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          SUBJECT:  ACCRUAL ACCOUNTING

          1-10-00   Purpose and Applicability
               10   Policy
               20   General
               30   Definitive Statements

               1-10-00        PURPOSE AND APPLICABILITY

               A.   An effective accrual accounting system involves more than
 the accrual of costs and expenditures and the production of periodic
 statements of financial condition.  Properly structured, the accounts
 should produce current information consistent with budget and PPBS
 classifications.  If these classifications are not consistent with an
 agency's organizational structure, the periodic or cumulative costs
 and expenditures systematically accrued in accounts by organizational
 components can be distributed by statistical techniques or other
 acceptable methods to the classifications as needed for analysis and
 budget purposes.

               B.   This chapter provides a general definition and guidance in
          the application of accrual accounting within the Department. 
          Further guidance is provided in subsequent chapters of this
          manual devoted to specific areas of accounting.  Accrual
          operating procedures appear in Chapter 3-60.

               C.   To prescribe a standard application of accrual accounting to
          fit the varied needs of all organizations within the
          Department is not feasible.  Applicable systems must be
          designed to fit the circumstances and requirements of each
          organization or a component thereof.  Since a major
          objective of accrual accounting is to provide management
          officials with essential and reliable information for use in
          achieving efficient and economical operations, management's
          advice and cooperation must be obtained in establishing the
          accounting structure and internal reporting system.

               D.   The policies and procedures defined and explained herein
          will apply to all agencies within the Department and to all
          affiliated Government organizations supported by the
          Department.  Agencies and other HHS affiliated organizations
          will implement the instructions contained herein which are
          applicable to their operations.  Any significant deviations
          from the policies or accrual accounting procedures
          prescribed in this manual will be cleared in advance with
          the Deputy Assistant Secretary, Finance.

          1-10-10   POLICY

               A.   In the area of grants and contracts with non-profit
          institutions, it is considered that the Government is in
          partnership with the grantee or contractor.  No changes will
          be required in a grantee's or contractor's system of
          accounting as a result of the collection of data required by
          this instruction if the system otherwise meets the
          requirements of the grant/contract and of the awarding
          Agency.  However, grantees and contractors may be requested
          to provide periodic information which does not normally
          appear in their regular reporting.

               B.   Financial data relative to obligations and disbursements
          which are currently being recorded will continue to be so
          handled.

               C.   Accruals will be recorded at the Common Accounting Number
          (CAN) level.

               D.   Data collection techniques will, where possible, serve
          management needs as well as financial requirements
          responsive to Department and Central Financial Agencies'
          reporting needs.

               E.   Reliability of data will be commensurate with the
          expenditure of resources necessary to secure that
          reliability.  The convention of materiality will be applied
          so as to exclude the need for refinement on small items
          unless otherwise required by this manual.  Materiality,
          however, will not be limited to relative measures but will
          also be measured in absolute amounts.  Prudent business
          judgment relative to possible misinterpretation will serve
          as a guide.

               F.   Direct monthly reporting by grantees and contractors for
          accrual purposes will be obtained only when statistical
          techniques such as correlation, regression procedures and
          sampling are inappropriate or will not provide valid and
          reliable data under the standards of paragraph E above.

               G.   Techniques for obtaining accrual data based on program logic
          will be revalidated periodically by statistical procedures. 
          Arbitrary prorations will not be employed for more than a
          calendar quarter without being adjusted to actual figures
          where available.

          1-10-20   GENERAL

               A.   Accrual accounting will be on a monthly basis.  Good
          management depends on current factual information concerning
          financial operations for purposes of planning and control. 
          Accrual accounting meets this requirement by reflecting in
          the records and reports events as they occur from a Time or
          Period standpoint.

               B.   Accrual accounting produces Accrued Costs and Accrued
          Expenditures related to goods and services used without
          regard to WHEN ordered, delivered, or paid.

               C.   Accrual accounting provides current financial control over
          expenditures, revenues, assets and liabilities, and produces
          information about resources available for use in later
          fiscal years.  

               D.   A properly designed accrual accounting system thus provides
          information with respect to the status of:

                              OBLIGATIONS, i.e., value of goods and services ordered

                              ACCRUED EXPENDITURES, i.e., value of goods and
               services received actually or constructively.  (1-10-
               30F)

                              DISBURSEMENTS, i.e., payments for goods and services

                              COSTS, i.e., goods and other resources used (consumed)
          
               E.   Accrual accounting does not require a change in the method
          of appropriating funds because accrued costs are reconciled
          with obligations incurred, with accrued expenditures, and
          with disbursements.

               F.   It is not a question of obligation accounting versus accrual
          accounting; information produced by both methods is
          necessary - but for different purposes.
.               G.   Obligation accounting produces information necessary for:

                         1.   Controlling the dollar amounts of goods and services
               ordered against appropriations, apportionments, and
               allotments.

                         2.   Reporting to Congress in the budget submission the
               dollar amounts of goods and services ordered, or to be
               ordered according to "object classes" such as personal
               services, travel, supplies and materials, etc.

                         3.   As a by-product, showing dollar amounts disbursed for
               goods and services regardless of when ordered,
               delivered, or used.

