Accounting for liabilities

SFFAS No. 5

**************************************************

Executive Office of the President

Office of Management and Budget

"ACCOUNTING FOR LIABILITIES OF THE FEDERAL

GOVERNMENT"

Statement of Federal Financial Accounting Standards

Number 5

September 1995

**************************************************

**************************************************
*************From Inside Front Cover**************

APPLICABILITY, MATERIALITY, AND TERMINOLOGY

These standards apply to general purpose financial

reports of U.S. Government reporting entities.

These standards need not be applied to immaterial

items. Statement of Federal Financial Accounting

Concepts No. 2 (SFFAC No. 2), "Entity and

Display", lists criteria for defining Government

reporting entities. Paragraph 78 of "Entity and

Display" notes that some of a reporting entity's

components may be required by law or policy to

issue financial statements in accordance with

accounting standards other than those recommended

by the FASAB and issued by the OMB and the GAO,

e.g., accounting standards issued by the Financial

Accounting Standards Board or by a regulatory

agency. Those components should continue to apply

the standards used in these reports. The reporting

entities of which the components are a part,

however, need to be sensitive to differences that

may arise from different accounting standards. If

these differences are material, the standards

recommended by the FASAB and issued by the OMB and

the GAO should be applied. In such cases, the

components would need to provide any additional

disclosures or different measurements required by

the accounting standards issued by the OMB and the

GAO that would not be required by the other

standards.

The word "disclosure" in FASAB's recommended

standards indicates reporting information in notes

or narrative that is regarded as an integral part

of the basic financial statements, while

"supplemental" indicates reporting information in

schedules or narrative regarded as "required
supplementary information" as that term is used in

accounting and auditing standards. Government

auditing standards require little auditing

assurance for required supplementary information.

"Other accompanying information" refers to

unaudited information that accompanies the audited

financial statements. "Required supplementary

stewardship information" is a new category of

information FASAB proposes in its exposure draft,

"Supplementary Stewardship Reporting", with the

expectation that OMB and GAO will in collaboration

agree upon audit procedures that would be

appropriate to apply to this information. These

terms are intended to indicate the Board's

expectations regarding the minimum auditor's

responsibility for the information, not its

specific location within general purpose financial

reports.

**************************************************

EXECUTIVE SUMMARY

**************************************************

a This Statement establishes accounting

standards for liabilities of the federal

government not covered in Statement of Federal

Financial Accounting Standards Number 1,

"Accounting for Selected Assets and Liabilities",

and in Statement of Federal Financial Accounting

Standards Number 2, "Accounting for Direct Loans

and Loan Guarantees." This Statement defines

"liability" as a probable future outflow or other

sacrifice of resources as a result of past

transactions or events. [FN 1:Liabilities

recognized according to the standards in this

Statement include both liabilities covered by

budgetary resources and liabilities not covered by

budgetary resources. Liabilities covered by

budgetary resources are liabilities incurred that

will be covered by available budgetary resources

encompassing not only new budget authority but

also other resources available to cover

liabilities for specified purposes in a given

year. Liabilities not covered by budgetary

resources include liabilities incurred for which

revenues or other sources of funds necessary to
pay the liabilities have not been made available

through congressional appropriations or current

earnings of the reporting entity. Notwithstanding

an expectation that the appropriations will be

made, whether they in fact will be made is

completely at the discretion of the Congress.

(Adapted from OMB Bulletin No. 94-01, "Form and

Content of Agency Financial Statements.")]

b The Statements of Federal Financial

Accounting Standards (SFFAS) and Concepts (SFFAC)

referred to in this document are statements

recommended by the Federal Accounting Standards

Advisory Board (FASAB), approved by the Secretary

of the Treasury, the Director of the Office of

Management and Budget, and the Comptroller General

(the Principals) and issued by the Office of

Management and Budget (OMB) and the General

Accounting Office (GAO).

c This Statement defines the recognition points

for liabilities associated with different types of

events and transactions (***Figure 1 IS AVAILABLE

IN HARD COPY ONLY***).[FN 2: Recognition means

reporting a dollar amount on the face of the basic

financial statements.]

-- A liability arising from reciprocal or

"exchange" transactions (i.e., transactions in

which each party to the transaction sacrifices

value and receives value in return) should be

recognized when one party receives goods or

services in return for a promise to provide money

or other resources in the future (e.g., a federal

employee performs services in exchange for

compensation).

-- A liability arising from nonreciprocal

transfers or "nonexchange" transactions (i.e.,

transactions in which one party to the transaction

receives value without directly giving or

promising value in return, such as grant and

certain entitlement programs) should be

recognized for any unpaid amounts due as of the

reporting date. The liability includes amounts

due from the federal entity to pay for benefits,
goods, or services [FN 3: Goods or services may be

provided under the terms of the program in the

form of, for example, contractors providing a

service for the government on the behalf of the

disaster relief beneficiaries.] provided under the

terms of the program, as of the federal entity's

reporting date, whether or not such amounts have

been reported to the federal entity (e.g.,

estimated Medicaid payments due to health

providers for service that has been rendered and

that will be financed by the federal entity but

have not yet been reported to the federal entity).

-- Government-related events are nontransactionbased events that involve interaction between

federal entities and their environment. The event

may be beyond the control of the entity. A

liability is recognized for a future outflow of

resources that results from a government-related

event when the event occurs if the future outflow

of resources is probable and measurable (see

paragraphs 33 and 34 for the definitions of

probable and measurable, respectively) or as soon

thereafter as it becomes probable and measurable.

Events, such as a federal entity accidentally

causing damage to private property, would create a

liability when the event occurred, to the extent

that existing law and policy made it probable that

the federal government would pay for the damage

and to the extent that the amount of the payment

could be estimated reliably. Government-related

events also include hazardous waste spills on

federal property caused by federal operations or

accidents and catastrophes that affect governmentowned property.

--Government-acknowledged events are events that

are of financial consequence to the federal

government because it chooses to respond to the

event. A liability is recognized for a future

outflow of resources that results from a

government-acknowledged event when and to the

extent that the federal government formally

acknowledges financial responsibility for the

event and a nonexchange or exchange transaction

has occurred. The liability for a nonexchange
transaction should be recognized for any unpaid

amounts due as of the reporting date and the

liability for the an exchange transaction should

be recognized when goods or services have been

provided. The liability includes amounts due from

the federal entity to pay for benefits, goods, or

services provided under the terms of the program,

as of the federal entity's reporting date, whether

or not such amounts have been reported to the

federal entity (Examples of governmentacknowledged events include toxic waste damage

caused by nonfederal entities and damage from

natural disasters).

d In addition to discussing the general

liability recognition principle, the Statement

includes several specific federal liability

accounting standards which are summarized below.

-- Contingencies - A contingency is an existing

condition, situation, or set of circumstances

involving uncertainty as to possible gain or loss

to an entity that will ultimately be resolved when

one or more future events occur or fail to occur.

Contingent future outflows or other sacrifices of

resources as a result of past transactions or

events may be recognized, may be disclosed [FN 4:

"Disclosure" in this document refers to reporting

information in notes regarded as an integral part

of the basic financial statements.], or may not be

reported at all, depending on the

circumstances.[FN 5: In the case of governmentacknowledged events giving rise to nonexchange or

exchange transactions, there must be a formal

acceptance of financial responsibility by the

federal government, as when the Congress has

appropriated or authorized (i.e., through

authorization legislation) resources.

Furthermore, exchange transactions that arise

from government-acknowledged events would be

recognized as a liability when goods or services

are provided. For nonexchange transactions, a

liability would then be recognized at the point

the unpaid amount is due. Therefore, governmentacknowledged events do not meet the criteria

necessary to be recognized as a contingent
liability.] Contingencies should be recognized as

a liability when a past transaction or event has

occurred, a future outflow or other sacrifice of

resources is probable, and the related future

outflow or sacrifice of resources is measurable.

A contingent liability should be disclosed if any

of the conditions for liability recognition are

not met and there is a reasonable possibility that

a loss or an additional loss may have been

incurred. Disclosure should include the nature of

the contingency and an estimate of the possible

liability, an estimate of the range of the

possible liability, or a statement that such an

estimate cannot be made.

-- Capital leases - In a lease transaction, the

lessee should report a liability when one or more

of four specified capital lease criteria are met

(see detailed criteria on paragraph 43). The

amount to be recorded by the lessee as a

liability[FN 6: "The cost of general property,

plant, and equipment acquired under a capital

lease shall be equal to the amount recognized as a

liability for the capital lease at its inception."

(See SFFAS No. 6, "Property, Plant, and

Equipment".)] under a capital lease is the

present value of the rental and other minimum

lease payments during the lease term, excluding

that portion of the payments representing

executory cost to be paid by the lessor.

-- Federal debt - Federal debt transactions are

recognized as a liability when there is an

exchange between the involved parties. Fixedvalue securities are securities that have a known

maturity or redemption value at the time of issue.

These securities should be valued at their

original face (par) values net of any unamortized

discount or premium. Amortization of the discount

or the premium should normally follow the interest

method; in certain cases, the straight line method

is permitted (see paragraph 50 ). Variable-value

securities should be originally valued and

periodically revalued at their current value on

the basis of the regulations or offering language.

The related interest cost of the federal debt
includes the accrued (prorated) share of the

nominal interest incurred during the accounting

period, the amortization amounts of discount or

premium for each accounting period, and the amount

of change in the current value for the accounting

period for variable-value securities.

-- Pensions, other retirement benefits, and other

postemployment benefits - The liability and

associated expense for pensions and other

retirement benefits (including health care) should

be recognized at the time the employee's services

are rendered. The expense for postemployment

benefits should be recognized when a future

outflow or other sacrifice of resources is

probable and measurable based on events occurring

on or before the reporting date. Any part of that

cost unpaid at the end of the period is a

liability. The aggregate entry age normal

actuarial cost method should be used to calculate

the expense and the liability for the pension and

other retirement benefits for the administrative

entity financial statements, as well as the

expense for the employer entity financial

statements. The employer entity should recognize

an expense and a liability for postemployment

benefits when a future outflow or other sacrifice

of resources is probable and measurable on the

basis of events that have occurred as of the

reporting date.

-- Insurance and guarantee programs - All

federal insurance and guarantee programs [FN 7:

Social insurance is considered to be a separate

program type not included within insurance and

guarantee programs. See social insurance

discussion in FASAB ED, "Supplementary Stewardship

Reporting."] (except social insurance and loan

guarantee programs [FN 8: Accounting for federal

loan guarantee programs should follow the

Statement of Federal Financial Accounting

Standards Number 2, "Accounting for Direct Loans

and Loan Guarantees" (August 23, 1993).]) should

recognize a liability for unpaid claims incurred

resulting from insured events that have already

occurred. Insurance and guarantee programs
should recognize as an expense all claims incurred

during the period, including, when appropriate,

those not yet reported. The change in a

contingent liability during the reporting period

should also be recognized as a component of

expense. Life insurance programs should recognize

a liability for future policy benefits in addition

to the liability for unpaid claims incurred. All

federal insurance and guarantee programs (except

life insurance and loan guarantee programs) should

also report as required supplementary stewardship

information (RSSI) the expected losses that are

based on risk inherent in the insurance and

guarantee coverage in force.

******* FIGURE 1 : "LIABILITY RECOGNITION SUMMARY"

APPEARED HERE IN THE HARD COPY TEXT **********

**************************************************

TABLE OF CONTENTS

**************************************************

EXECUTIVE SUMMARY

-- Paragraphs a-d

INTRODUCTION

-- Paragraphs 1-18

 PURPOSE

 -- Paragraph 1

 SCOPE

 -- Paragraphs 2-7

 OBJECTIVES OF FINANCIAL REPORTING

 -- Paragraphs 8-10

 ENTITY AND DISPLAY

 -- Paragraphs 11-12

 EFFECTIVE DATE

 -- Paragraph 13

 STRUCTURE OF THIS DOCUMENT

 -- Paragraphs 14-18

LIABILITY STANDARDS

-- Paragraphs 19-121

 DEFINITION AND GENERAL PRINCIPLES FOR

 RECOGNITION OF A LIABILITY

 -- Paragraphs 19-34
 CONTINGENCIES

 -- Paragraphs 35-42

 CAPITAL LEASES

 -- Paragraphs 43-46

 FEDERAL DEBT AND RELATED INTEREST COST

 -- Paragraphs 47-55

 PENSIONS, OTHER RETIREMENT BENEFITS,

 AND OTHER POSTEMPLOYMENT BENEFITS

 -- Paragraphs 56-96

 INSURANCE AND GUARANTEES

 -- Paragraphs 97-121

APPENDIX A: BASIS FOR CONCLUSIONS

-- Paragraphs 122-193

 EXCHANGE AND NONEXCHANGE TRANSACTIONS

 -- Paragraphs 126-133

 CONCLUSION ON SOCIAL INSURANCE

 -- Paragraphs 134-136

 IMPACT OF COMMUNICATING INFORMATION IN

 GENERAL PURPOSE FEDERAL FINANCIAL REPORTS

 -- Paragraphs 137-141

 RELATIONSHIP TO LIABILITY RECOGNITION

 PRINCIPLES USED BY PRIVATE SECTOR ENTITIES

 -- Paragraphs 142-143

 CONCLUSION ON CONTINGENCIES

 -- Paragraphs 144-147

 CONCLUSION ON PENSIONS, OTHER RETIREMENT

 BENEFITS AND OTHER POSTEMPLOYMENT BENEFITS

 -- Paragraphs 148-181

 VETERANS MEDICAL CARE COST

 -- Paragraphs 182-184

 CONCLUSION ON INSURANCE AND GUARANTEES

 -- Paragraphs 185-193

APPENDIX B: LIABILITY RECOGNITION AND MEASUREMENT

MATRIX  THIS MATRIX IS AVAILABLE IN HARD COPY

ONLY** **

GLOSSARY

**************************************************

INTRODUCTION

**************************************************

PURPOSE
1 The purpose of this Statement is to establish

accounting standards to recognize and measure

liabilities in general purpose federal financial

reports, which are issued for both internal and

external users. Appendixes provide background,

rationale, and examples of how to apply this

standard to liabilities associated with federal

programs' transactions and events.

