held by thesefunds may also be callable or redeemable ondemand. If these debt securities are retiredbefore maturity, the difference, if any,between the reacquisition price and the netcarrying value of the extinguished debt shouldbe recognized as a gain or loss by the fundthat owned the securities. The gain or lossshould be accounted for as a nonexchange gainor loss if the interest on the associated debtsecurities is classified as nonexchangerevenue, and it should be accounted for as anexchange gain or loss if the interest on theassociated debt securities is classified asexchange revenue. For trust funds (except trustrevolving funds) and special funds, asexplained elsewhere, the interest is normallybut not always a nonexchange revenue.

312. The difference, if any, between thereacquisition price and the net carrying valueof the extinguished debt should be recognizedas a loss or gain in accounting for interest onTreasury debt. The amount should be equal inabsolute value but with the opposite sign tothe gain or loss recognized by the trust fundor special fund. The amount should berecognized as a gain or loss from exchange inorder to offset it against the gross intereston Treasury debt in the Government-wideconsolidated financial statements.


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313. Cancellation of debt.--The debt that anentity owes Treasury (or other agency) may becanceled by Act of Congress. The amount of debtthat is canceled (including the amount ofcapitalized interest that is canceled, if any)is a gain to the entity whose debt is canceledand a loss to Treasury (or other agency). Thepurpose of borrowing authority is generally toprovide an entity with capital rather than tofinance its operations. Therefore, thecancellation of debt is not earned by theentity’s operations and is not directly relatedto the entity’s costs of providing goods andservices. As a result, the cancellation is anonexchange gain to the entity that owed thedebt and a nonexchange loss to the lender.

Exchange transactions--intragovernmental:revenue

314. Intragovernmental sales of goods andservices by a revolving fund.--The cost ofproviding goods or services by a revolving fundis defrayed in whole or in part by selling thegoods or services provided. Intragovernmentalsales may be made by an organization thatmaintains either an intragovernmental revolvingfund (such as the Defense Business OperationsFund) or a public enterprise revolving fund(such as the Postal Service). Each partyreceives and sacrifices something of value. Theproceeds are an exchange revenue.

315. Intragovernmental sales of goods andservices by a fund other than a revolvingfund.--The cost of providing goods or servicesis defrayed in whole or in part by selling thegoods or services provided. Each party receivesand sacrifices something of value. The proceedsare an exchange revenue.



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316. Employer entity contributions to pensionand other retirement benefit plans for Federalemployees.--Employees of the Federal Governmentprovide service to their employer in exchangefor compensation, of which some is receivedcurrently (the salary); and some is deferred(pensions, retirement health benefits, andother retirement benefits). This is an exchangetransaction, because each party sacrificesvalue and receives value in return. As part ofthis transaction, the Government promises apension and other retirement benefits(especially health benefits) to the employeesafter they retire. The financing of thesebenefits may include contributions paid by theemployer entity to the retirement fund.

317. In broad terms, the employer entitycontribution is an inflow of resources to theretirement fund as part of this exchangetransaction. More narrowly, it is a payment bythe employer entity in exchange for the futureprovision of a pension or other retirementbenefit to its employees. Therefore, it is anexchange revenue of the entity that administersthe retirement plan and thus is an offset tothat entity's gross cost in calculating its netcost of operations.

36

318. Employer entity contributions to health benefit plans for currentcoverage of Federal employees.--Employees of the FederalGovernment provide services to their employer in exchange forcompensation, of which some is received currently in the form ofmoney (the salary); some is received currently in the form of paymentsto a third party (the employer entity contribution to the medicalinsurance plan for current coverage of the employees); and some isdeferred (pensions and other retirement benefits). This is an exchangetransaction, because each party sacrifices value and receives value inreturn. As part of this exchange transaction, the Government and itsemployees both contribute to a medical insurance plan that providescurrent coverage of its employees.

319. In broad terms, the employer entity contribution is an inflow of


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resources to the health benefits plan as part of this exchangetransaction. More narrowly, it is a payment in exchange for currentcoverage of the employer entity's employees by a health benefits plan.Therefore, it is an exchange revenue of the entity that operates thehealth benefits plan and thus is an offset to that entity's gross cost indetermining its net cost of operations.



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320. Employer entity payments for unemployment benefits andworkers compensation.--The employer entity recognizes a liability andan expense for Federal employees who are laid-off or injured on thejob and are entitled under law to unemployment benefits or workerscompensation, respectively.

37 The payment to the former

or current employee is made by the unemploymenttrust fund (Department of Labor) in the case ofunemployment benefits and by the specialbenefits fund (Department of Labor) in the caseof workers compensation. Unemployment benefitsare reimbursed by the former employer entity;and workers compensation costs are mostlycharged back to the employer entity.

321. Since the costs are recognized by theemployer entity and its payment to theunemployment trust fund or the special benefitsfund reimburses these funds for the costs theyincur, the amounts these funds receive from theemployer entity are exchange revenues.

322. Interest on Treasury securities held by revolving funds.--Arevolving fund conducts a cycle of business-type operations in whichthe expenses are incurred to produce goods and services that generaterevenue, and the revenue, in turn, finances expenses. Revolving fundsneed capital in their operations and may invest some of that capital inTreasury securities. Since their holding of invested balances and thesale of goods and services are both integral to the funds� operations,the interest on the funds� securities is related to the funds� cost ofoperations just as is the revenue earned from selling goods andservices. Furthermore, the source of the invested balances ispredominantly revenue earned from their sales of goods and services,for which the funds incurred costs of operations when that revenue wasearned. The interest they receive should therefore be classified in thesame way as their revenue earned from selling goods and services andshould likewise be deducted from gross cost in determining the netcost of operations. For this reason, interest earned by revolving fundsshould normally be classified as exchange revenue.


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323. The source of balances for some revolving funds may not bepredominantly exchange revenue. For such exceptions, as explained inthe Basis for Conclusions, the interest should be classified in the sameway as the predominant source of balances rather than according to thenormal rule.

324. Interest on Treasury securities held by trust revolving funds.--Atrust revolving fund is a revolving fund that is also classified by law asa trust fund. Like other revolving funds, it earns exchange revenue,which is an offset to its gross cost. For example, the revenue that theEmployees Health Benefit fund earns from contributions by Federalemployees, annuitants, employer entities, and the Office of PersonnelManagement (OPM) is an offset to the insurance premiums that it paysto private firms. Trust revolving funds need capital in their operations,just like other revolving funds, the source of which is predominantlythe revenue they have earned. When some of their capital is invested inTreasury securities, the interest is related to their cost of operations inthe same way as the revenue earned from selling services.Furthermore, the source of the invested balances is predominantlyrevenue earned from the sales of services, for which they incurredcosts of operations when the revenue was earned. The interest theyreceive should therefore be classified in the same way as the interestreceived by other revolving funds, which is exchange revenue.