               H.   Accrual accounting, properly integrated with obligation and
          appropriation accounting, provides:

                         1.   All the information produced by obligation accounting
               plus,

                         2.   Accrued costs and expenditures for management's use in
               planning, controlling and appraising the efficiency of
               operations.

                         3.   Financial control over assets and liabilities.

                         4.   Information for determining accrued costs as a basis
               for fee establishment or for reimbursement for
               services.

                         5.   Accrued cost information for more valid comparisons of
               actual and planned financial performance.

                         6.   All the information necessary for cost budgets,
               including goods and services received and resources
               available for future use.

               I.   An accrual accounting system, properly integrated with
          accounts for appropriations and obligations provides
          information for a complete picture of the financial results
          of operations.

          1-10-30   DEFINITIVE STATEMENTS

               A.   General

                    The concept of "accrued expenditures" should be clearly
          differentiated from that of "cost" or "applied cost."  These
          latter two terms, in place of referring to the time of
          receipt of service or material, refer to the time of use or
          consumption of the service or material.  Thus, an accrued
          expenditure for the acquisition of an inventory item becomes
          an applied cost at a later date, when the item is withdrawn
          for use.  In the case of materials and services provided
          through working funds, the applied costs become accrued
          expenditures of the appropriation for which the work is
          performed as well as the working fund and at the same time
          accrued revenues of the working fund.  Cost (applied cost)
          records will continue to be maintained where essential for
          performance evaluations as related to project schedule or
          technical reporting systems.  The following definitions are
          more specific and are presented to provide greater
          penetration of the subject than was afforded in the
          preceding treatment.

               B.   Accrued Expenditures

                         1.   Accrued expenditures are the aggregate dollar amount
               of financial transactions occurring during an
               accounting period which either (a) require the
               concurrent or subsequent disbursement of funds or (b)
               result in the application of funds previously advanced
               to others.  Such transactions consist of (a) goods and
               services whether received actually or constructively
               (1-10-30F), (b) services performed by employees,
               contractors, grantees, lessors and other payees, (c)
               amounts becoming owed under programs for which no
               current service or performance is required (such as
               annuities, insurance claims, other benefit payments
               and a few types of grants), (d) program-type loans (as
               distinct from current advances), and (e) liquidation
               of previously unfunded liabilities.  Expenditures
               accrue without regard to when the payment takes place
               and thus include, for any period, all disbursements
               made in payment of goods and services received during
               the period as well as any amounts unpaid for such
               services at the end of the period.

                         2.   Expressed in accounting terms, accrued expenditures
               are those transactions which result in reduction in
               the Government's equity in net fund assets (other than
               refunds of receipts).  The credit side of such entries
               will always be to fund-type assets such as cash or
               advances or to funded liabilities such as accounts
               payable or accrued liabilities, the latter being
               liabilities not yet due and payable.  While accrued
               expenditures are frequently simultaneously accrued
               costs or accrued expenses, they are not always such
               and, contrari-wise, accrued costs and expenses are not
               always accrued expenditures. See subparagraph D below
               for the definition of accrued costs and expenses.

                         3.   In those cases where Congress has permitted
               liabilities to be accrued without being charged to the
               balance of an appropriation, a fund, or a contract
               authorization, the liability is considered "unfunded"
               and no accrued expenditure is recorded or reported
               until the time that the liability becomes funded,
               although an accrued non-fund cost would be recorded. 
               The most common example of such an accrual is the
               earning of employee annual leave, which, except in the
               case of working capital or other revolving funds, is
               not funded, i.e., chargeable to an appropriation or
               other fund until taken or until payable upon
               termination of employment.

               C.   Accrued Revenues

                    Accrued revenues earned during a given period are a source
          of funds and result                                    
                    from (1) services performed by the Government, (2) goods and
          other tangible property delivered to purchasers or their
          agents, including sales of fixed assets, and (3) amounts
          becoming owed to the government for which no current
          performance by the Government is required.  Examples of
          revenues are charges for hospital services, fines and
          forfeitures levied, interest accruing on loans, and premiums
          earned on Government-operated insurance programs.  Revenue
          from gifts to the United States will be recorded on a cash
          basis.  The term "revenue" is also used by the Treasury
          Department to include collections of program-type loans.  In
          the Umbrella system, such collections are classified as
          receipts.

               D.   Accrued (Applied) Costs or Expenses

                         1.   The meaning of the word "costs" lies in the context of
               its use.  When used to describe the use or consumption
               of goods or services, the term Applied Costs is
               synonymous with the terms Accrued Costs and Accrued
               Expenses but not with Accrued Expenditures.  In Bureau
               of the Budget Circular A-11, the following definition
               is given:

                                        "For operating programs, costs will represent the
                    value of resources consumed or used."

                         2.   In this manual, the above definition will be intended
               whenever the terms Applied or Accrued Costs are used. 
               When the word costs is used without a  modifying
               adjective its meaning will have to be determined from
               the context.

                         3.   For most operating purposes, costs are synonymous with
               current expenses and are the value of goods and
               services actually used or consumed during the current
               period.