SCOPE

2 This Statement articulates a general

principle that should guide preparers of general

purpose federal financial reports. It also

provides more detailed guidance regarding

liabilities resulting from deferred compensation,

insurance and guarantees (except social

insurance), certain entitlements, and certain

other transactions. The Statement addresses

liabilities not covered in Statement of Federal

Financial Accounting Standards (SFFAS) Number 1,

"Accounting for Selected Assets and Liabilities",

and in Statement of Federal Financial Accounting

Standards Number 2, "Accounting for Direct Loans

and Loan Guarantees."

3 The concept of a liability in this document

is consistent with those in Statements Number 1

and 2. The definition amends the stated

definition of a liability in SFFAS Number 1.

This Statement establishes accounting for

liabilities not covered in SFFAS No. 1 and 2.

Statement Number 1 addresses only those selected

liabilities that routinely recur in normal

operations and are due within a fiscal year. The

liabilities covered in Statement Number 1 are

accounts payable, interest payable, and other

current liabilities, such as accrued salaries,

accrued entitlement benefits payable, and unearned

revenue. [FN 9: Adapted from Statement of Federal

Financial Accounting Standards (SFFAS) Number 1,

"Accounting for Selected Assets and Liabilities"

(March 30, 1993), p. 25.]

4 Statement Number 2 addresses liabilities

specifically arising from direct loans and loan
guarantees. Loan guarantees are "any guarantee,

insurance, or other pledge with respect to the

payment of all or part of the principal or

interest on any debt obligation of a nonfederal

borrower to a nonfederal lender, but they do not

include the insurance of deposits, shares, or

other withdrawable accounts in financial

institutions."[FN 10: OMB Circular No. A-11 as

cited in Statement of Federal Financial Accounting

Standards Number 2, "Accounting for Direct Loans

and Loan Guarantees" (August 23, 1993), p. 46.]

5 The general conceptual definition of

"liability" underlying this Statement is similar

in some respects to that articulated by the

Financial Accounting Standards Board (FASB) but

the FASAB made certain modifications to the

private sector concept to apply it within the

federal context. Also, as is explained in the

Basis for Conclusions, the specific standards

dealing with pensions, other retirement benefits,

and postemployment benefits differ from those the

FASB has published.

6 This Statement requires certain disclosures

about existing liabilities. The Statement,

however, does not fully address information about

stewardship responsibilities, including social

insurance,[FN 11: Stewardship responsibilities are

further discussed in "Supplementary Stewardship

Reporting."] related to future financial

reporting periods. Such information may be

reported in a supplementary stewardship report,

pursuant to standards now being developed (see

FASAB's ED, "Supplementary Stewardship

Reporting"). Information about projected future

outflows is vital to making informed decisions

about public policies, including the level of

benefits promised under current law and the level

of revenues/premiums required to liquidate the

liability (if any).

7 The recognition of social insurance

programs[FN 12: Social insurance programs are

income transfer programs financed by compulsory

earmarked taxes and in certain cases also include
general revenues of the federal government.]

presented the Board with significant theoretical

and practical problems. The exposure process for

the draft liability standard brought forth

strongly held positions about social insurance.

Upon reconsideration of the issues the Board

concluded that, regardless of the technical merits

of the arguments concerning the nature of social

insurance programs, it was questionable whether

adequate information concerning social insurance

could be presented by means of a single, point-intime number on a Balance Sheet. The Board

modified the draft standard so it would require

several measures of social insurance to be

presented. The Board decided that, given the

sensitivity and magnitude of social insurance, the

new proposal should receive additional exposure to

allow users to review it and comment. The Board

felt that the concepts and alternatives had not

yet been presented to the user community in

sufficient detail. Hence, the discussion of

social insurance has been withdrawn from the

liability standard and presented in the

"Supplementary Stewardship Reporting" Exposure

Draft. (For more details see the Basis for

Conclusions).

OBJECTIVES OF FEDERAL FINANCIAL REPORTING

8 When developing accounting standards for the

federal government, the significant environmental

differences between the federal government and the

private sector must be kept in mind. Statement of

Federal Financial Accounting Concepts Number 1,

"Objectives of Federal Financial Reporting",

discusses the federal accounting and financial

reporting environment. It notes the following:

-- The federal government is unique, when

compared with any other entity in the country,

because it is the vehicle through which the

citizens of the United States exercise their

sovereign power. The federal government has the

power through law, regulation, and taxation to

exercise ultimate control over many facets of the

national economy and society. All other entities
within the nation, both public and private,

operate within the context of laws, oversight, and

accountability established by the national

government. The federal government is accountable

only to its citizens. It is politically

accountable to the electorate, but no higher

agency has the power to demand an accounting from

the government.

9 The objectives of federal financial reporting

were designed to guide the Board in developing

accounting standards to enhance the financial

information reported by the federal government.

The four objectives are discussed under the

headings (1) budgetary integrity, (2) operating

performance, (3) stewardship, and (4) systems and

control. These objectives were used as a basis to

develop the Liability Statement. The Board

believes that the operating performance objective

has special relevance to decisions about

recognition and measurement of liabilities in

general purpose federal financial reports. That

objective reads as follows:

 "Federal financial reporting should assist

report users in evaluating the service efforts,

cost, and accomplishments of the reporting entity;

the manner in which these efforts and accomplishments have been financed; and the management of

the entity's assets and liabilities."[FN 13:

Statement of Federal Financial Accounting Concepts

Number 1, 'Objectives of Federal Financial

Reporting" (Sept. 2, 1993).]

10 At the same time, the Board recognizes that

the third objective, dealing with stewardship, is

equally important.

 "Federal financial reporting should assist

report users in assessing the impact on the

country of the government's operations and

investments for the period and how, as a result,

the government's and the nation's financial

conditions have changed and may change in the

future.

 Federal financial reporting should provide
information that helps the reader to determine:

 -- whether the government's financial

position improved or deteriorated over the period;

 -- whether future budgetary resources will

likely be sufficient to sustain public services

and to meet obligations as they come due; and

 -- whether government operations have

contributed to the nation's current and future

well-being.

 Examples of information relevant to this

objective include:

 -- the amount of assets, liabilities, and net

assets (or net position);

 -- an analysis of government debt, its

growth, and debt service requirements;

 -- changes in the amount and service

potential of capital assets; and

the amount of contingent liabilities and

unrecognized obligations [FN 14: The term

"obligation" is used in its everyday or generic

sense, not as it is used in federal budgetary

accounting.] (such as the probable cost of deposit

insurance)."

 Accordingly, information about projected

future responsibilities and resources is as

important as information about assets,

liabilities, revenues, and expenses.

ENTITY AND DISPLAY

11 SFFAC Number 2, "Entity and Display" is a

concept statement that provides a framework for

defining the meaningful reporting units for

general purpose federal financial reports with

consideration of the relationships among the

budgetary, organizational, and programmatic units.

The Concept Statement also describes in general

terms the nature of general purpose federal
financial reports, including their names and

formats. Agreement on the concepts of entity and

display is necessary to establish standards for

presenting general purpose federal financial

reports.

12 The "Entity and Display" and Liability

Statements are interrelated in several ways.

Decisions on each affected the other. For

example, the "Entity and Display" Concept

Statement suggests what reporting units should

report liabilities and, in general terms, how

these liabilities should be displayed. The

provisions of the Concept Statement that

contemplate presentation of information about

future stewardship responsibilities as well as

information about events and transactions that

have occurred are related to the selection of

events and transactions to be recognized.[FN 15:

See Statement of Federal Financial Accounting

Concepts (SFFAC) Number 2, "Entity and Display"

(April 20, 1995).]

EFFECTIVE DATE

13 The accounting standards presented in this

Statement become effective for fiscal periods

beginning after September 30, 1996. Earlier

implementation is encouraged.

STRUCTURE OF THIS DOCUMENT

14 This document has three sections, two

appendixes, and a glossary. The first section,

the executive summary, precedes this section.

This introduction constitutes the second section.

The remaining section and appendixes are described

below.

Liability Standards

15 This section presents a definition and

criteria for recognizing a liability and related

disclosure requirements. It also provides

specific standards for contingencies, capital

leases, federal debt, pensions, other
postemployment and retirement benefits, and

insurance (other than social insurance) and

guarantees.

Appendix A: Basis For Conclusions

16 This appendix summarizes considerations that

members of the Board deemed significant in

reaching the conclusions in the Statement.

Appendix B: Liability Recognition and Measurement

Matrix

17 The Liability Recognition and Measurement

Matrix illustrates the measurement attributes and

recognition points for several transactions and

events (***THIS MATRIX IS AVAILABLE IN HARD COPY

ONLY***).

Glossary

18 The glossary defines various terms used in

this Statement.

**************************************************

LIABILITY STANDARDS

**************************************************

DEFINITION AND GENERAL PRINCIPLE

FOR RECOGNITION OF A LIABILITY

19 A liability for federal accounting purposes

is a probable future outflow or other sacrifice of

resources as a result of past transactions or

events. General purpose federal financial

reports should recognize [FN 16: Recognition means

reporting a dollar amount on the face of the basic

financial statements.] probable and measurable

future outflows or other sacrifices of resources

arising from (1) past exchange transactions, (2)

government-related events, (3) governmentacknowledged events, or (4) nonexchange

transactions that, according to current law and

applicable policy, are unpaid amounts due as of

the reporting date.[FN 17: This document uses the
term "nonexchange transaction" in a way similar to

FASB's "nonreciprocal transfer." That is, it

implies a one-way flow of resources, services, or

promises between two parties. "Transaction" in

the phrase "nonexchange transaction" does not

include reclassification, closing, and similar

"internal" entries to the accounting records,

though some accountants use the term in that

broader sense. "Probable" means more likely than

not. "Measurable" means reasonably estimable.]

Events and Transactions

20 The existence of a past event (which includes

transactions) is essential for liability recognition. An event is a happening of financial

consequence to an entity.[FN 18: "Consequence" is

defined as something of importance or

significance.] An event may be an internal event

that occurs within an entity, such as transforming

raw materials into a product. An event may also

be an external event that involves interaction

between an entity and its environment, such as a

transaction with another entity, an act of nature,

a theft, vandalism, an injury caused by

negligence, or an accident.

21 As the term is used in this Statement, a

transaction involves the transfer of something of

value. Transactions may be either exchange

transactions or nonexchange transactions. The

distinction between exchange and nonexchange

transactions is important in determining the point

of liability recognition in federal accounting.

22 An exchange transaction arises when each

party to the transaction sacrifices value and

receives value in return. There is a two-way flow

of resources or of promises to provide resources.

In an exchange transaction, a liability is

recognized when one party receives goods or

services in return for a promise to provide money

or other resources in the future.[FN 19: Executory

contracts where goods and services have not been

received are not generally recognized as

liabilities in financial accounting, although they
are generally recognized as obligations in

governmental budgetary accounting.]

23 An example of an exchange transaction occurs

when a federal employee performs services in

exchange for compensation. The compensation

includes current salary and future retirement

benefits. An exchange transaction occurs because

both parties (the employee and the employer)

receive and sacrifice value. The expense is

recognized in the period that the exchange occurs.

The compensation liability includes unpaid salary

amounts earned and the cost of future retirement

benefits related to current period services.

24 A nonexchange transaction arises when one

party to a transaction receives value without

directly giving or promising value in return.

There is a one-way flow of resources or promises.

For federal nonexchange transactions, a liability

should be recognized for any unpaid amounts due as

of the reporting date. This includes amounts due

from the federal entity to pay for benefits,

goods, or services [FN 20: Goods or services may

be provided under the terms of the program in the

form of, for example, contractors providing a

service for the government on the behalf of the

disaster relief beneficiaries.] provided under

the terms of the program, as of the federal

entity's reporting date, whether or not such

amounts have been reported to the federal entity

(for example, estimated Medicaid payments due to

health providers for service that has been

rendered and that will be financed by the federal

entity but have not yet been reported to the

federal entity).

25 Many grant and certain entitlement programs

are nonexchange transactions. When the federal

government creates an entitlement program or gives

a grant to state or local governments, the

provision of the payments is determined by federal

law rather than through an exchange transaction.

26 An event is defined as a happening of

financial consequence to an entity. For federal
financial reporting, some events may be other than

transaction based and these events may be

classified in one of two categories: (1)

government-related events or (2) governmentacknowledged events.

27 Government-related events are nontransactionbased events that involve interaction between the

federal government and its environment. The event

may be beyond the control of the federal entity.

In general, a liability is recognized in

connection with government-related events on the

same basis as those that arise in exchange

transactions. Events, such as a federal entity

accidentally causing damage to private property,

would create a liability when the event occurred,

to the extent that existing law and policy made it

probable that the federal government would pay for

the damages and to the extent that the amount of

the payment could be estimated reliably. [FN 21:

The vast majority of claims against the United

States Government stemming from tortious

government conduct are adjudicated under the

Federal Tort Claims Act (FTCA), which provides for

both administrative and judicial resolution.

Administrative awards under the established

threshold are paid from agency appropriations.

Administrative awards in excess of the established

threshold are paid from the judgment

appropriation. Court judgments and compromise

settlements by the Department of Justice are paid

from the judgment appropriation regardless of

amount. This Act means that, for certain types of

events it is not necessary for the government to

acknowledge financial responsibility separately

for each individual event as is the case for

events described in paragraph 30.]