325. The source of balances for some trust revolving funds may not bepredominantly exchange revenue. For such exceptions, as explained inthe Basis for Conclusions, the interest should be classified in the sameway as the predominant source of balances rather than according to thenormal rule.



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326. Interest on uninvested funds received by direct loan andguaranteed loan financing accounts.--A guaranteed loan financingaccount holds uninvested balances as reserves against its loanguarantee liabilities and earns interest on these balances that adds to itsresources to pay these liabilities. A direct loan financing account mayhold uninvested balances to bridge transactions that are integral to itsoperations, such as when it borrows from Treasury to disburse directloans prior to the time of disbursement; it earns interest on thesebalances to reflect the time value of money and thereby finance theinterest it pays on its debt to Treasury. Thus, in both cases, the interestreceived by the financing account is earned through exchangetransactions with Treasury and is an offset to the financing account�srelated costs of operations. The interest is therefore an exchangerevenue of the financing account.

327. Interest received by Treasury.--Accounts or funds (includingdirect loan and guaranteed loan financing accounts) may be authorizedto borrow from the Treasury or from the Federal Financing Bank (anentity within Treasury) or other sources. The interest that the entitypays on its borrowings is a cost to the entity and an inflow of resourcesto the Treasury. The Treasury may be deemed to have borrowed fromthe public to finance the outlays for which the entity borrowed, andthus to have incurred a corresponding interest cost of its own. Theinterest received by Treasury from the entity is therefore related toTreasury�s cost of borrowing from the public and should be classifiedas an exchange revenue.

Exchange transactions--intragovernmental:gains and losses

328. Note: As explained in the introduction tothis appendix, transactions that are classifiedas producing gains or losses should instead beclassified as producing revenue or expense ifthey are usual and recurring for a particularreporting entity.


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329. Retirement of debt securities prior tomaturity: revolving funds and trust revolvingfunds.--Treasury securities held by revolvingfunds and trust revolving funds are primarilyissued in the Government account series, whichcan generally be redeemed on demand. OtherTreasury securities held by these funds mayalso be callable or redeemable on demand. Ifthese debt securities are retired beforematurity, the difference, if any, between thereacquisition price and the net carrying valueof the extinguished debt should be recognizedas a gain or loss by the fund that owned thesecurities. The gain or loss should beaccounted for as a nonexchange gain or loss ifthe interest on the associated debt securitiesis classified as nonexchange revenue, and itshould be accounted for as an exchange gain orloss if the interest on the associated debtsecurities is classified as exchange revenue.For revolving funds and trust revolving funds,as explained elsewhere, the interest isnormally but not always an exchange revenue.

330. The difference, if any, between thereacquisition price and the net carrying valueof the extinguished debt should be recognizedas a loss or gain in accounting for interest onTreasury debt. The amount should be equal inabsolute value but with the opposite sign tothe gain or loss recognized by the revolvingfund or trust revolving fund. The amount shouldbe recognized as a gain or loss from exchangein order to offset it against the grossinterest on Treasury debt in the Government-wide consolidated financial statements.



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Other financing sources--intragovernmental

331. Appropriations.--Appropriations--a form ofbudget authority--permit an entity to incurobligations and make payments and thus are ameans of financing the entity's cost. They arenot otherwise related to the entity's cost andtherefore are not an offset to its gross costin determining its net cost of operations. Theyare not earned by the entity's activities,demanded by the entity, or donated to theentity. Therefore, appropriations provide another financing source instead of a revenue.

332. More precisely, "appropriations used" is recognized as an other financing source indetermining the entity’s operating results whenthe entity receives goods and services orprovides benefits, grants, or other transferpayments. To avoid double counting,appropriations used are not recognized for theappropriation of earmarked revenues or otherfinancing sources, which are already counted indetermining the entity’s operating results.Appropriations that have been made availablefor apportionment but have not been used arerecognized as “unexpended appropriations” inthe entity’s capital.


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333. Cost subsidies: difference betweeninternal sales price (reimbursement) and fullcost.--One entity may receive goods or servicesfrom another entity without paying the fullcost of the goods or services or without payingany cost at all. Other Federal accountingstandards may require the receiving entity torecognize the full cost as an expense (or, ifappropriate, as an asset). In these cases thedifference between full cost and the internalsales price or reimbursement (sometimes calleda "transfer price") is an imputed cost to thereceiving entity.

38

334. The financing of the imputed cost is also imputed to the receivingentity. Imputed financing is necessary so that the imputed cost does notreduce the entity's operating results and net position. The imputedfinancing equals the imputed cost and is recognized as an otherfinancing source. It is not a revenue, because the receiving entity doesnot earn the amount imputed or demand its payment.

335. Cost subsidies: difference between the service cost of pensions(and other retirement benefits), less the employee contributions, if any,and the employer entity contributions.--The service cost of pensions(and other retirement benefits) to the employer entity, less theemployee contributions, if any, is recognized as a cost to the employerentity. The difference between the employer entity's cost and itscontributions, if any, is imputed to the employer entity as part of itsrecognized cost. For pensions, the cost recognized by the employerentity is more than its contribution for employees who are covered bythe Civil Service Retirement System and several minor systems (in afew of which the employer entity does not make any contributionstoward the service cost). For retirement health care benefits, neither theemployees nor the employer entity make any contributions while theemployee is working.

39 Therefore, the entire service

cost is recognized as a cost to the employerentity and imputed to it.



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336. The financing of the imputed cost is alsoimputed to the employer entity.

69 The imputed

financing is necessary so that the imputed costdoes not reduce the employer entity's operatingresults and net position. The imputed financingequals the imputed cost and is recognized as another financing source. It is not a revenue,because the employer entity does not earn theamount imputed or demand its payment.

70

337. (This transaction differs from theimmediately preceding transaction, in which anentity does not pay the full cost of the goodsor services it receives from another entity. Inthe present case, the employer entity acquiresthe services of the employees itself, butanother entity pays part of their cost.)

338. Contribution by the General Fund to the SMI trust fund.--TheGeneral Fund makes a contribution to the SMI (SupplementaryMedical Insurance) trust fund. This appropriated payment is separatefrom the transfer of earmarked premiums and is not a transfer ofearmarked taxes or other income. It does not arise from an exchangetransaction, because SMI does not sacrifice any value to the GeneralFund in exchange for the payment, and the General Fund does notreceive anything of value from SMI. Instead, the payment constitutes aGeneral Fund subsidy of the SMI trust fund. Since the payment is notdemanded or earned, it is an other financing source to SMI rather thana revenue.

69

The employer entity's own contribution, if any, is generally financed by anappropriation but could be financed by earned revenue or other sources. 70

For further discussion of the accounting standards for pensions and otherretirement benefits for federal employees, see SFFAS No. 5, Accounting forLiabilities of the Federal Government, pp. 20-36 and 56-63. The standards donot cover accounting for the plan per se as distinct from the administeringentity. Nor do they cover defined contribution plans, or administrativeentities that are not Federal reporting entities.