                         4.   Examples of accrued costs or expenses are salaries,
               taxes, depreciation, materials issued, and interest
               charges.  These costs accrue and are recognized in a
               specific period even though payment for them was made
               in a prior period (Depreciation) or will be made in a
               future period (Salaries earned but not paid at the end
               of the month or other period).

               E.   Advances and Prepaid Expenses

                         1.   Advance payments, including prepaid expenses (costs),
               are assets and are, from the Treasury's viewpoint,
               treated as cash; they are neither accrued expenditures
               nor costs.  They develop into such accruals only as
               the value represented by the advance is earned by the
               payee, at which time the advance outstanding or the
               prepaid expense is reduced and the accrued
               expenditures and costs are recognized.  If an advance
               is neither earned by the payee nor returned, it
               becomes an accrued expenditure and cost when its
               uncollectibility is determined, at which time it
               should be recognized in the accounts.

                         2.   Prepaid expenses are rare in Government, since
               generally the Government does not prepay rent and does
               not carry insurance, the two areas where prepayments
               most frequently occur in private industry.  The
               criterion of materiality will generally likewise
               preclude the treatment of subscriptions to
               publications and reporting services as prepaid
               expenses.  See Section 1-10-30G for the accounting
               treatment for deferred charges where benefits or
               services have been received by the Government (and
               hence are not prepaid expenses) but it is desired to
               spread the cost over subsequent periods benefitting
               from the expenditure.

               F.   Constructive Receipt

                         1.   Constructive receipt of goods or other tangible
               property, rather than physical receipt or the passing
               of legal title, is the measure of the accrual in
               certain cases.  When a contractor provides goods to
               the Government which he holds himself available to
               sell to others, the accrual occurs when physical
               delivery by the contractor and receipt by the
               Government take place or title passes (that is, when
               goods are either delivered to the Government or to a
               carrier acting on behalf of the Government).  However,
               when a contractor manufactures or fabricates goods or
               equipment to the Government's specifications,
               constructive receipt occurs in each accounting period
               when the contractor earns a portion of the contract
               price, and the accrual takes place as the work is
               performed.  Formal acceptance of the work by the
               Government is not a test in such case.

                         2.   The accrual basis, among other things, measures what
               is owed between the parties, whether or not it is "due
               and payable", as soon as it becomes owed.  In general,
               the Government does not owe on its obligations until
               performance takes place on the part of the other
               party; it does not owe on goods and equipment of a
               type sold generally until physical delivery has been
               made.  However, once performance occurs, the
               Government owes for special fabrication even though it
               has not yet been billed.

               G.   Deferred Charges

                         1.   Deferred charges are expenditures which benefit future
               fiscal periods and must, therefore, be accounted for
               as non-cash assets until applied to costs.  They
               differ from prepaid expenses, paragraph E above, in
               that services have been rendered by the payees in the
               case of deferred charges while in the case of prepaid
               expenses they have not.

                         2.   Deferred charges are accrued expenditures when
               incurred, similar to the acquisition of inventory or
               fixed assets, but do not become accrued costs until
               amortized.  Examples of deferred charges are leasehold
               improvements, the cost of which is to be amortized
               over the life of the lease and premiums on bonds
               purchased which are amortized by charges against
               interest income as earned.

               H.   Disbursements

                    Disbursements are checks issued or cash paid, net of
          refunds.  Note that disbursements are not the same thing as
          expenditures.  Also, note that disbursements include funds
          used to make advance payments.

               I.   Liabilities not Previously Recorded

                    Liabilities which are normally funded will be recorded as
          accrued expenditures and reported promptly, even if they
          cause the recorded obligations to exceed available funds. 
          The concept of accrued expenditures must not be modified,
          nor disclosure prevented by the failure to record
          obligations larger in total than the amounts of available
          funds.  Necessary corrective and reporting actions will be
          taken whenever such a violation of law has occurred (see
          Chapter 2-10-90).  See paragraph K below for unfunded
          liabilities.

               J.   Subgrantees and Subcontractors

                    Where a grantee, a contractor, or even another Government
          agency (to which there is an obligation or an advance
          payment) performs through a subgrantee, subcontractor, or
          other party, it is necessary to determine the timing of such
          performance   generally following the same rules as if the
          principal had performed directly.  For instance, in a grant
          requiring specific performance according to Government
          specifications, the grantee's earnings, and therefore the
          Government's accrued expenditures, will be measurable, at
          least in part, by the amounts of the subgrantees' costs,
          including a pro-rata share of overhead, in a given period.

               K.   Unfunded Liabilities

                    In those cases where Congress has permitted liabilities to
          accrue without being charged as an obligation to the balance
          of an appropriation, a fund, or a contract authorization,
          the liability is considered "unfunded" and no obligation or
          accrued expenditure is recorded or reported until the time .                    
that the liability becomes funded.  Non-funded costs are,
          however, to be considered as applied costs at the time the
          unfunded liability is accrued.  Accrued annual leave earned
          is a principal example.  However, for some
          appropriations/funds specifically authorized by law, annual
          leave is recorded as a funded liability and reported as
          obligations incurred, as an accrued expenditure, and as
          applied cost at the time leave is earned.