28 Government-related events include:

 (1) cleanup from federal operations

resulting in hazardous waste that the federal

government is required by statutes and/or

regulations, that are in effect as of the Balance

Sheet date, to clean up (i.e., remove, contain, or

dispose of);[FN 22: See SFFAS No. 6, "Accounting
for Property, Plant, and Equipment" for a detailed

discussion of cleanup cost.]

 (2) accidental damage to nonfederal property

caused by federal operations; and

 (3) other damage to federal property caused

by such factors as federal operations or natural

forces.[FN 23: The subjects of valuing assets and

of measuring asset impairments--thus measuring the

loss to be recognized--are beyond the scope of

this Statement. See SFFAS No. 6, Accounting for

Property, Plant, and Equipment for a discussion on

the impairment or loss of federal property.]

29 Government-related events resulting in a

liability should be recognized in the period the

event occurs if the future outflow or other

sacrifice of resources is probable and the

liability can be measured, or as soon thereafter

as it becomes probable and measurable.

30 Government-acknowledged events are those

nontransaction-based events that are of financial

consequence to the federal government because it

chooses to respond to the event. The federal

government has broad responsibility to provide for

the public's general welfare. The federal

government has established programs to fulfill

many of the general needs of the public and often

assumes responsibilities for which it has no prior

legal obligation.

31 Consequently, costs from many events, such as

toxic waste damage caused by nonfederal entities

and natural disasters, may ultimately become the

responsibility of the federal government. But

these costs do not meet the definition of a

"liability" until, and to the extent that, the

government formally acknowledges financial

responsibility for the cost from the event and an

exchange or nonexchange transaction has occurred.

In other words, the federal entity should

recognize the liability and expense when both of

the following two criteria have been met (1) the

Congress has appropriated or authorized (i.e.,
through authorization legislation) resources and

(2) an exchange occurs (e.g., when a contractor

performs repairs) or nonexchange amounts are

unpaid as of the reporting date (e.g., direct

payments to disaster victims), whichever applies.

32 The following example illustrates the

liability recognition of government-acknowledged

events. A tornado damages a U.S. town and the

Congress appropriates funds in response to the

disaster. This event is of financial consequence

to the federal government because the federal

government chooses to provide disaster relief to

the town. Transactions resulting from this

appropriation, including disaster loans, outright

grants to individuals, and work performed by

contractors paid by the federal entities, are

recognized as exchange or nonexchange

transactions. In the case of exchange

transactions, amounts payable for goods and

services provided to federal entities are

recognized when the goods are delivered or the

work is done. In the case of nonexchange

transactions, a liability should be recognized for

any unpaid amounts due as of the reporting date.

The liability includes amounts due from the

federal entity to pay for benefits, goods, or

services provided under the terms of the program,

as of the federal entity's reporting date, whether

or not such amounts have been reported to the

federal entity.

Probable Future Outflow or

Other Sacrifice of Resources

33 "Probable" refers to that which can

reasonably be expected or is believed to be more

likely than not on the basis of available evidence

or logic. The probability of a future outflow or

other sacrifice of resources is assessed on the

basis of current facts and circumstances. These

current facts and circumstances include the law

that provides general authority for federal entity

operations and specific budget authority to fund

programs. If budget authority has not yet been
provided, a future outflow or other sacrifice of

resources might still meet the probability test if

(1) it directly relates to ongoing entity operations and (2) it is the type for which budget

authority is routinely provided. Therefore, the

definition applies both to liabilities covered by

budgetary resources and to liabilities not covered

by budgetary resources.[FN 24: See Statement of

Federal Financial Accounting Standards Number 1,

"Accounting for Selected Assets and Liabilities",

(March 30, 1993), app. A, p. 25.]

Measurability

34 "Measurability" means that an item has a

relevant attribute that can be quantified in

monetary units with sufficient reliability to be

reasonably estimable. Liabilities reported in the

financial report are measured by different

attributes specified by various accounting

standards. Several different measurement

attributes are used for different items in present

practice (e.g., fair market value, current cost,

present value, expected value, settlement value,

and historical cost).

CONTINGENCIES

35 A contingency is an existing condition,

situation, or set of circumstances involving

uncertainty as to possible gain or loss to an

entity. The uncertainty will ultimately be

resolved when one or more future events occur or

fail to occur. Resolution of the uncertainty may

confirm a gain (i.e., acquisition of an asset or

reduction of a liability) or a loss (i.e., loss or

impairment of an asset or the incurrence of a

liability).[FN 25: Contingencies are different

from "subsequent events" as used in the

accounting/audit literature. Subsequent events

are events or transactions that occur subsequent

to the Balance Sheet date, but prior to the

issuance of the financial statements and auditor's

report, that have a material effect on the

financial statements and therefore require

adjustment or disclosure in the statements.]
36 This Statement does not deal with gain

contingencies or measurement of contingencies that

involve impairment of nonfinancial assets. When a

loss contingency (i.e., contingent liability)

exists, the likelihood that the future event or

events will confirm the loss or the incurrence of

a liability can range from probable to remote.

The probability classifications are as follows:

 -- Probable: The future confirming event or

events are more likely than not to occur.

 -- Reasonably possible: The chance of the

future confirming event or events occurring is

more than remote but less than probable.

 -- Remote: The chance of the future event or

events occurring is slight.

37 The following are some examples of loss

contingencies:

 -- collectibility of receivables,

 -- pending or threatened litigation, and

 -- possible claims and assessments.

Criteria for Recognition

of a Contingent Liability

38 A contingent liability should be recognized

when all of these three conditions are met: [FN

26: The unit of analysis for estimating

liabilities can vary according to the reporting

entity and the nature of the transaction or event.

The liability recognized may be the estimation of

an individual transaction or event; or a group of

transactions and events. For example, SFFAS

Number 2, "applies to direct loans and loan

guarantees on a group basis, such as a cohort or a

risk category of loans and loan guarantees.

Present value accounting does not apply to direct

loans or loan guarantees on an individual basis,

except for a direct loan or loan guarantee that

constitutes a cohort or a risk category."
Statement of Federal Financial Accounting

Standards Number 2, "Accounting for Direct Loans

and Loan Guarantees" p.9. See the standard on

Insurance and Guarantees in this document for a

description of incurred but not reported (IBNR)

claims.]

 -- A past event or exchange transaction has

occurred (e.g., a federal entity has breached a

contract with a nonfederal entity).[FN 27: In the

case of government-acknowledged events giving rise

to nonexchange or exchange transactions, there

must be a formal acceptance of financial

responsibility by the federal government, as when

the Congress has appropriated or authorized (i.e.,

through authorization legislation) resources.

Furthermore, exchange transactions that arise

from government-acknowledged events would be

recognized as a liability when goods or services

are provided. For nonexchange transactions, a

liability would then be recognized at the point

the unpaid amount is due. Therefore,

government-acknowledged events do not meet the

criteria necessary to be recognized as a

contingent liability.]

 -- A future outflow or other sacrifice of

resources is probable (e.g., the nonfederal entity

has filed a legal claim against a federal entity

for breach of contract and the federal entity's

management believes the claim is more likely than

not to be settled in favor of the claimant).

 -- The future outflow or sacrifice of

resources is measurable (e.g., the federal

entity's management determines an estimated

settlement amount).

39 The estimated liability may be a specific

amount or a range of amounts. If some amount

within the range is a better estimate than any

other amount within the range, that amount is

recognized. If no amount within the range is a

better estimate than any other amount, the minimum

amount in the range is recognized and the range

and a description of the nature of the contingency
should be disclosed.

Criteria for Disclosure of a Contingent Liability

40 A contingent liability should be disclosed if

any of the conditions for liability recognition

are not met and there is at least a reasonable

possibility that a loss or an additional loss may

have been incurred. "Disclosure" in this context

refers to reporting information in notes regarded

as an integral part of the basic financial

statements.

41 Disclosure should include the nature of the

contingency and an estimate of the possible

liability, an estimate of the range of the

possible liability, or a statement that such an

estimate cannot be made.

42 In some cases, contingencies may be

identified but the degree of uncertainty is so

great that no reporting (i.e., recognition or

disclosure) is necessary in the general purpose

federal financial reports. Specifically,

contingencies classified as remote need not be

reported in general purpose federal financial

reports, though law may require such disclosures

in special purpose reports. If information about

remote contingencies or related to remote

contingencies is included in general purpose

federal financial reports (e.g., the total face

amount of insurance and guarantees in force), it

should be labeled in such a way to avoid the

misleading inference that there is more than a

remote chance of a loss of that amount.

CAPITAL LEASES

43 Capital leases are leases that transfer

substantially all the benefits and risks of

ownership to the lessee. If, at its inception, a

lease meets one or more of the following four

criteria, the lease should be classified as a

capital lease by the lessee:

 -- The lease transfers ownership of the
property to the lessee by the end of the lease

term.

 -- The lease contains an option to purchase

the leased property at a bargain price.

 -- The lease term is equal to or greater than

75 percent of the estimated economic life of the

leased property.

 -- The present value of rental and other

minimum lease payments, excluding that portion of

the payments representing executory cost, equals

or exceeds 90 percent of the fair value of the

leased property.

The last two criteria are not applicable when the

beginning of the lease term falls within the last

25 percent of the total estimated economic life of

the leased property. If a lease does not meet at

least one of the above criteria it should be

classified as an operating lease.

44 The amount to be recorded by the lessee as a

liability under a capital lease is the present

value of the rental and other minimum lease

payments during the lease term, excluding that

portion of the payments representing executory

cost to be paid by the lessor.[FN 28: "The cost of

general property, plant, and equipment acquired

under a capital lease shall be equal to the amount

recognized as a liability for the capital lease at

its inception." See SFFAS No. 6, Accounting for

Property, Plant, and Equipment.] However, if the

amount so determined exceeds the fair value of the

leased property at the inception of the lease, the

amount recorded as the liability should be the

fair value. If the portion of the minimum lease

payments representing executory cost is not

determinable from the lease provisions, the amount

should be estimated.

45 The discount rate to be used in determining

the present value of the minimum lease payments

ordinarily would be the lessee's incremental

borrowing rate unless (1) it is practicable for

the lessee to learn the implicit rate computed by
the lessor and (2) the implicit rate computed by

the lessor is less than the lessee's incremental

borrowing rate. If both these conditions are met,

the lessee shall use the implicit rate. The

lessee's incremental borrowing rate shall be the

Treasury borrowing rate for securities of similar

maturity to the term of the lease.

46 During the lease term, each minimum lease

payment should be allocated between a reduction of

the obligation and interest expense so as to

produce a constant periodic rate of interest on

the remaining balance of the liability.[FN 29: OMB

Circular No. A-11, "Preparation and Submission of

Annual Budget Estimates," explains the measurement

of budget authority, outlays, and debt for the

budget in the case of lease-purchases and other

capital leases. Circular A-94, "Guidelines and

Discount Rates for Benefit-Cost Analysis of

Federal Programs," provides the requirements

under which a lease-purchase or other capital

lease has to be justified and the analytical

methods that need to be followed.]

FEDERAL DEBT AND RELATED

INTEREST COST

47 This standard applies to all securities or

other debt instruments issued by the U.S. Treasury

or other federal agencies. It encompasses debt

issued to the public and debt issued to federal

accounts by other federal accounts.[FN 30: This

includes but is not limited to debt issued by the

U.S. Treasury to trust funds, agency borrowings

from Treasury, and trust fund borrowings from

other trust funds.]

48 Accounting for the federal debt should

identify the amount of the outstanding debt

liability of the federal government at any given

time and the related interest cost for each

accounting period. This entails valuing

securities initially at their sales price or

proceeds, ultimately at the amount paid to the

holder at maturity, and in the intervening period
in a way that fairly expresses the federal

government's liability.

Accounting for Federal Debt Securities[FN 31:

Figure 2 (available in Hard Copy only) lists

various categories and examples of federal debt

securities.]

49 Federal debt securities fall into two major

categories for accounting purposes: fixed value

securities and variable value securities.

 Fixed Value Securities

50 Fixed value securities have a known maturity

or redemption value at the time of issue. These

securities should be valued at their original face

(par) value net of any unamortized discount or

premium. Securities sold at face (par) have no

discount or premium and should be valued at face

(par). Securities sold at a discount will

increase in value between sale and maturity;

securities sold at a premium will decrease in

value. Amortization of the discount or premium

may follow the straight line method or the

interest method.[FN 32: For an explanation and an

example of the interest method of amortization,

see Appendix B of SFFAS No. 1.] Either method is

acceptable in the cases of

 -- short-term securities that have a maturity

of 1 year or less, and

 -- longer-term securities for which the

amount of amortization under the straight-line

method would not be materially different from the

amount of amortization under the interest method.

51 In all other cases, the interest method for

amortizing any discount or premium should be used.

 Variable Value Securities

52 Variable value securities have unknown

redemption or maturity values at the time of

issue. Values of these securities can vary on the
basis of regulation or specific language in the

offering. These securities should be originally

valued and periodically revalued at their current

value, on the basis of the regulations or offering

language.

Related Interest Cost

53 The related interest cost of the federal debt

include:

 -- the accrued (prorated) share of the

nominal interest incurred during the accounting

period,

 -- the amortization amounts of discount or

premium for each accounting period (based on the

same amortization method used to account for the

related debt liability) for fixed value

securities, and

 -- the amount of change in the current value

for the accounting period for variable value

securities.

Retirement Prior to Maturity

54 For those securities that are retired prior

to the maturity date due to a call feature of the

security, or because they are eligible for

redemption by the holder on demand, the difference

between the reacquisition price and the net

carrying value of the extinguished debt should be

recognized currently in the period of the

extinguishment as losses or gains.