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339. Examples of other payments of a similar nature (and alsoclassified as other financing sources) are the payment by the GeneralFund to the social security trust funds for military service credits andfor certain uninsured persons at least 72 years old; and the payment bythe General Fund to the Railroad Retirement Board for the vested dualbenefit payments received by certain retirees under both the railroadretirement and the social security systems. The quinquennial militaryservice credit adjustment paid between the General Fund and the socialsecurity trust funds is likewise an other financing source to the socialsecurity trust funds but one that may be either positive or negative.

340. Transfer by CCC to Federal Crop Insurance Corporation.--TheCommodity Credit Corporation (CCC) makes transfers to the FederalCrop Insurance Corporation (FCIC), which it finances by anappropriation. This payment does not arise from an exchangetransaction, because FCIC does not sacrifice anything of value to CCC,and CCC does not receive anything of value from FCIC. It differs fromthe contribution to SMI primarily in that it is paid by another programentity (the CCC) rather than directly by the General Fund. Since thepayment is not demanded or earned, it is an other financing source toFCIC rather than a revenue.

341. Interchange between the Railroad Retirement Board and theSocial Security and Hospital Insurance trust funds.--The RailroadRetirement Board pays benefits equivalent to the amounts that wouldhave been paid if railroad workers had been covered under SocialSecurity since its inception, plus additional amounts unique to thatprogram. The railroad retirement program is partly financed by anannual financial interchange that takes place between the RailroadSocial Security Equivalent Benefit Account (a trust fund) and the trustfunds for old-age and survivors insurance, disability insurance, andhospital insurance (OASDHI). The interchange is designed to placeeach of the OASDHI trust funds in the same position as it would havebeen if railroad employment had been covered under Social Securitysince its inception.

342. The amount of the payment reflects the difference between (a) thebenefits that the OASDHI trust funds would have paid to railroadworkers and their families if railroad employment had been covered by



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OASDHI and (b) the payroll taxes that the OASDHI trust funds wouldhave received if railroad employment had been covered by OASDHI.If benefits would have exceeded taxes, the OASDHI trust funds makea payment to the Railroad Social Security Equivalent Benefit Account;if benefits would have been less, the OASDHI trust funds receive apayment. Currently OASI and DI make payments to that Account, andHI receives payment. The interchange differs from the examples in theprevious cases primarily in that (a) the payment is between two trustfunds and (b) the payment may be made in either direction.

343. The financial interchange does not arise from an exchangetransaction, because it is a reallocation of resources among funds, allof which are financed primarily from nonexchange revenue.Furthermore, the nature of this reallocation is such that the transferringentity does not receive anything of value and the recipient entity doesnot sacrifice anything of value. Therefore, the recipient entityrecognizes the transfer-in as an other financing source, and thetransferring entity recognizes the transfer-out as a negative financingsource.

344. Transfer of cash and other capitalized assets withoutreimbursement.--Cash and other capitalized assets may be transferredwithout reimbursement from one Government entity to another. Cashmay include exchange revenue that is recognized by the transferringentity in determining its net cost of operations but is required to betransferred to the General Fund or another entity; other capitalizedassets may include general property, plant, and equipment. Thereceiving entity does not sacrifice anything of value, and thetransferring entity does not acquire anything of value. Therefore, thetransfer is not an exchange transaction. The receiving entity recognizesthe transfer-in as an other financing source; the transferring entityrecognizes the transfer-out as a negative financing source. The amountrecorded by both entities is the transferring entity's book value of theasset.

345. Transfer of property, plant, and equipment withoutreimbursement: types that are expensed.--Property, plant, andequipment (PP&E) of types that are expensed (i.e., stewardship PP&E)may be transferred from one Government entity to another. If the asset


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was classified as stewardship PP&E in its entirety by both thetransferring entity and the recipient entity, the transfer does not affectthe net cost of operations or net position of either entity and thereforein such a case it is not a revenue, a gain or loss, or other financingsource.

346. However, if the asset that is transferred was classified as generalPP&E for the transferring entity but stewardship PP&E for therecipient entity, it is recognized as a transfer-out (a negative otherfinancing source) of capitalized assets by the transferring entity.



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REVALUATIONS

347. Revaluation of capitalized property, plant, and equipment.--Capitalized property, plant, and equipment (PP&E) may be removedfrom the general PP&E accounts if it no longer provides service in theoperations of the entity because it has suffered damage, becomeobsolete in advance of expectations, or is identified as excess. It isrecorded as an asset at its expected net realizable value. Any differencebetween the book value and the expected net realizable value isrecognized as a gain or loss in determining the net cost of operations,because the revaluation results from the entity�s operations. Theexpected net realizable value is adjusted at the end of each period, andany further revaluation is also recognized as a gain or loss indetermining the net cost of operations.

40

348. Since the revaluation does not affectobligations incurred but does affect net cost,an amount equal to the revaluation isrecognized in determining the reconciliationbetween obligations incurred and net cost ofoperations. A reconciliation is not needed indetermining the change in net position, becausethe revaluation affects net cost and netposition equally.

349. Revaluation of inventory and related property.--Inventory andrelated property may be revalued for such reasons as determination thatthe property is excess, obsolete, or unserviceable; that stockpilematerials have decayed or been damaged; that a loss is estimated oncommodity purchase agreements; or that a change has occurred in thenet realizable value of commodities valued at the lower of cost or netrealizable value. The amount of revaluation is recognized as a loss or again in determining the net cost of operations, because it results fromthe entity�s operations. Assets are correspondingly reduced orincreased.

41


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350. Since the revaluation does not affectobligations incurred, but does affect net cost,an amount equal to the revaluation isrecognized in determining the reconciliationbetween obligations incurred and net cost ofoperations. A reconciliation is not needed indetermining the change in net position, becausethe revaluation affects net cost and netposition equally.

TRANSACTIONS NOT RECOGNIZED ASREVENUES, GAINS, OR OTHER FINANCINGSOURCES

351. Borrowing from the public.--Borrowing from the public is ameans of financing the Government's outlays. However, it is not a netinflow of resources to the Treasury or other borrowing entity, becausethe asset received (cash) is offset by an equal liability (debt).Therefore, it is not revenue or an other financing source.

352. Borrowing from Treasury, the Federal Financing Bank, or otherGovernment accounts.-- An entity may be provided the authority toborrow from Treasury, the Federal Financing Bank, or otherGovernment accounts. Intragovernmental borrowing is a means offinancing the entity's outlays. However, it is not a net inflow ofresources to the entity, because the asset received (cash) is offset by anequal liability (debt). Therefore, it is not revenue or an other financingsource.