Old Currencies Issued by the Federal Government[FN

33: Old currencies include National and Federal

Reserve Bank Notes, Old Demand Notes, Old Series

currency, and silver certificates classified as

public debt pursuant to 31 U.S.C. 5119.]

55 Pursuant to federal law, old currencies

issued by the federal government and not yet

redeemed or written off are identified as a

federal debt liability at face value and do not
bear any interest.

**************FIGURE 2: VARIOUS CATEGORIES AND

EXAMPLES OF FEDERAL DEBT SECURITIES APPEARED HERE

IN THE HARD COPY TEXT **************************

[FN 34: These tables are intended to illustrate

current practice only and are not to be considered

authoritative.]

PENSIONS, OTHER RETIREMENT BENEFITS,

AND OTHER POSTEMPLOYMENT BENEFITS

56 Employee benefits of federal civilian and

military personnel and veterans[FN 35: Veterans'

compensation included in this category is a

measurable program benefit that directly relates

to a veteran's prior military service and is not

the type of benefit included in general fund

benefit programs. For example, compensatory

income payments for injuries sustained in the line

of duty (i.e., VA disability compensation

benefits) are employee benefits, while entitlement

benefits (i.e., VA pension) are accounted for as

general fund benefits. (Also see Appendix A:

Basis for Conclusions.)] include pensions and

postemployment and retirement benefits other than

pensions. Pension plans[FN 36: This standard

addresses "defined benefit plans," which define

the future benefits that will be paid in terms of

such factors as age, years of service, or

compensation. The amount of benefit depends on a

number of future events incorporated in the plan's

benefit formula.] provide benefits upon retirement

and may also provide benefits for death,

disability, or other termination of employment

before retirement. Pension plans may also include

benefits to survivors and dependents, and they may

contain early retirement or other special

features. The actuarially determined liability

and expense of the plan, including all its

provisions, is part of the pension plan's

liability and expense estimate.

57 In addition to or in lieu of pension
benefits, a liability for postemployment and other

retirement benefits may be incurred outside the

pension plan. Postemployment benefits other than

pensions (OPEB) include all types of benefits

provided to former or inactive (but not retired)

employees, their beneficiaries, and covered

dependents.[FN 37: Special termination benefits

(such as specially authorized separation incentive

programs) are considered other postemployment

benefits and should be recognized as such.]

Inactive employees are those who are not currently

rendering services to their employers and who have

not been terminated, but who are not eligible for

an immediate annuity, including those temporarily

laid off or disabled. OPEB include salary

continuation, severance benefits, counseling and

training, continuation of health care or other

benefits, and unemployment and workers'

compensation benefits paid by the employer

entity.[FN 38: The terms "employer entity" and

"administrative entity" are used in this document

to distinguish between entities that employ

federal workers and thereby generate the employee

costs, including pension cost, and those that are

responsible for managing and/or accounting for the

pension or the other employee plan. For example,

entities that receive "salaries and expense"

appropriations are employer entities, while the

Office of Personnel Management is an

administrative entity because it administers the

civilian retirement benefit plans.]

58 Retirement benefits other than pensions (ORB)

are all forms of benefits to retirees or their

beneficiaries provided outside the pension plan.

Examples include health and life insurance.

Retirement health care benefits are the primary

ORB expense. They present unique measurement

problems.

59 Pension benefits, OPEB, and ORB are exchange

transactions because the employee performs service

in part to receive the deferred compensation

provided by the plans (such as future pension and

medical care benefits). For pension and other

retirement benefits, the expense is recognized at
the time the employees' services are rendered.

For OPEB, the expense is recognized at the time

the accountable event occurs. Any part of that

cost unpaid at the end of the period is a

liability.

60 This Statement is intended to specify the

accounting objectives. With regard to pensions

and ORB, if estimates, averages, or such devices

can reduce the cost of applying this Statement,

their use is appropriate provided the results do

not materially differ from a detailed application

of the standard.

Pensions

61 Pension benefits include all retirement,

disability, and survivor benefits financed through

a pension plan, including unfunded pension plans.

Federal civilian and military employees are

covered primarily under the following three

defined benefit retirement plans: Civil Service

Retirement System (CSRS), Federal Employees

Retirement System (FERS), and Military Retirement

System (MRS). To the extent that federal

employees are covered by social insurance programs

(such as Social Security), the taxes they pay to

the program and the benefits they will eventually

receive are to be accounted for on the same basis

used to account for other program participants.

However, the payments to social insurance plans

that agencies must make are operating costs.

Similarly, to the extent that federal employees

are covered by defined contribution plans (i.e.,

the Thrift Savings Plan, which is like a 401(k)

plan), federal payments to the plan are expenses,

but the plan itself is not covered under this

standard.

62 This Statement establishes standards of

accounting for pension expense and related pension

liability for federal government employers and

administrative agencies.

 Accounting for the Pension Plan
63 This section covers federal pension plans.

The entity that administers the plan (i.e., the

"administrative entity") should account for and

report the plan in accordance with this

standard.[FN 39: In addition to the requirements

of this standard, which deals with general purpose

financial reports, federal plans report annually

pursuant to P.L. 95-595, which calls for

statements of net assets available for benefits, a

statement of accumulated benefits, and other

statements.] A subsequent section covers federal

employer entities.

64 Attribution Methods--The "aggregate entry age

normal" actuarial cost method should be used to

calculate the pension expense, the liability for

the administrative entity financial statements,

and the expense for the employer entity financial

statements. The aggregate entry age normal method

is one under which the actuarial present value of

projected benefits is allocated on a level basis

over the earnings or the service of the group

between entry age and assumed exit ages; and it

should be applied to pensions on the basis of a

level percentage of earnings. The portion of this

actuarial present value allocated to a valuation

year is called the "normal cost." The portion not

provided for at a valuation date by the actuarial

present value of future normal cost is called the

"actuarial accrued liability."[FN 40: Adapted from

Actuarial Standards of Practice No.4, "Measuring

Pension Obligations" (Jan. 1990), p. 31.] The

plan, however, may use other actuarial cost

methods if it explains why aggregate entry age

normal is not used and if the results are not

materially different.

65 Assumptions--For financial reports prepared

for the three primary federal plans (CSRS, FERS,

and MRS), the best available actuarial estimates

of assumptions should be used to calculate the

pension expense and liability. The selection of

all actuarial assumptions should be guided by

Actuarial Standards of Practice No. 4, "Measuring

Pension Obligations," as revised from time to time

by the Actuarial Standards Board.[FN 41: The
Actuarial Standards Board is a board within the

American Academy of Actuaries that sets

professional standards of actuarial practice.]

Accordingly, actuarial assumptions should be on

the basis of the actual experience of the covered

group, to the extent that credible experience data

are available, but should emphasize expected longterm future trends rather than give undue weight

to recent past experience. Although emphasis

should be given to the combined effect of all

assumptions, the reasonableness of each actuarial

assumption should be considered independently on

the basis of its own merits and its consistency

with each other assumption.

66 In addition to complying with the guidance in

the preceding paragraph, the interest rate

assumption should be based on an estimated longterm investment yield for the plan, giving

consideration to the nature and the mix of current

and expected plan investments and the basis used

to determine the actuarial value of assets; or if

the plan is not being funded, other long-term

assumptions (for example, the long-term federal

government borrowing rate). The underlying

inflation rate and the other economic assumptions

should be consistent. The rate used to discount

the pension obligation should be equal to the

long-term expected return on plan assets.

67 The administrative entity should disclose the

assumptions used. Administrative entities are

encouraged to consult with one another to achieve

the maximum consistency among assumptions used for

financial reports. Smaller federal administrative

entities may employ the assumptions used by any of

the three primary plans where appropriate or their

own assumptions. If they use assumptions that

differ from all of the primary plans, a footnote

should explain how and why the assumptions differ

from one of those plans.

68 Assets should be reported separately from the

pension liability rather than reporting only a net

liability. Assets of federal pension plans should

be carried at their acquisition cost, adjusted for
amortization, if appropriate. For investments in

market-based and marketable securities, the market

value of the investment should be disclosed.[FN

42: See SFFAS Number 1, "Accounting for Selected

Assets and Liabilities."]

69 Past Service Cost, Prior Service Cost, and

Actuarial Gains and Losses--Past service costs

result from retroactive benefits granted when a

new plan is initiated. Prior service costs result

from retroactive benefits granted in a plan

amendment. A plan amendment may also reduce

benefits attributed to prior service. This

results in a gain to the extent that previously

recognized benefits are reduced. As explained in

the next paragraph, the accounting for such gains

should be consistent with accounting for

retroactive benefit increases. Actuarial gains

and losses are changes in the balance of the

pension liability that result from (1) deviations

between actual experience and the actuarial

assumptions used or (2) changes in actuarial

assumptions.

70 The administrative entity should recognize

all past and prior service costs (or gains)

immediately, without amortization. Similarly, the

administrative entity should recognize all

actuarial gains and losses immediately, without

amortization.

71 Accounting by the Administrative Entity-- The

administrative entity should account for and

report the pension liability in its financial

report, using the aggregate entry age normal

actuarial method. The liability is the actuarial

present value of all future benefits, based on

projected salaries and total projected service,

less the actuarial present value of future normal

cost contributions that would be made for and by

the employees under the plan. Projected salaries

should reflect an estimate of the future

compensation levels of the individual employees

involved, including future changes attributed to

the general price level, productivity, seniority,
promotion, and other factors.

72 The administrative entity should report a

pension expense for the net of the following

components:

 -- normal cost;

 -- interest on the pension liability during

the period;

 -- prior (and past) service cost from plan

amendments (or the initiation of a new plan)

during the period, if any; and

 -- actuarial gains or losses during the

period, if any.

 The individual components should be

disclosed.

73 The administrative entity should report

revenue for the sum of amounts received from the

employer entity representing contributions from:

 -- the employer entity and

 -- its employees.[FN 43: The administrative

entity may also receive financing from the General

Fund to cover prior service or other cost for

which contributions from employer entities are not

provided.]

 The employer entity's contribution represents

intragovernmental revenue.[FN 44:

Intragovernmental revenue should be eliminated for

government-wide consolidated financial

statements.]

 An illustration of the accounting for the

administrative entity (and the employer entity) is

explained in the following section entitled

"Accounting Illustration."

 Employer Entity Accounting
74 The federal employer entity should recognize

a pension expense in its financial report that

equals the service cost[FN 45: "Service cost" is

defined as the actuarial present value of benefits

attributed by the pension plan's benefit formula

to services rendered by employees during an

accounting period. The term is synonymous with

"normal cost."] for its employees for the

accounting period, less the amount contributed by

the employees, if any. The measurement of the

service cost should require the use of the plan's

actuarial cost method and assumptions, and

therefore the factor to be applied by the employer

entities must be provided by the plan and/or the

administrative entity.

75 The employer entity's pension expense should

be balanced by: (a) a decrease to its "fund

balance with Treasury" for the amount of its

contribution to the pension plan, if any; and if

this does not equal the full expense, by (b) an

increase to an account representing an

intragovernmental imputed financing source

entitled, for example, "imputed financing -

expenses paid by other agencies." The latter

represents the amount being financed directly

through the pension plan's administrative entity.

76 In special instances when an employer entity

is also the administrative entity, that is, when

there is no separate pension plan (e.g., the Coast

Guard), the employer entity should report the

liability and recognize the pension expense for

all components of cost. The liability and the

expense should be accounted for as described in

the preceding section for the administrative

entity without reference to transactions with

external employer entities.

 Accounting Illustration

77 Tables 1-4 provide an example in which the

employer entity recognizes an "employer's pension

expense" in an amount equal to the service cost

attributable to its employees during the
accounting period, less the employees' own

contributions. The expense in this example is

more than the contribution that the employer

entity is required by law to pay. The difference

between the employer's pension expense and the

employer's contribution is credited to the

employer entity as a financing source ("imputed

financing-expenses paid by other entities"). The

employer entity transfers its contribution and

that of its employees to the administrative

entity.

78 The administrative entity recognizes revenue

for: (1) contributions from the employer entity,

(2) contributions from the employees, and (3)

interest on the plan's investments. The

administrative entity recognizes expense for the

net of the pension cost components.

 Assumptions are as follows:

 -- Total normal cost of employees for the

accounting period is $160,000.

 -- The employer's pension expense is

$100,000. The employer entity would calculate its

pension expense on the basis of information

received from the plan and/or the administrative

entity. Its pension expense is equal to its share

of the service cost of its employees' pensions.

 -- According to current law, the employer

entity is authorized in its appropriation to pay

$60,000 for employee pensions.

 -- The employees contribute $60,000 to the

pension fund.

 -- No general fund appropriations made

directly to the administrative agency are involved

in these transactions, as they could be under

actual operations.

 Entry #1 -- Employer entity's entry to record

pension expense:
 DR. Employer's Pension Expense $100,000

 CR. Appropriations Used $60,000

 CR. Imputed Financing - Expenses

 Paid by Other Entities 40,000

***************

Table 1

Employer Entity's Other Financing Sources as They

Should Appear on Its Statement of Changes in Net

Position

FINANCING SOURCES:[FN 46: SFFAC No. 2, "Entity and

Display" presents a change in the way revenue and

other financing sources are reported. This

illustration reflects the new concepts.]

 Appropriations Used..........$60,000

 Imputed financing ..............$40,000

Note: Imputed financing covers the difference

between (1) the employer entity's contribution

transferred to the administrative entity pursuant

to law (exclusive of the employees' contributions)

and (2) the employer's pension expense calculated

on the basis of information received from the

administrative entity--as shown immediately below.

Employer Entity's Cost as It Should Appear on the

Statement of Net Cost

 COST :

 Employer's pension cost....$ 100,000

Note: This is the employer entity's service cost

of employee pensions. The employer entity would

calculate this amount using factors provided by

the plan and/or the administrative entity. Also

to be transferred to the administrative entity is

the amount withheld from employees' wages, as

called for under the terms of the plan. The

employees' contribution is not an expense of the

employer entity.

***************
**Note: The above table and those that follow in

the sections on pensions and ORB are presented for

illustrative purposes only; the responsibility for

defining the form and content of a financial

statement prepared pursuant to the Chief

Financial Officers Act, as amended, is the

responsibility of the Office of Management and

Budget.

Entry #2 -- Administrative entity's entry to

record revenue received from employer entity:

DR. Fund Balance with Treasury $120,000

 CR. Retirement Program Revenue -

 Contribution Received from Employer

 Entity $60,000

 CR. Retirement Program Revenue -

 Contribution Received from Employees

 $60,000

Entry #3 -- Administrative entity's entry to

record revenue from interest on investments in

Treasury securities:

DR. Fund Balance with Treasury $XXX,XXX

 CR. Interest Revenue $XXX,XXX

***************

Table 2

Administrative Entity's Revenue as It Should

Appear on the Statement of Net Cost

LESS OTHER EARNED REVENUES:

 Contributions received

 from employer entities $ 60,000

 Contributions received

 from employees 60,000

 Interest on investments XX,XXX

 Total other earned

 revenues $ XXX,XXX
Note: Contributions are amounts transferred to

the administrative entity from the employer entity

representing its contribution--and that of its

employees--for the employees' pensions.

***************

Entry # 4 -- Administrative entity's entry to

record its pension expense:

DR. Pension Expense $XXX,XXX

 CR. Pension Liability $XXX,XXX

***************

Table 3

Administrative Entity's Pension Expense

 Normal cost ......................... $160,000

 Interest on pension liability ............ XXX

 Prior serv. costs (gains) (if any) ....... XXX

 Actuarial gains(losses) (if any) ......... XXX

 Total pension expense ...........$ XXX,XXX

**Note: The $160,000 represents 100 percent of

the normal cost--as calculated by plan actuaries--

for the one employer entity in this example.

According to law, $60,000 of this amount is to be

contributed by the employer entity and $60,000 is

to be contributed by the employees themselves.

The remaining $40,000 is a liability of the

pension plan (covered by future financing

sources). The pension expense is reported on the

Statement of Net Cost in accordance with paragraph

72.

***************

***************

Table 4

Administrative Entity's Pension Liability:

 Beginning balance $ XX,XXX,XXX

 Add: additional pension expense
 incurred (as calculated

 in table 3) XXX,XXX

 Less: payments made to

 beneficiaries XXX,XXX

 Ending liability balance $ XX,XXX,XXX

Note: The liability balance should be reported on

the administrative entity's Balance Sheet.

***************

Other Retirement Benefits (ORB)

79 ORB include all retirement benefits other

than pension plan benefits.[FN 47: See Appendix A:

Basis for Conclusions, for a discussion of

reporting medical costs for veterans.] ORB are

provided outside the pension plan by an employer

to a former employee or the employee's beneficiary

upon retirement. The predominant ORB in the

federal government is retirement health care

benefits, and they are the focus of this

section.[FN 48: Accounting for life insurance is

described in a separate section of the liability

standard. However, to the extent that premiums

paid by covered individuals and employer entities

do not fully cover the retirement life insurance

cost of employees, the employer entities would

account for the additional cost as described in

this section.]

80 Future health care benefits present unique

measurement problems. They are more uncertain

than pensions since they depend on the changing

patterns of health care delivery and utilization,

on the price trends for medical care, and on the

benefits provided by social insurance programs

like Medicare (part A). Also, medical plans do

not vest like pensions in which, after a fixed

number of years of service, an employee has a

right to receive payment. To receive ORB benefits

the employee must retire with health care benefits

provided by the organization.
81 This Statement establishes standards of

accounting for ORB expense and related ORB

liability for federal government employers and

administrative agencies.

 Accounting for the ORB Plan

82 Attribution Method--The aggregate entry age

normal actuarial cost method should be used to

calculate the ORB expense and liability for the

administrative entity's financial statements, and

the expense for the employer entity's financial

statements. As indicated in the pension section,

aggregate entry age normal is a method under which

the actuarial present value of projected benefits

is allocated on a level basis over the earnings or

the service of the group between entry age and

assumed exit ages. It should be applied to ORB on

the basis of service rendered by each employee.

The portion of this actuarial present value

allocated to a valuation year is called the normal

cost. The portion not provided for at a valuation

date by the actuarial present value of future

normal cost contributions is called the actuarial

accrued liability.[FN 49: Adapted from Actuarial

Standards of Practice No. 4, p. 31. Also see

Actuarial Standard of Practice No. 6 "Measuring

and Allocating Actuarial Present Values of Retiree

Health Care and Death Benefits," Actuarial

Standards Board (1988).] Unlike federal pensions,

retiree health care benefits do not depend on

future salary levels of individual employees but

rather are allocable to each employee on a per

person basis. Plans may use other actuarial cost

methods if they explain why aggregate entry age

normal is not used and if the results are not

materially different.

83 Assumptions--Amounts calculated for financial

reports prepared for ORB plans should reflect (1)

general actuarial and economic assumptions that

are consistent with those used for pensions and

(2) a health care cost trend assumption that is

consistent with Medicare projections or other

authoritative sources appropriate for the

population covered by the plan. The rate used to
discount projected benefits should be equal to the

long-term expected return on plan assets if the

plan is being funded or on other long-term

assumptions (for example, the long-term federal

government borrowing rate) for unfunded plans.

The administrative entity should disclose the

assumptions used.

84 The accrual period should be based on

expected retirement age rather than the age when

the employee first becomes eligible.

85 Assets should be reported separately from the

ORB liability rather than merely reporting the net

liability. Assets of federal ORB plans should be

carried at their acquisition cost, adjusted for

amortization, if appropriate.[FN 50: See SFFAS No.

1, "Accounting for Selected Assets and

Liabilities."] For investments in market-based and

marketable securities, the market value of the

investment should be disclosed.

86 Past Service Cost, Prior Service Cost, and

Actuarial Gains and Losses--The standard for ORB

is the same as that for pensions. Past service

costs result from retroactive benefits granted

when a new plan is initiated. Prior service costs

result from retroactive benefits granted in a plan

amendment. A plan amendment may also reduce

benefits attributed to prior service resulting in

a gain to the plan to the extent that previously

recognized benefits are reduced. The accounting

for such gains should be consistent with

accounting for retroactive benefit increases.

Actuarial gains and losses are changes in the

balance of the ORB liability that result from (1)

deviations between actual experience and the

actuarial assumptions used or (2) changes in

actuarial assumptions.

87 The administrative entity should recognize

all past and prior service costs (or gains)

immediately, without amortization. Similarly, the

administrative entity should recognize all

actuarial gains and losses immediately, without

amortization.
88 Accounting for the ORB Plan--The ORB plan

should be accounted for in a way that is very

similar to that described above for pensions. The

administrative entity should account for and

report the ORB liability in its financial report,

using the aggregate entry age normal method. The

liability is the actuarial present value of all

future benefits less the actuarial present value

of future normal cost contributions that would be

made for and by the employees under the plan. The

administrative entity should report an ORB expense

for the net of the following components:

 -- normal cost,

 -- interest on the ORB liability during the

period,

 -- prior (and past) service costs from plan

amendments (or the initiation of a new plan)

during the period, if any,

 -- any gains/losses due to a change in the

medical inflation rate assumption; and

 -- other actuarial gains or losses during the

period, if any.

 The individual components should be

disclosed.

89 The administrative entity should report

revenue for the sum of amounts received, if any,

from the employer entity representing

contributions from:

 -- the employer entity and

 -- its employees.

 The employer entity's contribution represents

intragovernmental revenue.[FN 51:

Intragovernmental revenue should be eliminated for

government-wide consolidated financial

statements.] An illustration of the accounting
for the administrative entity (and employer

entity) is provided in the following section

entitled "Accounting Illustration".

 Employer Entity Accounting

90 The federal employer entity should account

for and report the ORB expense in its financial

report in a manner similar to that used for

pensions. The employer's ORB expense should be

recognized in an amount equal to the total service

cost[FN 52: "Service cost" is defined as the

actuarial present value of benefits attributed to

services rendered by employees during an

accounting period. The term is synonymous with

"normal cost".] for its employees for the

accounting period, less the amount contributed by

its employees, if any. The measurement of the

service cost requires use of the plan's actuarial

cost method and assumptions. The cost factor

should be provided to the agencies on a per

employee basis by the administrative entity and/or

the plan.

91 The employer entity's ORB expense should be

balanced by (a) a decrease to the employer

entity's "fund balance with Treasury" for the

amount of its contributions to the ORB plan, if

any; and, if this does not equal the full expense,

(b) by an increase to an account representing an

intragovernmental financing source entitled, for

example, "imputed financing - expenses paid by

other entities." The latter represents the amount

being financed directly through the ORB plan.

92 In special instances when an employer entity

is also the administrative entity, the employer

entity should report the liability and recognize

the ORB expense for all components of cost. For

example, the entity is paying its retirees' ORB on

a pay-as-you-go basis. The liability and the

expense should be accounted for as described in

the preceding section for the administrative

entity accounting without reference to

transactions with external employer entities.
 Accounting Illustration

93 Tables 5-8 provide an example where the

employer entity recognizes an "employer's ORB

expense" in an amount equal to the service cost

attributable to its employees during the

accounting period. In this example, neither the

employer entity nor its employees contribute to

the plan. The employer's ORB expense is offset by

a credit to the employer entity as a financing

source ("imputed financing-expenses paid by other

entities"). The administrative entity recognizes

a revenue and other financing source for

contributions from the General Fund. The

administrative entity recognizes an expense for

the total ORB expense.

 Assumptions are as follows:

 -- Total normal cost of employees for the

accounting period is $10,000.[FN 53: This is the

amount attributable to the government for its

share of future medical care costs for future

retirees. Although this simplified illustration

does not show contributions other than those from

the General Fund, current retirees pay premiums

for their health insurance that partially defray

the cost of the program. Federal civilian

retirees pay approximately 25-30 percent of the

total health benefit premium.]

 -- The employer's ORB expense is $10,000.

The employer entity should calculate its expense

on the basis of factors received from the plan

and/or the administering entity. For example, the

plan-supplied factor is $100 per employee (or

full-time equivalent); if the employer has 100

employees, the expense would be $10,000. (The

employer's ORB expense equals the service cost of

its employees' retirement health care.)

 -- The employer and employees do not make

contributions to a fund. The cost of retirement

health care is paid for by General Fund

appropriations directly to the administrative

entity on a pay-as-you-go basis.
 Entry #5 -- Employer entity's entry to record

ORB expense:

 DR. Employer's ORB Expense $10,000

 CR. Imputed Financing-Expenses

 Paid by Other Entities $10,000

***************

Table 5

Employer Entity's Other Financing Sources as They

Should Appear on the Statement of Changes in Net

Position

FINANCING SOURCES:

 Imputed financing Expenses paid by other

entities ................................ $10,000

Note: Imputed financing "Expenses paid by other

entities" covers the annual expense for the

employer entity's employees as shown immediately

below.

Employer Entity's Cost as It Should Appear on the

Statement of Net Cost

COST :

 Employer's ORB cost ........$ 10,000

Note: This is the annual ORB service cost of the

employer entity's employees. The employer entity

would calculate this amount using factors provided

by the administrative entity.

***************

***************

Table 6

Administrative Entity's Other Financing Sources as

It Should Appear on the Statement of Changes in

Net Position

 FINANCING SOURCES:

 Appropriations used......... $ XX,XXX
Note: Since, in this example, contributions are

not required from the employer entity or its

employees, all benefits must be paid with

appropriations from the General Fund.

***************

Entry #6 -- Administrative entity's entry to

record its ORB expense.

DR. ORB Expense $XX,XXX

 CR. ORB Liability $XX,XXX

***************

Table 7

Administrative Entity's ORB Expense

 Normal cost ......................... $ 10,000

 Interest on ORB liability ............. XX,XXX

 Prior service costs (gains) (if any) ...... XX

 Actuarial gains (losses) (if any) ......... XX

 Total ORB expense ............... $ XX,XXX

Note: The $10,000 represents 100% of the service

cost

 attributable to the employer entity in this

example, as calculated by plan actuaries. The ORB

expense (as calculated above) would be reported on

the Statement of Net Cost in accordance with

paragraph 88.

***************

***************

Table 8

Administrative Entity's ORB Liability

 Beginning balance ................ $ X,XXX,XXX

 Add: additional ORB expense

 incurred (as calculated in

 table 7) ............................. XX,XXX

 Less: payments made on

 behalf of beneficiaries ............. XX,XXX

 Ending liability balance...... $ X,XXX,XXX
Note: The liability balance should be reported on

the administrative entity's Balance Sheet.

***************

Other Postemployment Benefits (OPEB)

94 OPEB are provided to former or inactive

employees, their beneficiaries, and covered

dependents outside pension or ORB plans. Inactive

employees are those who are not currently

rendering services to the employer but who have

not been terminated, including those temporarily

laid off or disabled. Postemployment benefits can

include salary continuation, severance benefits,

counseling and training, continuation of health

care or other benefits, and unemployment, workers'

compensation, and veterans' disability

compensation benefits paid by the employer entity.

95 The employer entity should recognize an

expense and a liability for OPEB when a future

outflow or other sacrifice of resources is

probable and measurable on the basis of events

occurring on or before the reporting date. For

example, a reduction in force may require an

employer entity to make severance payments,

unemployment reimbursements, or other payments in

future periods. Similarly, an injury on the job

may require the employer entity to make short- or

long-term reimbursements to the federal workers'

compensation program. A long-term OPEB liability

should be measured at the present value of future

payments. This will require the employer entities

to estimate the amount and timing of future

payments, and to discount the future outflow using

the Treasury borrowing rate for securities of

similar maturity to the period over which the

payments are to be made.