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353. Disposition of revenue to other entities: custodial transfers.--Revenue, primarily nonexchange revenue, may be collected by anentity acting on behalf of the General Fund or another entity within theGovernment on whose behalf it was collected. The collecting entityaccounts for the disposition of revenue as part of its custodial activity.These custodial transfers, by definition, do not affect the collectingentity�s net cost of operations or operating results, nor are they part ofthe reconciliation between its obligations and net cost of operations.(The receiving entity recognizes the revenue as nonexchange orexchange revenue, depending on its nature, according to the applicablerevenue standards.)

354. Sales of different types of Government assets.--The sale ofGovernment assets (other than forfeited property) is an exchangetransaction, because each party receives and sacrifices something ofvalue. As a general rule, any difference between the sales proceeds andbook value is recognized as a gain or loss when the asset is sold. Theremainder of the transaction does not provide a net inflow of resources,so no gain, revenue, or other financing source is recognized. If thesales proceeds equal book value, there is no gain or loss, because theexchange of one asset for another of equal recorded value is not a netinflow of resources.

355. This general rule applies to property, plant, and equipment,receivables (other than direct loans), foreclosed property associatedwith pre-1992 direct loans and loan guarantees, and miscellaneousassets. It does not apply to inventory, nor does it apply to forfeitedproperty (as explained in the previous section on nonexchangerevenue). It also does not apply to the sale of direct loans and the saleof foreclosed property associated with post-1991 direct loans and loanguarantees. The latter transactions are discussed in subsequentparagraphs.

356. Acquisition of property, plant, and equipment through exchange.--The cost of property, plant, and equipment (PP&E) acquired throughan exchange of assets with the public is the fair value of the PP&Esurrendered at the time of exchange. If the fair value of the PP&Eacquired is more readily determinable than that of the PP&Esurrendered, the cost is the fair value of the PP&E acquired. If neither


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fair value is determinable, the cost of the PP&E acquired is the costrecorded for the PP&E surrendered net of any accumulateddepreciation or amortization. In the event that cash consideration isincluded in the exchange, the cost of PP&E acquired is increased (ordecreased) by the amount of the cash surrendered (or received).

42

357. Any difference between the cost of thePP&E acquired and the book value of the PP&Esurrendered is recognized as a gain or loss. Ifthe cost of the PP&E acquired equals the bookvalue of the PP&E surrendered, there is no gainor loss (nor a revenue or other financingsource), because the exchange of one asset foranother of equal value does not provide a netinflow of resources. Therefore, the amount ofthe transaction equal to the book value of thePP&E surrendered is not recognized as a gain, arevenue, or an other financing source.

358. Transfer of property, plant, and equipment withoutreimbursement: types that are expensed.--Property, plant, andequipment (PP&E) of types that are expensed (i.e., stewardship PP&E)may be transferred from one Government entity to another. If the assetwas classified as stewardship PP&E in its entirety by both thetransferring entity and the recipient entity, the transfer does not affectthe net cost of operations or net position of either entity and thereforein such a case it is not a revenue, a gain or loss, or other financingsource.

359. However, if the asset that is transferred was classified as generalPP&E for the transferring entity but stewardship PP&E for therecipient entity, it is recognized as a transfer-out (a negative otherfinancing source) of capitalized assets by the transferring entity.

360. If multi-use heritage assets are transferred and some cost wasrecognized for them on the books of the transferring entity, that cost isrecognized as a transfer-out (a negative other financing source) ofcapitalized assets. No amount is recognized by the entity that receivesthe asset.

43

361. Donation of property, plant, and equipment: types that are



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expensed.--The acquisition cost of stewardship property, plant, andequipment (PP&E) is recognized as a cost when incurred. Such PP&Econsists of Federal mission PP&E, heritage assets, and stewardshipland. When such PP&E is donated to the Government, however, noamount is recognized as a cost.

44 Since the donation of

such PP&E does not affect the net cost or netposition of the recipient entity, it is not arevenue, a gain, or an other financing source.


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362. Negative subsidies on post-1991 direct loans and loanguarantees.--A negative subsidy means that the direct loans or loanguarantees are estimated to make a profit, apart from administrativecosts (which are excluded from the subsidy calculation by law). Theamount of the subsidy cost is recognized as an expense when the directloan or guaranteed loan is disbursed. A negative subsidy is recognizedas a direct reduction in expense, not as a revenue, gain, or otherfinancing source.

45

363. Downward subsidy reestimates for post-1991 direct loans andloan guarantees.--A downward subsidy reestimate means that thesubsidy cost of direct loans or loan guarantees is estimated to be lessthan had previously been estimated. The initial subsidy cost isrecognized as an expense; a positive subsidy reestimate is recognizedas an expense; and a downward subsidy reestimate is recognized as adirect reduction in expense, not as a revenue, gain, or other financingsource.

364. Fees on post-1991 direct loans and loan guarantees.--The presentvalue of estimated fees is included as an offset in calculating thesubsidy cost of direct loans and loan guarantees, which is recognizedas an expense when the loans are disbursed. The present value ofestimated fees is likewise included as one component in calculating thevalue of loans receivable or loan guarantee liabilities. When cash isreceived in payment of fees, the loans receivable decrease by an equalamount (or the loan guarantee liabilities increase by an equal amount).The increase in one asset is offset by an equal decrease in another asset(or by an equal increase in liabilities). Therefore, fees are notrecognized as a revenue, a gain, or an other financing source.

46



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365. Repayment of post-1991 direct loans.--The present value ofestimated loan repayments is included in the calculation of the subsidycost of direct loans, and this subsidy cost is recognized as an expensewhen the loans are disbursed. The present value of estimated loanrepayments is likewise included in the value of the loans receivable.When cash is received for the repayment of loans, the loans receivabledecrease by an equal amount. The increase in one asset is offset by anequal decrease in another asset. Therefore, cash inflow from therepayment is not recognized as a revenue, a gain, or an other financingsource.

47

366. Repayment of pre-1992 direct loans.--When pre-1992 directloans are repaid in whole or in part, the entity exchanges one asset(loans receivable) for another (cash) with equal value. There is no netinflow of resources. Therefore, the amount of cash inflow equal tobook value is not recognized as a revenue, a gain, or an other financingsource.

48

367. Repayment of receivables: except direct loans.--Whenreceivables other than direct loans are paid or repaid in whole or inpart, the entity exchanges one asset (loans receivable) for another(cash) with equal value. There is no net inflow of resources. Therefore,the amount of cash inflow equal to book value is not recognized as arevenue, a gain, or an other financing source.

49


156 APPENDIX B-------------------------------------------------------------------

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368. Sales of direct loans.--The sale of a direct loan is amodification according to the Federal Credit Reform Act of 1990regardless of whether the loan being sold was obligated after FY 1991or before FY 1992. The book value loss (or gain) on a sale of directloans equals the book value of the loans sold (prior to sale) minus thenet proceeds of the sale. It normally differs from the cost ofmodification, which is recognized as an expense.