96 Most OPEB liabilities should be short-term

because the benefits will be paid in the near

future. Some OPEB, however, could be longer term.
For example, a liability for workers' compensation

or veterans' disability compensation might be

long-term for some injuries since federal employer

entities might be required to reimburse the

program for many years.[FN 54: Both the federal

employee unemployment program and the federal

workers' compensation program are financed by

direct reimbursements from federal employers.]

Also, certain specially authorized separation

incentive programs could provide for payments that

extend over many future years.

INSURANCE AND GUARANTEES

Nature of Federal Insurance

and Guarantee Programs[FN 55: In the federal

government, the aspects of insurance and

guarantees are frequently commingled within the

same program. Therefore, this Statement treats

the terms as a single type of activity.]

97 Insurance and guarantee programs are federal

programs that provide protection to individuals or

entities against specified risks. Many of these

programs were established to assume risks that

private sector entities are unable or unwilling to

assume [at least at prices that beneficiaries of

the program can afford (in some cases) or want to

pay ( in other cases)] or to subsidize the

provision of insurance to achieve social

objectives. Program participants pay fees or

premiums for specific services. These funds are

commonly held in revolving funds within the

federal government; losses sustained by

participants are paid from these funds. Many of

these programs receive appropriations to pay

excess claims and/or have authority to borrow from

the Treasury.

98 For accounting purposes, private sector

insurance and guarantee contracts are customarily

divided into two types. The first type provides

insurance protection for a fixed period. The

insurer may cancel the coverage or adjust the
provisions of coverage at the end of any coverage

period, for example, by adjusting the amount of

premiums charged or changing the conditions under

which coverage is provided. Most property

insurance and health insurance offered by private

insurers is of this type.

99 The second type of insurance or guarantee

contract is one in which the insurer cannot cancel

the insurance or the insured is guaranteed the

ability to renew it. The insurer must provide

coverage for an extended period until the insured

event occurs or can no longer occur, or when the

insured party allows the policy to lapse.

Examples of this type of insurance offered by

private insurers include whole and guaranteed

renewable term life insurance, annuities, and

title insurance.

100 Federal programs provide protection against

many types of risk for individuals and entities.

These include life insurance; medical insurance;

and insurance against damage to property (homes,

crops, and airplanes) or other assets (deposits

and pension benefits) caused by perils such as

flooding and other natural disasters, war-risk,

and insolvency.

101 For federal insurance and guarantee programs,

there often is no explicit contract. For example,

the federal government, acting through the Pension

Benefit Guaranty Corporation (PBGC), functions as

an insurer of pension benefits, but the "contract"

with employers and pension plans is implicit in

federal law, not explicit in contracts between

PBGC and employers. Moreover, the PBGC itself has

no power to set premiums or to change the terms of

coverage, though it may recommend changes to the

Congress. The Congress has occasionally raised

premiums and changed other factors, such as

pension plan funding requirements, in an effort to

achieve the statutory intent that the program be

self-financing without appropriations from general

revenue.[FN 56: Further details on PBGC may be

found in "Controlling Losses of the Pension

Benefit Guaranty Corporation", Congressional
Budget Office, January 1993.] Companies with

defined benefit pension plans must participate,

but may (and sometimes do) elect to terminate

their defined benefit pension plans.

102 Federal insurance programs also differ from

private insurance in that they are not subject to

the same market forces (e.g., competition for

business and for capital) and regulatory

requirements (e.g., for capitalization) that apply

to privately owned insurers. In particular,

federal insurance, unlike private insurance, is

not extended with the intent of earning a profit.

Some programs operate deliberately at a loss, as

when disabled veterans are offered life insurance

at premiums set for healthy participants. Other

programs offer insurance covering catastrophic or

systemic risks, where large losses can occur all

at once, as in war-risk or deposit insurance. At

most, federal insurance programs are expected just

to meet anticipated costs, leaving them vulnerable

to unfavorable surprises.

103 For this reason, the issue in accounting for

federal insurance and guarantee programs is when

to recognize net expected losses. In this

respect, federal insurance programs are similar to

federal credit programs. The federal government

extends credit on terms and conditions designed to

subsidize particular borrowers or encourage

particular activities for social policy reasons.

As soon as a federal direct loan or loan guarantee

is obligated, the federal government is committed

to bear whatever loss, through defaults or

interest subsidies, is inherent in the terms and

the conditions under which the credit is extended.

The government is likewise committed when federal

insurance is extended to additional policyholders,

either for an additional fixed period, or to cover

additional amounts of assets.

Accounting for Liabilities of Federal

Insurance and Guarantee Programs

104 All federal insurance and guarantee programs
(except social insurance and loan guarantee

programs[FN 57: Social insurance is considered to

be a different type of program not included within

insurance and guarantee programs. See social

insurance discussion in the FASAB ED,

"Supplementary Stewardship Reporting". Accounting

for all federal loan guarantee programs should

follow the Statement of Federal Financial

Accounting Standards Number 2, "Accounting for

Direct Loans and Loan Guarantees" (August 23,

1993).]) should recognize a liability for unpaid

claims incurred, resulting from insured events

that have occurred as of the reporting date. The

standard requires recognition of the liability

that is known with certainty plus an accrual for a

contingent liability recognized when an existing

condition, situation, or set of circumstances

involving uncertainty as to possible loss exists

and the uncertainty will ultimately be resolved

when one or more probable future events occur or

fail to occur; a future outflow or other sacrifice

of resources is probable; and the future outflow

or sacrifice of resources is measurable.

Insurance and guarantee programs should recognize

as an expense all claims incurred during the

period, including, when appropriate, those not yet

reported and contingencies that meet the criteria

for recognition. Life insurance programs should

recognize a liability for future policy benefits

(a liability to current policyholders that relates

to insured events, such as death or disability) in

addition to the liability for unpaid claims

incurred. (See Contingencies section for the

criteria for disclosure of a contingent

liability.)

105 Risk assumed information is important for all

federal insurance and guarantee programs (except

social insurance, life insurance and loan

guarantee programs) and will be considered in the

context of the Stewardship reporting. Risk

assumed is generally measured by the present value

of unpaid expected losses net of associated

premiums, based on the risk inherent in the

insurance or guarantee coverage in force.
Additional Disclosures for Insurance

and Guarantee Programs Administered

by Government Corporations

106 When financial information pursuant to FASB's

standards on federal insurance and guarantee

programs conducted by government corporations is

incorporated in general purpose financial reports

of a larger federal reporting entity, the entity

should report as RSSI what amounts and periodic

change in those amounts would be reported under

the "risk assumed" approach referred to in this

section (see par. 105). In other words, in

addition to the liability for unpaid claims from

insured events that have already occurred

(including any contingent liability that meets

criteria for recognition), such reporting entities

should also report as RSSI risk assumed

information.

Illustrations of the

Application of the Standard

107 Table 9 [**Availiable in Hard Copy Only**]

illustrates the application of the liability

recognition, disclosure, and supplementary

reporting standards for six federal insurance and

guarantee programs. Two of these, flood and crop

insurance, offer fixed period annual insurance. A

third, deposit insurance, also can be said to

offer fixed period annual insurance, though in

practice it is continually renewed at the option

of the insurer.[FN 58: In effect, FDIC's options

are to renew the insurance coverage or to assume

losses of the institution; only Congress can

reduce or eliminate the deposit insurance

program.] A fourth program listed, overseas

private investment insurance, offers a fixed

period multi-year written contract. The fifth

program, life insurance, offers coverage that in

practice is noncancelable by the insurer and

guaranteed renewable by the insured, continuing

until the insured event has occurred or the policy

is cancelled by the insured. Finally, the pension

benefit guarantee program is included as an

example of noncancelable insurance. Pension
insurance is characterized here as noncancelable

with respect to vested guaranteed benefits earned

by covered employees to date, on the assumption

that this coverage would remain in effect even if

the Congress ended the program.

108 The column numbered (3) in the table shows

the point at which the standard requires a

liability to be recognized for insurance and

guarantee programs except life insurance. Column

(3) recognizes all unpaid claims and expected

claims resulting from insured events that have

already occurred, whether floods, crop damage,

overseas investment losses, bank closures and

insolvencies, deaths, or pension plan

terminations. The liability for unpaid claims is

the estimated amount needed to settle claims

relating to insured events that have occurred on

or before the reporting date. This liability

includes a contingent liability recognized when an

existing condition, situation, or set of

circumstances involving uncertainty as to possible

loss exists and the uncertainty will ultimately be

resolved when one or more probable future events

occur or fail to occur; a future outflow or other

sacrifice of resources is probable; and the future

outflow or sacrifice of resources is measurable.

109 The liability at the end of any period should

be the expected unpaid net loss inherent in

insured events that have occurred, including any

claims --both claims reported and when

appropriate, claims incurred but not reported

(IBNR)-- and any contingent liabilities that meet

the criteria for recognition. When payments and

losses extend beyond the current year, net losses

should be calculated on a present value basis to

reflect the time value of money. The expense for

claims incurred in the reporting period should be

recognized in that period. Changes in estimates

of claim cost resulting from the present value

calculations, the continuous review process, and

differences between estimates and actual payments

for claims should be recognized as charges against

operations of the period in which the estimates

are changed or payments are made.
110 Liability recognition for life insurance

programs spans over columns (3) and (4). The

column numbered (4) in the table shows the point

at which the standard requires liability

recognition for life insurance and supplementary

reporting for other insurance and guarantee

programs. The supplementary reported amounts

represent the present value of unpaid expected

losses based on the risk assumed as a result of

insurance coverage net of associated premiums.

********** TABLE 9 : "LIABILITY RECOGNITION,

SUPPLEMENTARY INFORMATION AND DISCLOSURE FOR

FEDERAL INSURANCE AND GUARANTEE PROGRAMS"

APPEARED HERE IN THE HARD COPY TEXT **********

111 Insurance programs are on-going and may be

viewed as having long term characteristics. Thus,

from a broader, longer term perspective, the

liability to be recognized (column 3), and the

amount to be reported as supplementary information

(column 4) may be conceptually different and

materially different from each other. From the

broader perspective column (4) could be a longer

term measure and a probabilistic estimate of

future costs of these programs.

112 For noncancelable or guaranteed renewable

insurance also, a difference arises between

columns (3) and (4). Thus, for pension

guarantees, column (3) shows the net present value

of losses arising from plans that have already

been terminated or that are more likely than not

to be terminated. This is the amount to be

recognized as a liability. Column (4) shows the

net present value of the expected loss inherent in

the risk assumed as a result of coverage on the

guaranteed and vested benefit amounts. This

number should be reported as supplementary

information. It will generally be larger than the

liability because it includes a provision for the

additional losses that are expected to arise

because some plan sponsors currently in good
financial condition will in the future face

bankruptcy with pension assets too small to cover

the vested benefits that were guaranteed.

113 The liability for life insurance includes

both the liability for unpaid claims, including

IBNR (i.e., column 3), and a liability for net

future policy benefit outflows (i.e., column 4).

The liability for future policy benefits

represents the expected present value of future

outflows to be paid to, or on behalf of, existing

policyholders, less the expected present value of

future net premiums to be collected from those

policyholders. The liability is estimated using

appropriate financial or actuarial methods that

include assumptions, such as estimates of expected

investment yield, mortality, morbidity,

terminations, and expenses, applicable at the time

the insurance contracts are made and in accordance

with existing law and related policy (see specific

whole life insurance standard below). Changes in

the liability for future net policy benefit

outflows that result from periodic re-estimations

would be recognized as expense in the period in

which the changes occur. The effects of changes

in relevant law or policy would be recognized when

those changes occur.

114 The assessments of losses expected based on

the risk assumed may be made by appropriate

actuarial or financial methods that include

information and assumptions applicable to the

economic, legal, and policy environment in force

at the time the assessments are made. Since all

future events are uncertain, indicators of the

range of uncertainty around expected estimates,

including indicators of the sensitivity of the

estimates to changes in major assumptions, should

also be reported.

Whole Life Policies

115 Some VA life insurance programs are whole

life policies.[FN 59: Whole life policies

provide insurance over the insured's entire life

and the proceeds (face amount) are paid only upon
death of the insured. A level premium is usually

paid for policies of this type. The premium may

be paid annually or more frequently. ] These

programs operate in a manner similar to private

sector mutual life insurance enterprises,[FN 60:

A mutual company is an incorporated entity without

private ownership interests which operates for the

benefit of its policyholders and their

beneficiaries. With limited exceptions, mutual

companies issue only participating policies. In a

mutual company, participating policyholders have

the right to vote for members of the company's

board of directors or trustees. In some states,

the insurance laws provide that upon liquidation

of a mutual insurance company, the net assets are

distributed among the existing policyholders of

the company, and the prior policyholders have no

claim against such assets.] except that the

regulations and market forces that control the

private sector are different for these federal

programs. VA life insurance policyholders are

issued participating policies, and a portion of

the earnings from those policies is returned to

policyholders in the form of dividends. The

following paragraphs specifically address the

accounting required for federal whole life

insurance programs.

116 The premiums collected by the insurer are

used to pay benefits and other cost, and the

balance is usually invested to yield additional

income. These assets would be fund balances with

Treasury or investments. Encompassed in the

liability (also referred to as policy reserves) is

cash surrender value and the liability for future

policy benefits. The cash surrender value is the

portion of premiums paid or other amount

recoverable on an insurance policy if immediately

canceled. The liability for future policy

benefits is the present value of future outflows

to be paid to (or in behalf of) policyholders,

less the present value of future related premiums.

In general, for whole life policies, the liability

for future policy benefits should be no less than

the cash surrender value that accrues to the

benefit of policyholders.
 Accounting for Liabilities of Federal Whole

Life Insurance Programs

117 All federal reporting entities with whole

life insurance programs should follow the

standards as prescribed in the private sector

standards (and as these private sector standards

are amended) when reporting the liability for

future policy benefits, in addition to the

required disclosures described below. [FN 61: The

applicable private sector standards are as

follows, FASB SFAS 60 "Accounting and Reporting by

Insurance Enterprises," FASB SFAS 97 "Accounting

and Reporting by Insurance Enterprises for Certain

Long- Duration Contracts and for Realized Gains

and Losses from the Sale of Investments," and FASB

SFAS 120 "Accounting and Reporting by Mutual Life

Insurance Enterprises and by Insurance Enterprises

for Certain Long-Duration Participating Contracts"

and AICPA Statement of Position (SOP) 95-1

"Accounting for Certain Insurance Activities of

Mutual Life Insurance Enterprises."

For those federal entities with "mutual

enterprise-type" whole life insurance programs,

FASB SFAS 120 should be followed. SFAS 120 states

that mutual life insurance enterprises shall apply

SFAS 60 or 97, as appropriate, to participating

life insurance contracts unless those contracts

meet both of the following conditions:

-- The contracts are long-duration participating

contracts that are expected to pay dividends to

policyholders based on actual experience of the

insurer.

-- Annual policyholder dividends are paid in a

manner that identifies divisible surplus and

distributes that surplus in approximately the same

proportion as the contracts are considered to have

contributed to divisible surplus (commonly

referred to in actuarial literature as the

contribution principle).

If the participating life insurance contracts meet
the above conditions SOP 95-1 should be followed.]

118 A liability for future policy benefits

relating to participating life insurance contracts

should be equal to the sum of:

 a. the net level premium reserve for death

and endowment policy benefits,

 b. the liability for terminal dividends, and

 c. any premium deficiency.[FN 62: The

liability for future policy benefits is consistent

with the liability required by SOP 95-1. Net

level premium reserve is the excess, if any, of

the present value of future guaranteed death

endowment benefits over the present value of

future net premiums. The net level premium

reserve should be calculated based on the dividend

fund interest rate, if determinable, and mortality

rates guaranteed in calculating the cash surrender

values described in the contracts. The dividend

fund interest rate is the interest rate determined

at policy issuance used to determine the amount of

the dividend fund. It is the rate used to credit

interest to the dividend fund, and against which

experience is measured to determine the amount of

the interest portion of dividends paid to

individual policyholders. Terminal dividends are

dividends to policyholders calculated and paid

upon termination of a contract, such as on death,

surrender, or maturity. If the payment of

terminal dividends is probable and the amount can

be reasonably estimated, the liability should be

recognized. (AICPA SOP 95-1, Glossary, p. 33)]

119 An assessment should be made to compare the

liability for future policy benefits using

actuarial assumptions applicable at the time the

contract is made (contract assumptions) with the

liability for future policy benefits using

assumptions that consider current economic

conditions and experience (current conditions).

Actual mortality, morbidity, and termination rates

should be used when determining experience. For
economic conditions, the nature and the mix of

current and expected investments should be

considered with expected long-term yields.

120 A premium deficiency occurs if the liability

for future policy benefits using current

conditions exceeds the liability for future policy

benefits using contract conditions; the difference

should be recognized as a charge to operations in

the current period.

 Additional Whole Life Insurance Disclosure

121 All components of the liability for future

policy benefits (i.e., the net level premium

reserve for death and endowment policy and the

liability for terminal dividends) should be

separately disclosed in a footnote with a

description of each amount and an explanation of

its projected use and any other potential uses

(e.g., reducing premiums, determining and

declaring dividends available, and/or reducing

federal support in the form of appropriations

related to administrative cost or subsidies).

**************************************************

APPENDIX A: BASIS FOR CONCLUSIONS

**************************************************

122 This appendix summarizes considerations

deemed significant by the Board in reaching the

conclusions in this Statement. It includes

reasons for accepting certain approaches and

rejecting others. Individual members gave greater

weight to some factors than to others.

123 This Statement addresses recognition and

measurement of liabilities in the general purpose

financial reports of federal reporting entities.

The unique circumstances of the federal

government, most notably its role as the vehicle

through which citizens express their sovereign

power, meant that the Board had to resolve some
new issues in order to define exactly how to apply

accrual concepts in federal financial reports.

124 The Board's deliberations on liabilities were

based on certain ideas about the distinction

between exchange and nonexchange transactions, the

importance of reporting cost of services provided

by the federal government, and the impact of

information on decisionmakers. These ideas are

explained in the following paragraphs.

125 Many users of federal financial reports are

familiar with accounting concepts and standards

published by the Financial Accounting Standards

Board (FASB) for private sector entities, and the

Governmental Accounting Standards Board (GASB) for

state and local government entities. Because such

users might assume that identical concepts and

standards are used by the federal government if

differences are not explained clearly, this

appendix compares certain concepts underlying the

federal standard with concepts that govern

recognition and measurement of liabilities in

financial reports of private sector entities and

state and local governments in the United States.

Finally, this appendix also explains the basis for

specific conclusions regarding social insurance,

contingencies, federal employee pensions, other

retirement benefits, other postemployment

benefits, and insurance and guarantee programs.

EXCHANGE AND NONEXCHANGE TRANSACTIONS

126 As noted in SFFAC No. 1, "Objectives of

Federal Financial Reporting": "The accounting

process begins with recording information about

transactions between the government (or one of its

component entities) and other entities, that is,

inflows and outflows of resources or promises to

provide them."[FN 63: P. 53, paragraph (16c).]

In some transactions, consideration of value is

exchanged: there is a reciprocal or two-way flow.

Other transactions, such as grants and other

transfer payments are nonexchange transactions

(i.e., there is a nonreciprocal transaction--
normally a one-way flow).

127 The federal government is the vehicle through

which citizens of the nation exercise their

sovereign power. In this role, the federal

government is responsible for taking collective

action at the national level "to promote the

general welfare. "Thus the government undertakes

many programs that do not involve reciprocal

transfers between the government as an entity and

its counterparties. Examples include disaster

relief, grants to state and local governments,

subsidies, and other transfer programs for

individuals. The federal government has a

propensity to assume such burdens because it is

the agent by which the society, through its

elected officials, accomplishes transfers between

groups of citizens to enhance their well-being.

128 A taxpayer or a donor may, in fact, receive a

benefit of some sort, such as the opportunity to

live in a safe, secure environment; to improve

one's standard of living; and to receive specific

benefits, such as visits to national parks and

travel over highways. But it is not ordinarily

said that the benefit to the individual taxpayer

or donor is of value comparable to that of the

consideration given. Therefore, these are

classified as nonexchange transactions. For this

Statement, the significance of the distinction

between exchange and nonexchange transactions

arises from the nature of the obligation that is

created when one party to a transaction provides a

product or service to the other party in return

for a promise that something of value will be

exchanged for it.

129 Obligations become legally enforceable claims

against the federal government in different ways

and at different points within transaction cycles

that relate to various programs. An important

factor in distinguishing between various programs

is whether an exchange is involved. For example,

the federal government may not contract for and

receive goods or services and then arbitrarily

decide not to honor the contract. Similarly,
under existing law, the federal government may be

financially responsible for certain damage and

injury it causes.

130 In other cases, the obligation may be more a

matter of what is perceived as equitable and good

public policy than a legally enforceable claim.

Although there may be a high probability that a

grant, a subsidy, or an income transfer will be

made or will continue in future years, the

recipients of such grants, subsidies, or transfers

do not have a right to receive such payments in

the future from the federal government as do those

who receive payments in exchange for service they

have performed.

131 However, it is possible to make meaningful

estimates of the future amounts required to

continue present policies regarding such programs.

These estimates are relevant to certain decisions

and should be disclosed or otherwise reported, as

discussed further in "Supplementary Stewardship

Reporting." In the context of the Board's

definition, however, estimates of future

nonexchange payments should not be recognized as a

current period liability. On the other hand, any

payments due as a result of past events but unpaid

at the end of the period constitute a liability.

132 In the case of federal liabilities, some

future outflows of resources are so likely that

they should be recognized as accounting

liabilities in general purpose federal financial

reports before all the other events necessary to

create a legally enforceable claim against the

government exists.[FN 64: Notwithstanding an

expectation that the appropriations will be made,

whether they in fact will be made is completely at

the discretion of the Congress.] Two important

examples of such substantive accounting

liabilities are the pensions and retirement health

care promised federal workers in return for their

service.

133 An exchange can in substance be said to have

occurred in such cases, even if the government has
not yet made an outlay of cash or other financial

resources. Service has been exchanged for a

promise of future payment or health care. Such

charges are properly assignable to the current

period in financial reports. This exchange

implies, for example, that general purpose federal

financial reports should recognize the financial

effects of the promise to provide health care to

retired federal workers as that obligation accrues

during their years of service, regardless of

whether the budget includes a provision for this

item. This is true even though unfunded

liabilities of the federal government reported on

the financial statements cannot be liquidated

without the enactment of an appropriation. Also,

as a sovereign entity, the payment of all

liabilities other than for contracts can be

abrogated by the federal government.

CONCLUSION ON SOCIAL INSURANCE

134 The recognition, measurement and display of

obligations for social insurance programs

presented the Board with significant theoretical

and practical problems. From the theoretical

perspective, the Board considered whether social

insurance programs resulted in exchange or

nonexchange transactions, or whether they

contained both exchange and nonexchange features.

The Board also considered the problems of

articulation between the operating statement and

the Balance Sheet, specifically whether the

process of reporting a year-to-year change in a

Balance Sheet liability might affect the

usefulness of an operating statement measure of

performance. Finally, the Board considered the

difficulty of determining an appropriate measure

of the obligation assumed, whether such a measure

were to be presented on the face of the Balance

Sheet or in the notes.

135 In the exposure draft "Accounting for

Liabilities of the Federal Government", the

majority of the Board concluded that social

insurance programs were entitlement programs

developed to carry out the sovereign
responsibilities of the government, financed

primarily by compulsory earmarked taxes. The

Board favored characterizing social insurance

obligations as nonexchange transactions, and

limiting recognition of a liability to any unpaid

amounts due as of the reporting date. A

significant majority of the respondents, however,

agreed with an alternative view, which expressed

the notion that social insurance programs

contained both exchange and nonexchange features,

and that there was a need for recognizing a

liability at least equal to the present value of

future payments due to recipients currently

eligible for benefits.

136 Upon reconsideration of the issues, the Board

concluded that the most appropriate approach from

both the Balance Sheet and Statement of Net Cost

perspectives would be: (1) to include a line item

entitled "social insurance obligations" in a

separate section of the Balance Sheet following

the liability section and before the equity

section; (2) to make note disclosure of

supplementary data resulting from several

approaches for measuring the obligation, and (3)

to report the annual financial outflows of current

financial resources on the Statement of Net Cost.

The Board also decided that, given the sensitivity

and magnitude of social insurance, this new

position should receive additional exposure, to

allow users to review it and comment. The Board

felt that the concepts and alternatives had not

yet been presented to the user community in

sufficient detail. Hence, the discussion of

social insurance has been withdrawn from the

liability standard and consolidated in

"Supplementary Stewardship Reporting."

IMPACT OF COMMUNICATING INFORMATION

IN GENERAL PURPOSE FEDERAL

FINANCIAL REPORTS

137 FASAB recognizes that extensive information

about probable and possible future federal outlays

is available now in many special purpose reports

on various federal programs. In that sense, the
financial reports prepared pursuant to this

Statement are not likely to reveal information

that is new in an absolute sense. Analysts

working for the various executive agencies,

congressional committees, private interest groups,

"think tanks" and universities are, collectively,

aware of this information and much more.

Nevertheless, the Board believes that presenting

liabilities and stewardship responsibilities in

the general purpose federal financial reports can

be valuable in several ways. There are at least

four reasons for this belief.

138 First, analysts typically know a lot about

certain programs, but only those programs.

Currently it is difficult, if not impossible, to

assemble comprehensive information prepared on a

comparable basis for the federal government as a

whole. In many cases, this is also true for

significant component units. General purpose

federal financial reports attempt to provide a way

of presenting comprehensive information.

139 Second, much of this information has no

impact on individual decisionmakers, such as

program managers, unless it is conveyed in a way

that facilitates, or even requires, suitable

attention to it. For example, information about

federal pension plans and retirement benefits

conveyed in an actuarial report or in the

narrative section of the "Budget of the United

States Government" may have an impact on certain

congressional decisions, but is unlikely to

influence managers' decisions about whether to use

federal employees, invest in labor-saving

equipment, or contract out to accomplish a given

task. If the information is to have such an

impact, it must be reported in a way more directly

associated with the activities the manager is

responsible for. Associating the expenses and

liabilities reported in the general purpose

federal financial report with the outputs of

responsibility centers is able to accomplish this

direct association.

140 Third, the mere requirement to assemble and
report these data will, in some cases, affect

federal managers, who, like everyone, tend to

manage what they measure. Some observers believe,

for example, that the prospect of having to comply

with FASB's Statement 106, "Employers' Accounting

for Postretirement Benefits Other Than Pensions,"

caused corporate managers and others to focus

increased attention on the need to manage the cost

of promises they had made to provide health care

to retirees, even before the statement became

effective.

141 Fourth, financial reports prepared and

audited pursuant to federal accounting standards

may reasonably be expected to possess a certain

credibility and to command a certain amount of

attention from various users, sufficient to affect

decisions about federal government public policy.