50 Any

difference between the book value loss (orgain) and the cost of modification isrecognized as a gain or loss.

71 The amount of

cash inflow equal to book value is not a netinflow of resources to the entity, because itis an exchange of one asset for another ofequal recorded value. Therefore, the amount ofcash inflow equal to book value is notrecognized as a revenue, a gain, or an otherfinancing source.

369. Sales of foreclosed property: associated with post-1991 directloans and loan guarantees.--The net present value of the cash flowfrom the estimated sales of foreclosed property is included incalculating the subsidy cost of post-1991 direct loans and loanguarantees. This subsidy cost is recognized as an expense when theloans are disbursed. When property is foreclosed, the property isrecognized as an asset at the net present value of its estimated net cashflows. When the foreclosed property is sold, any difference betweenthe sales proceeds and the book value (i.e., the net present value as ofthe time of sale) requires a reestimate of the subsidy expense, which isrecognized as a subsidy expense or a reduction in subsidy expense.The amount of cash flow equal to book value is an exchange of oneasset for another of equal recorded value and therefore is notrecognized as a gain, a revenue, or an other financing source.

51

71

SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 17 and 66-69.



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370. Deposit fund transactions.--Deposit funds areaccounts outside the budget that record amounts that the Government(a) holds temporarily until ownership is determined or (b) holds as anagent for others. The standards and guidance in this Statement do notapply to deposit funds except insofar as a particular deposit fund maybe classified as part of a Federal reporting entity or a disclosure may berequired due to a fiduciary relationship on the part of a Federalreporting entity toward a deposit fund.


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158

APPENDIX C: GLOSSARY


GLOSSARY 159-------------------------------------------------------------------

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This glossary provides definitions for many terms used in this Statement. The definitions may bemodified or superseded when relevant terms are considered or defined by the Board in futureprojects.

Abatement

A reduction or cancellation of an assessed tax. (Cooper W, Ijiri Y, Kohler'sDictionary for Accountants, 6th ed., Englewood Cliffs, NJ: Prentice-Hall, 1983)

Apportionment

A distribution made by OMB of amounts available for obligation in anappropriation or fund account into amounts available for specified timeperiods, programs, activities, projects, objects, or combinations thereof.The apportioned amount limits the obligations that may be incurred.(OMB Circular A-34)

Assessments

Enforceable claims for nonexchange revenue for which specific amountsdue have been determined and the person from whom the tax or duty isdue has been identified. They include both self- assessments made bypersons filing tax returns and assessments made by the collectingentities as a result of audits, investigations, and litigation. Although theterm is normally used in connection with taxes, as used in thisStatement assessments also include determinations of amounts due forany other kind of nonexchange revenue. Specifically excluded from thedefinition of assessments, as used in this Statement, are complianceassessments. Compliance assessments, as defined by IRS and Customs,do not represent financial receivables.

Basic Financial Statements


160 APPENDIX C-------------------------------------------------------------------

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As used in this Statement, the basic financial statements are those on whichan auditor would normally be engaged to express an opinion. The term"basic" does not necessarily mean that other financial information notcovered by the auditor's opinion is less important to users than thatcontained in the basic statements; it merely connotes the expectednature of the auditor's review of, and association with, the information.

The basic financial statements in financial reports prepared pursuant to theChief Financial Officers Act, as amended, are called the "principalfinancial statements." The Form and Content of these statements aredetermined by OMB.

Budget Authority

The authority provided by Federal law to incur financial obligations thatwill result in immediate or future outlays. Specific forms of budgetauthority include:

� appropriations, which may be provided in appropriations acts orother laws and which permit obligations to be incurred andpayments to be made;

� borrowing authority, which permits obligations to be incurred butrequires funds to be borrowed to liquidate the obligation;

� contract authority, which permits obligations to be incurred butrequires a subsequent appropriation or offsetting collections toliquidate the obligations; and

� spending authority from offsetting collections, which permitsoffsetting collections to be credited to an expenditure accountand permits obligations and payments to be made using theoffsetting collections (the offsetting collections credited to anaccount are deducted from gross budget authority of theaccount.)

Budget authority may be classified by period of availability (one year,multiple-year, or no year), by nature of the authority (current orpermanent), by the manner of determining the amount available(definite or indefinite), or as gross (without reduction of offsetting


GLOSSARY 161-------------------------------------------------------------------

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collections) and net (with reductions of offsetting collections). (OMBCircular A-11; OMB, The Budget System and Concepts, 1996; andGAO, A Glossary of Terms Used in the Federal Budget Process,Exposure Draft, January 1993)

Budgetary Accounting

Budgetary accounting is the system that measures and controls the use ofresources according to the purposes for which budget authority wasenacted; and that records receipts and other collections by source. Ittracks the use of each appropriation for specified purposes in separatebudget accounts through the various stages of budget execution fromappropriation to apportionment and allotment to obligation and eventualoutlay. This system is used by the Congress and the Executive Branch toset priorities, to allocate resources among alternative uses, to financethese resources, and to assess the economic implications of federalfinancial activity at an aggregate level. Budgetary accounting is used tocomply with the Constitutional requirement that �No Money shall bedrawn from the Treasury, but in Consequence of Appropriations Madeby Law; and a regular Statement and Account of the Receipts andExpenditures of all public Money shall be published from time to time.�(See Statement of Federal Financial Accounting Concepts No. 1,Objectives of Federal Financial Reporting, September 1993:15, 35-36,and 61-62.)

Cost

Defined in SFFAC No. 1, Objectives of Federal Financial Reporting as themonetary value of resources used (para. 195). Defined more specificallyin SFFAS No. 4, Managerial Cost Accounting Concepts and Standardsfor the Federal Government, as the monetary value of resources used orsacrificed or liabilities incurred to achieve an objective, such as toacquire or produce a good or to perform an activity or service (page105). Depending on the nature of the transaction, cost may be charged tooperations immediately, i.e., recognized as an expense of the period, orto an asset account for recognition as an expense of subsequent periods.In most contexts within Accounting for Revenue and Other FinancingSources, "cost" is used synonymously with expense. See also "FullCost."


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Dedicated Collections (or Taxes)

See "earmarked taxes."

Directed Flows of Resources

Expenses to nonfederal entities imposed by federal laws or regulationswithout providing federal financing. In the case of state and localgovernments, directed flows are known as "unfunded mandates." Thecosts and financing of federal regulations do not flow through theGovernment, but their effects are similar to direct federal expendituresand revenue.

Drawbacks

Refunds of all or part of duties on imported goods that are subsequentlyexported or destroyed. Typically these arise when imported materials areused to manufacture a product that is later exported. In such cases, mostof the duties originally paid are refundable when the finished product isexported.

Earmarked Taxes

Taxes levied by the Government that are dedicated by law to finance aspecific federal program. (SFFAS No. 5, Accounting for Liabilities ofthe Federal Government, page 71.)

Exchange Revenue

Inflows of resources to a governmental entity that the entity has earned.They arise from exchange transactions, which occur when each party tothe transaction sacrifices value and receives value in return.

Expended Appropriations

The dollar amount of appropriations used to fund goods and servicesreceived or benefits or grants provided.


GLOSSARY 163-------------------------------------------------------------------

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Full Cost

The total amount of resources used to produce the output. Morespecifically, the full cost of an output produced by a responsibilitysegment is the sum of (1) the costs of resources consumed by theresponsibility segment that directly or indirectly contribute to the output,and (2) the costs of identifiable supporting services provided by otherresponsibility segments within the reporting entity and by otherreporting entities. (SFFAS No. 4, Managerial Cost AccountingConcepts and Standards for the Federal Government, p. 36) All directand indirect costs to any part of the Federal Government of providinggoods, resources, or services. (OMB Circular A-25).

General Fund

Accounts for receipts not earmarked by law for a specific purposes, theproceeds of general borrowing, and the expenditure of these moneys.(OMB, The Budget System and Concepts)

General Purpose Financial Reports

Reports intended to meet the common needs of diverse users who typicallydo not have the ability to specify the basis, form, and content of thereports they receive.

Governmental Receipts

Collections from the public that result primarily from the exercise of theGovernment's sovereign or governmental powers. Governmentalreceipts consist mostly of individual and corporation income taxes andsocial insurance taxes but also include excise taxes, compulsory usercharges, customs duties, court fines, certain license fees, gifts anddonations, and deposits of earnings by the Federal Reserve System.They are compared to outlays in calculating a surplus or deficit. (OMB,The Budget System and Concepts)


164 APPENDIX C-------------------------------------------------------------------

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Nonexchange Revenue

Inflows of resources to the Government that the Government demands orthat it receives by donations. The inflows that it demands include taxes,duties, fines, and penalties.

Offsetting Collections

Collections from the public that result from business-type or market-oriented activities and collections from other Government accounts.These collections are deducted from gross disbursements in calculatingoutlays, rather than counted in governmental receipts. Some offsettingcollections are credited directly to appropriation or fund accounts;others, called offsetting receipts, are credited to receipt accounts. Theauthority to spend offsetting collections is a form of budget authority.(OMB, The Budget System and Concepts)

Other Financing Sources

Inflows of resources that increase net position of a reporting entity but thatare not revenues or gains. Borrowing is not included as other financingsources, since it does not increase the net resources of the reportingentities.

Proprietary Accounting

Also known as financial accounting, a process that supports accrualaccounting and financial reporting that attempts to show actual financialposition and results of operations by accounting for assets, liabilities,net position, revenues, and expenses. (See Tierney, Cornelius E.,Handbook of Federal Accounting Practices, Reading Massachusetts:Addison-Wesley, 1982:122).

Revenue Adjustment

A contra revenue account that is used to report reduction in revenue whenrealization is not probable (less likely than not). It includes , returns,allowances, and price redeterminations but not credit losses (due to theinability of the debtor to pay the established or negotiated price).


GLOSSARY 165-------------------------------------------------------------------

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Revolving Fund

A fund consisting of permanent appropriation and expenditures ofcollections, from both the public and other Governmental agencies andaccounts, that are earmarked to finance a continuing cycle of business-type operations. (OMB Circular A-34)

Special Fund

Federal fund accounts for receipts earmarked for specific purposes and theassociated expenditure of those receipts. (OMB, The Budget System andConcepts)

Tax Expenditure

A revenue forgone attributable to a provision of the federal tax laws thatallows a special exclusion, exemption, or deduction from gross incomeor provides a special credit, preferential tax rate, or deferral of taxliability. (see GAO, A Glossary of Terms Used in the Federal BudgetProcess, Exposure Draft, February 1993)

Tax Gap

An estimate of taxes (including duties) that are unpaid because of non-compliance with existing laws and regulations.

Treasury Warrant

An official document that the Secretary of the Treasury issues pursuant tolaw and that establishes the amount of monies authorized to bewithdrawn from the central accounts that Treasury maintains. Warrantsfor currently unavailable special and trust fund receipts are issued whenrequirements for their availability have been met. (GAO, A Glossary ofTerms Used in the Federal Budget Process, Exposure Draft, February1993)


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Trust Funds

Accounts that are designated by law as trust funds, for receipts earmarkedfor specific purposes and the associated expenditure of those receipts(OMB, Budget System and Concepts).

Trust Revolving Funds

Accounts that record permanent appropriation and expenditure ofcollections used to carry out a cycle of business type operations inaccordance with a statute that designates the fund as a trust fund. (OMBCircular A-34)


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167

INDEX OF TRANSACTIONS CLASSIFIED IN APPENDIX B

Acquisition of property, plant, and equipment (116)Acquisition of property, plant, and equipment through exchange(135)

Appropriations (128)Borrowing from the public (134)Borrowing from Treasury, the Federal Financing Bank, or other Government accounts (134)Cancellation of debt (122), (127)Contribution by the general fund to the SMI trust fund (130)Cost subsidies: difference between internal sales price(reimbursement) and full cost (128)

Cost Subsidies: difference between the service cost of pensionsand employer entity contributions (129)

Customs Service fees (101)Deposit fund transactions (140)Deposits by states for unemployment trust fund (99)Deposits of earnings, Federal Reserve System (102)Disposition of revenue to other entities: custodial transfers(134)

Diversion fees, Department of Justice (112)Donation of property, plant, and equipment: types that areexpensed (137)

Donations: except types of property, plant, and equipment that areexpensed (103)

Downward subsidy reestimates for direct loans and loan guarantees (137)Employer entity contributions to health benefit plans for currentcoverage of Federal employees (123)

Employer entity contributions to retirement plans for Federalemployees (123)

Employer entity contributions to social insurance programs (120)Employer entity payments for unemployment benefits and workerscompensation (124)

Federal employee contributions to health benefits plan for currentcoverage (113)

Federal employee contributions to retirement plans (112)Fees on post-1991 direct loans and loan guarantees (138)Fines and penalties (104)Forfeitures (105)Individual income taxes, corporation income taxes, socialinsurance taxes and contributions, excise taxes, estate and gifttaxes,and customs duties (97)

Interchange between the Railroad Retirement Board and the SocialSecurity and Hospital Insurance trust funds (131)

Interest (unless classified elsewhere) (108)Interest on delinquent taxes and other receivables that arise as aresult of custodial operations (111)

Interest on post-1991 direct loans (110)Interest on Treasury securities held by revolving funds (124)Interest on Treasury securities held by trust funds and specialfunds except trust revolving funds (119)

Interest on Treasury securities held by trust revolving funds


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(125)Interest on uninvested funds held by direct loan and guaranteedloan financing accounts (126)

Interest received by one fund from another (120)Interest received by Treasury (126)Intragovernmental sales of goods and services by a fund other thana revolving fund (122)

Intragovernmental sales of goods and services by a revolving fund(122)

168

Negative subsidies on direct loans and loan guarantees undercredit reform (137)

Penalties due to delinquent taxes in connection with custodialactivity (104)

Premiums for SMI (Supplementary Medical Insurance), bank depositinsurance, pension benefit guarantees, crop insurance, lifeinsurance, and other insurance (112)

Proceeds from the auction of the radio spectrum (109)Regulatory user fees such as patent and copyright fees;immigration and consular fees; SEC registration and filing fees;and Nuclear Regulatory Commission fees (111)

Reimbursement for cleanup costs (115)Reimbursement for collecting revenue (114)Rents, royalties, and bonuses on Outer Continental Shelf (OCS)(108)

Repayment of post-1991 direct loans (138)Repayment of pre-1992 direct loans (138)Repayment of receivables: except direct loans (139)Retirement of debt securities prior to maturity (118)Retirement of debt securities prior to maturity: revolving fundsand trust revolving funds (127)

Retirement of debt securities prior to maturity: trust funds andspecial funds except trust revolving funds (121)

Revaluation of capitalized property, plant, and equipment (133)Revaluation of inventory and related property (133)Sales of different types of Government assets (135)Sales of direct loans (117), (139)Sales of foreclosed property associated with post-1991 directloans and loan guarantees (140)

Sales of foreclosed property associated with pre-1992 direct loansand loan guarantees (117)

Sales of goods and services (107)Sales of goods and services in undercover operations (107)Sales of government property: other than property, plant, andequipment (115)

Sales of property, plant, and equipment: types that arecapitalized (115)

Sales of receivables: except direct loans (117)Seigniorage (118)Social insurance taxes and contributions paid by Federal employees(99)

Transfer by CCC to Federal Crop Insurance Corporation (131)Transfer of cash and other capitalized assets without


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reimbursement (132)Transfer of property, plant, and equipment (132), (136)User fees, Harbor Maintenance trust fund (100)


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170

LIST OF ABBREVIATIONS

CFS--Consolidated Financial StatementsFASAB--Federal Accounting Standards Advisory BoardFASB--Financial Accounting Standards BoardGAO--General Accounting OfficeGASB--Governmental Accounting Standards BoardGPRA--Government Performance and Results ActIRS--Internal Revenue ServiceMMS--Minerals Management ServiceOCS--Outer Continental ShelfOMB--Office of Management and BudgetPP&E--Property, Plant, and EquipmentRSI--Required Supplementary InformationSEC--Securities and Exchange CommissionSFFAC--Statement of Federal Financial Accounting ConceptsSFFAS--Statement of Federal Financial Accounting StandardsSGL--Standard General Ledger


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FASAB TASKFORCE ON REVENUE AND OTHER FINANCING SOURCES

Donald H. Chapin, Taskforce Chair--FASAB Member/GAO*

Peter BenEzra--AgricultureChristine Bonham--GAODebra Carey--Interior

Christine Chang--TreasuryRobert Dacey--GAO

*

Lowell Dworin--TreasuryRobert Hamilton--Customs Service

Gregory Holloway--GAOLinda Hoogeveen--OMB

Martin Ives--FASAB Member/New York UniversityRobert Kilpatrick--OMB

*

Allan Lund--TreasuryThomas Luter--Treasury

*

JoEllen McCormack--GAO*

Dennis Mitchell--TreasuryRichard Nieman--Energy Department

Marvin Phaup--CBOJoel Platt--Treasury

Darlene Schongalla--InteriorCharles Sims--InteriorDeborah Taylor--GAO

Dana Thiebeau--TreasuryWilliam Truitt--JusticeEllen Waterhouse--IRS

*working group member

Individual members of the task force do not necessarily agree with allaspects of the Board's recommendations.


THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

Elmer B. Staats, Chairman James L. Blum Gerald Murphy Donald H. Chapin James E. Reid Martin Ives Cornelius E. Tierney Norwood Jackson Alvin Tucker

The Secretary of the Treasury, the Director of the Office of Managementand Budget, and the Comptroller General established the Federal AccountingStandards Advisory Board (the FASAB or "the Board") in October 1990 toconsider and recommend accounting principles for the United StatesGovernment.

The Board communicates its recommendations by publishing recommendedaccounting standards after considering the financial and budgetaryinformation needs of Congress, executive branch agencies, and other users offederal financial information. The Board also considers comments from thepublic on its proposed recommendations, which are published for comment as"exposure drafts." The Board's sponsors, i.e., the officials who establishedthe Board, then decide whether to adopt the recommendations. If they do, thestandard is published by the OMB and the GAO and then becomes effective.

Additional background information is available from the FASAB,including: (1) the "Memorandum of Understanding among the General AccountingOffice, the Department of the Treasury, and the Office of Management andBudget, on Federal Government Accounting Standards and a Federal AccountingStandards Advisory Board" and (2) the "Mission Statement of the FederalAccounting Standards Advisory Board."

Federal Accounting Standards Advisory BoardRonald S. Young, Executive Director

750 First Street, NE, Room 1001Washington, DC 20002

Telephone (202) 512-7350Fax (202) 512-7366

1..As explained in para. 44 of SFFAS Number 1, Accounting forSelected Assets and Liabilities, "more likely than not" means more than a50 percent chance. "Not probable" means the converse, i.e., less than a50 percent chance. 2..Statement of Federal Financial Accounting Concepts No. 1,Objectives of Federal Financial Reporting.

standard is an exception to the general principle of SFFAS No. 5, Accounting fores of the Federal Government, which, but for this exception, would require a loss on ato be recognized at the time when expected costs exceeded expected revenue. However, theloss must be disclosed: see the disclosure requirement in paragraph 0 (d) below.pricing guidance in OMB Circular No. A-25 does not apply to prices set by law ororder.

5..SFFAS No. 1, Accounting for Selected Assets and Liabilities, para. 41, states that "areceivable should be recognized . . . based on legal provisions, such as a payment due


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date (e.g., taxes not received by the date they are due) . . ." Under the revenuestandard, past due taxes are not recognized on the date they are due, but rather on thedate when tax returns are received without sufficient payment or legally enforceableclaims against non-compliant taxpayers are established through enforcement processes. 6..

SFFAS No. 1, para. 44-51. 7..

For the recognition criteria for donated property, plant and equipment, see SFFASNo. 6, Accounting for Property, Plant, and Equipment, para. 30, 62, and 71.

accounting standards will determine the criteria for the imputation of costs and howsts shall be measured. This standard provides guidance for accounting for theding financing source that is reported in such cases. explained in the Basis for Conclusions, in the private sector, the term "net results ofs" is synonymous with net income and net income is the "bottom line" measure ofce for profit-seeking businesses. For most Government reporting entities, on the others is not the "bottom line" for performance measurement. See para. 0 and following.e transfers are distinguished from custodial transfers in that transfers involve assetse been earned or in use by the entity in carrying out its programs whereas custodial

involve funds that have been collected on behalf of another entity. Accounting fortransfers is described in the section covering nonexchange revenue.information on funds is reported separately and the basis of accounting is not in

e with applicable accounting standards, the report should state that it is prepared onof legal requirements.category includes representational organizations, retired federal employees, federalresponding as individuals, and federal contractors, as well as academics and other

revolving funds that are self-financing do not recover full cost from their customers ifnot charged for all of their own costs, such as pension and retirement health benefitsemployees.C No. 1, Objectives of Federal Financial Reporting, p. 39, paragraphs 126 and 128.ods of calculating depletion based on the economic cost of extraction, such ased here, should be distinguished from depletion methods allowed under the Internalode.ular No. A-25, User Charges, as revised July 8, 1993, establishes Federal policyfees assessed for government services and for the sale or use of government goods or

. It implements the provisions of Title V of the Independent Offices Appropriations Act31 U.S.C. 9701), which generally calls for "each service or thing of value provided by

y . . . to a person . . . to be self-sustaining to the extent possible" and says thathall be based on a number of specified criteria including "the costs to the Government."dance of Circular A-25 also applies to the assessment of user charges under otherHowever, Circular A-25 is intended to be applied only to the extent permitted by law ororder; it does not apply to the legislative and judicial branches or to mixed-ownership

t corporations; and its requirements are deemed to be met by other OMB circulars thatuidance concerning a specific user charge area.if all taxpayers filed returns, the underlying event criteria for most taxpayers is

come for the calendar year, whereas the government's fiscal year ends September 30.required estimated tax payments do not eliminate the problem of measuring taxes based

rtificial" nine months period ending September 30 for calendar year taxpayers whoser the following three month "stub" period ending December 31 could be disproportionate.uant to law, Customs establishes legal assessments for fines in amounts which frequentlyy exceed the value of the goods, then subsequently abates the fine to a fraction of thatlso in accordance with applicable law. Full disclosure and explanation of practiced better understanding of the significance of assessments, abatements, and uncollectible


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eported by Customs in its disclosures required by para. 0.r details see Net Tax Gap and Remittance Gap Estimates (Supplement to Publication 7285),on 1415 (4-90), Internal Revenue Service; and Tax Gap: Many Actions Taken, But aCompliance Strategy Needed, GAO/GGD-94-123, May 1994.nts appropriated to liquidate contract authority or repay debt are not available to incurations and hence are not considered budget authority.

al insurance" does not include programs established solely or primarily for Federal, such as pension and other retirement plans. "Social insurance" taxes and contributions do,include payments made by or on behalf of Federal employees to social insurance plans, suchSecurity and Medicare.

al insurance" does not include programs established solely or primarily for Federal, such as pension and other retirement plans.e fees are sometimes called the "COBRA user fees." This term comes from the Consolidatedudget Reconciliation Act of 1985, which established these fees.C No. 2, Entity and Display, pp. 14-15.term "donations" includes wills disposing of property and judicial proceedings other thanes.amends SFFAS No. 3, Accounting for Inventory and Related Property, with respect to

es related to satisfying tax liabilities.partial recognition of associated cost distinguishes interest from rents, royalties, andon the Outer Continental Shelf and the auction of the radio spectrum. For the latterons, see the subsequent paragraphs.-1991 direct loans consist of direct loans that were obligated after September 30, 1991,re-1992 direct loans consist of direct loans that were obligated before October 1, 1991. Theunting that is used for post-1991 direct loans is also used for pre-1992 direct loans thatfied and transferred to financing accounts; loans receivable arising from defaulted post-ranteed loans; and loans receivable arising from defaulted pre-1992 guaranteed loans thatfied and transferred to financing accounts.ral employee retirement plans do not include social insurance, such as Social Security and

ales price may include the fair value of items received in exchange.SFFAS No. 6, Accounting for Property, Plant, and Equipment, pp. 10-11.FFAS No. 3, Accounting for Inventory and Related Property, pp. 20-23.difference is due to the different interest rates used to discount future cash flows forng the subsidy cost (and subsidy allowance) when the loan is made and for calculating themodification at a later time. If the sale is with recourse, the present value of theloss from the recourse is also recognized as an expense.

S No. 5, Accounting for Liabilities of the Federal Government, p. 17.ial insurance" does not include programs established solely or primarily for Federal, such as pension and other retirement plans.further discussion of the accounting standards for pensions and other retirement benefitsal employees, see SFFAS No. 5, Accounting for Liabilities of the Federal Government, pp. 20-6-63. The standards do not cover accounting for the plan per se as distinct from thering entity. Nor do they cover defined contribution plans, or administrative entities thatederal reporting entities.SFFAS No. 6, Accounting for Liabilities of the Federal Government, p. 37 and p. 64, footnote

SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government,.red employees do pay premiums, however, and the service cost to the employer entity iset of the actuarial present value of those future premiums.


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S No. 6, Accounting for Property, Plant, and Equipment, pp. 12-13.SFFAS No. 3, Accounting for Inventory and Related Property, pp. 6-7, 11, 13, 24, and 26.FFAS No. 6, Accounting for Property, Plant, and Equipment, pp. 10-11.No. 6, Accounting for Property, Plant, and Equipment, pp. 17-18, 20.

standards on direct loans and loan guarantees, see SFFAS No. 2, Accounting for Direct LoansGuarantees. The accounting for negative subsidy costs is symmetrical to the accounting forsubsidy costs.ee component of the subsidy cost is required to be disclosed separately.he actual repayment is different from the previous estimate, the present value of thee between cash inflows and outflows over the term of the loan--calculated as of the date ofent--is reestimated and is recognized as a subsidy expense or a reduction in subsidy

he loan is not repaid, the unpaid amount is recognized as an adjustment to the bad debtand does not affect revenue, gains, or other financing sources.he receivable is not repaid, the unpaid amount is recognized as an adjustment to the badwance and does not affect revenue, gains, or other financing sources.difference is due to the different interest rates used to discount future cash flows forng the subsidy cost (and subsidy allowance) when the loan is disbursed and for calculatingof modification at a later time. If the sale is with recourse, the present value of theloss from the recourse is also recognized as an expense.SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 18 and 79-82; and SFFAScounting for Inventory and Related Property, pp. 20-23 and 37-38.


accounting for revenue and other financing

Documents