They will provide a source of information that

should complement what is provided by the "Budget

of the United States Government." An important

collateral benefit arises from the processes of

preparing, auditing, and publishing annual

financial statements. Experience demonstrates

that these processes improve the reliability of

information and of control systems, thereby

enhancing both decisionmaking and accountability

in general.

RELATIONSHIP TO LIABILITY

RECOGNITION PRINCIPLES USED

BY NONFEDERAL ENTITIES

142 FASB defines the basic principles that govern

liability recognition by private sector entities

in the United States.[FN 65: The Governmental

Accounting Standards Board (GASB) has not

published a concept statement on financial

statement elements as FASB has done in Concept

Statement Number 6 and has not defined "liability"

per se. In the current state and local

governmental accounting model, a fund liability is

"the amount left unpaid at the end of the

reporting period that normally would be liquidated

with expendable available financial resources.

The remainder of the liability should be reported
in the General Long-Term Debt Account Group

(GLTDAG)." National Council on Government

Accounting Statement (NCGAS) Number 4, par. 17.

(See GASB "Codification of Governmental Accounting

and Financial Reporting Standards", section

1500.)] Government corporations follow those

standards in their separately issued financial

statements. Probably most readers of this

Statement are familiar with these principles.

Probably most users of federal financial reports

are accustomed to seeing other financial reports

prepared according to these principles.

143 FASAB's principle for liability recognition

differs from FASB's. The difference can be seen

as a modification made necessary by the sovereign

nature of the federal government. FASAB

contemplates a liability standard within the

context of a reporting model that provides much

greater emphasis on publicly reporting certain

stewardship responsibilities than does the

reporting model used by private sector

organizations. This kind of reporting model is

necessary because of the federal government's

responsibility for the general welfare of the

nation and its resulting willingness to take on

obligations.

CONCLUSION ON CONTINGENCIES

144 In the Exposure Draft the Board asked the

following question. "When an estimated

[contingent] liability is a range of amounts and

no amount within the range is a better estimate

than any other amount, should either the midpoint

or, alternatively, the 'expected value' (as the

term is used in statistics) be recognized as a

liability instead of the minimum amount?" The

majority of respondents preferred the expected

value and the second preference was the minimum

amount.

145 The Board further considered all of the

options. Based on the Board discussions it was

noted that it would be difficult to use "expected

value" to pinpoint an estimate within a range.
The expected value method would assign a

probability percentage to each of the numbers

within the range, but these probabilities would

usually be difficult to estimate.

146 After much discussion the majority of the

Board preferred the minimum amount because of its

established use in other accounting standards.

The Board decided that liabilities arising from

nonexchange transactions would be recognized for

any unpaid amounts due as of the reporting date.

This includes amounts payable from the federal

entity to pay for benefits, goods, or services[FN

66: Goods or services may be provided under the

terms of the program in the form of, for example,

contractors providing a service for the government

on the behalf of disaster relief beneficiaries.]

provided under the terms of the program, as of the

federal entity's reporting date, whether or not

such amounts have been reported to the federal

entity (for example, estimated Medicaid payments

due to health providers that will be financed by

the federal entity but have not yet been reported

to the federal entity).

147 In the case of government-acknowledged events

giving rise to nonexchange or exchange

transactions, there must be a formal acceptance of

financial responsibility by the federal

government, as when the Congress has appropriated

or authorized (i.e., through authorization

legislation) resources. Furthermore, exchange

transactions that arise from governmentacknowledged events would be recognized as a

liability when goods or services are provided.

For nonexchange transactions a liability would

then be recognized at the point the amount is due.

Therefore, government-acknowledged events do not

meet the recognition criteria necessary to be

recognized as a contingent liability. The

government is acting in its sovereign capacity

when it assumes financial responsibility and makes

income transfer payments or provides other

nonexchange benefits. The Board does not believe

that accounting recognition should anticipate

sovereign actions in advance of occurrence.
CONCLUSION ON PENSIONS,

OTHER RETIREMENT BENEFITS AND

OTHER POSTEMPLOYMENT BENEFITS

Pensions - Projected Salary Levels

148 A primary objective for federal financial

reporting is to measure accurately the full cost

of employer entity services to the public. The

methods used to account for pensions, ORB, and

OPEB in general purpose financial reports should

accurately measure the full cost of an employer

entity's services. Since federal pension benefits

are based on final salaries, whatever method is

used for the annual cost and accrued liability of

federal pensions must include projected future

salaries that reflect an estimate of the

compensation levels of the individual employees

involved (including future changes attributable to

the general price level, seniority, promotion, and

other factors). They are part of the obligation

that the federal government is incurring.

Accounting for the Pension Plan

 Attribution Methods

149 The major federal pension plans use an

actuarial cost method for funding purposes known

as aggregate entry age normal (AEAN). Various

actuarial cost methods exist. All the methods

regarded as acceptable methods for advance funding

of private pension plans recognize the cost of an

employee's pension benefits during the employee's

years of service, but the different actuarial

methods recognize the cost in different patterns

over time. The AEAN method is intended to produce

a periodic pension cost that is a level percent of

payroll.

150 That is, AEAN is a method under which the

present value of projected benefits of each

employee is allocated on a level basis (such as a

constant percentage of salary) over the service of

the employee between entry age and assumed exit
age. The portion of this present value allocated

to each year is called the normal cost. The

portion of this present value not provided for at

a valuation date by the present value of future

normal cost is called the actuarial accrued

liability.

151 FASAB considered the method used by the

Financial Accounting Standards Board in Statement

of Financial Accounting Standards (SFAS) No. 87,

"Employer Accounting for Pensions" (the projected

unit credit, or PUC), as well as AEAN. FASB

concluded that PUC gave a better measure of the

employer's obligation for the benefits earned by

the employees at a particular point in time. It

therefore said that PUC provides a better measure

of the value of the benefits that accrue during

the year. However, FASAB heard testimony from an

OPM actuary that results from these two methods

were similar for federal plans. FASAB concluded

that AEAN is a sound measure of the accruing

expense.

152 FASAB concluded that any method of assigning

the value of benefits that are earned over the

entire career to particular years of service

involves a process of estimation. It is, of

course, reasonable to assume that the benefits

accrue in some sort of systematic and uniform

fashion and not, for example, all at once when the

employee becomes eligible. Assuming that the

benefits accrue as a uniform percentage of salary

each year (as is done with AEAN for pensions) is a

reasonable approach. AEAN is particularly useful

within an organization when measuring costs over

time because it provides that a dollar of salary

always equals a fixed percent of pension,

regardless of the year involved. Thus, inflation

is factored into the calculation automatically.

153 FASAB specified the AEAN for several reasons.

First, as stated, AEAN is a reasonable and

systematic way of allocating costs evenly over the

service lives of employees. Second, the major

federal retirement systems [the Military

Retirement System (MRS), the Civil Service
Retirement System (CSRS), and the Federal

Employees Retirement System (FERS)] use AEAN, and

in two cases (FERS and MRS) charge "full cost" in

the budget under a statutory requirement.[FN 67:

The CSRS statute calls for procedures that are

generally construed as entry age normal. "Full

cost," of course, depends on the method selected.

For example, prior service cost is amortized in

FERS over 30 years pursuant to the funding method;

it would be recognized over a shorter period

(years of expected future service of the group or

15 years) under SFAS 87. It should be recognized

in full immediately under the terms of this

standard, but only in financial reports of the

agency that administers the pension plan and in

the consolidated financial statements of the

United States, not in the employer agency's

financial statements. Thus, "full cost" in this

sentence must be read in a generic way, that is,

as a statement of the general intent underlying

the law.] Finally, exact comparability with

private-sector entities is not relevant. Minor

differences in the size of the pension liability

and expense calculated pursuant to this Statement

and SFAS 87 clearly would not have a material

impact on investor's assessment of the creditworthiness of the U. S. government.

154 Since there are several acceptable

attribution methods and several small pension

plans in addition to the three major plans, FASAB

decided that the use of methods other than AEAN

was permitted provided the results were not

materially different from those of AEAN. A

material difference between the expenses and the

liabilities for federal plans based solely on the

choice of attribution method would destroy the

comparability and impair the usefulness of the

information for users other than investors.

155 FASAB recognizes also that other attribution

methods might be useful for other purposes. For

example, a method that calculates the vested

benefits accrued by employees to date, at current

salary levels, would be useful as a measure of the

accumulated amount the plan would owe if it were
to terminate. Such calculations would be for

special purpose reports not covered by this

Statement.

 Assumptions

156 There are three objectives for actuarial

assumptions. First, FASAB considers it extremely

useful to have consistent assumptions among

accounting, budgeting, and actuarial statements to

the extent it is possible to do so while attaining

the objectives of federal financial reporting.

157 Second, assumptions ought to be consistent

across federal employee retirement systems.

Assumptions need not be identical because the

conditions facing each plan may objectively

differ, but they should be rationally related

(thus, the standard calls for financial reports to

be prepared on the basis of the best available

estimates for actuarial assumptions). Also, the

standard allows the smaller plans to use the

assumptions provided by any of the three primary

plans or to use their own assumptions if they

explain how and why they are different from one of

the major plans.

158 Third, assumptions ought to reflect the

underlying economic substance of the transaction.

They should reflect the entity's past experience

and current expectations regarding cost trends.

They should reflect the similarities of and

differences between two sets of economic phenomena

rather than forcing artificial uniformity.

159 FASAB concluded also that the discount rate

should reflect the long-term expected return on

plan assets rather than a current market rate on

debt of comparable maturity (the discount rate

called for by SFAS 87). The long-term expected

rate reduces volatility, reflects the actual

experience and expectations of the primary federal

plans, and is consistent with the assumptions used

in the budget. The Governmental Accounting

Standards Board uses a similar approach for the

discount rate for state and local government
pensions for similar reasons.

 Prior Service Cost

160 Prior service costs (or gains) are the costs

(or gains) of retroactive benefits granted (or

reduced) in a plan amendment. Under the current

budgetary system, prior service costs are funded

in the budget through General Fund appropriations

over 30 years. The employer entities under MRS

and FERS--which are intended to be fully funded--

are not charged in their budgets for prior service

cost (nor are they credited for gains), but rather

the General Fund is charged for these costs. [FN

68: CSRS also receives General Fund appropriations

for this purpose, but the appropriations are based

on statutory provisions and are less than they

would be under a fully funded approach. Because

of this, the CSRS funding approach is not being

used as an example of budgetary treatment to be

contrasted with the accounting treatment.]

161 As stated in the Statement, FASAB believes

that prior service costs, interest on the pension

(or ORB) liability, and actuarial gains and losses

are expenses of the federal government as a whole

and are best accounted for by the administrative

entity. Some respondents did not agree that

employer entities should recognize only the

"normal" or "service" cost element. The

respondents suggested that the employer entity

should recognize all elements of the pension (or

ORB) expense: service costs, prior service costs,

actuarial gains and losses, and interest on the

pension liability. In general, these respondents

believe that the full cost of products and

services produced by the employer entity includes

these elements, and that the full cost thus

defined is relevant to various decisions such as

comparing the cost of outputs and services with

alternative providers.

162 The Board considered these views, but it

continues to believe that employer component

entities of the U. S. Government should usually

recognize only the service cost element of pension
(and ORB) expense in their general purpose

financial reports. (Exceptions will arise in

cases such as the Coast Guard, where the employer

entity is also the administrative entity for the

plan). The Board is aware that its approach may

appear to differ from the approaches taken by FASB

and GASB in this regard. However, neither of

those Boards focused, in their standards on

pensions and other retirement benefits, on

reporting by component entities of a larger

reporting entity comparable to the Government of

the United States. All elements of pension (and

ORB) expense should be recognized in the

consolidated financial statements of the United

States Government; however, the Board believes

that prior service cost and other non-service cost

are not useful for most managerial or policy

decisions at the program level. They are sunk

costs (or sunk gains) attributable to services

rendered in prior years, or otherwise are not

under the control of program management. FASAB

continues to believe that having non-service

elements of cost reported by the administrative

entity best reflects the federal environment and

organizational structure.

163 The Board recognizes that some analysts

might, for some purposes, want to consider an

alternative measure of compensation cost, e.g.,

one that includes interest on the part of the

pension (or ORB) liability that relates to current

workers, or one that recognizes some non-service

costs over the workers' years of expected service.

Special analyses and reports will always be

necessary for special purposes. General purpose

financial reports must, by definition, focus on

the most common needs of users of those reports.

164 For similar reasons, FASAB also continues to

believe that prior service costs (or gains) should

be recognized immediately, without amortization,

by the administrative entity, and in federal

government-wide financial reports. FASAB sees no

benefit to delaying recognition of a cost and a

liability or to reducing volatility in the general

purpose financial report of the administrative
entity. FASAB was not persuaded that the benefit

(or the cost) derived in future periods from

increased (or deceased) pension benefits was

sufficiently tangible in the federal context to

warrant delayed recognition by means of

amortization over future periods. Examples of

plausible future benefits or costs would be,

increased (decreased) employee productivity or

reduced (increased) turnover.

165 FASAB recognizes that, for funding purposes,

prior service costs for CSRS, FERS, and MRS are

amortized through appropriations over a number of

years. Funding decisions, however, should not be

determinative for accounting recognition of cost.

Deciding when and how to fund an obligation is not

an accounting issue.

 Actuarial Gains and Losses

166 Actuarial gains and losses result from (1)

deviations between actual experience and the

actuarial assumptions used and (2) changes in

actuarial assumptions. Actuarial assumptions are

essentially long-range estimates about future

events and necessarily vary from actual

experience.

167 Actuarial gains and losses and prior service

costs (or gains) have similar characteristics.

They are both determined after the accounting

period in question has concluded, and both relate

to the past (either prior service or prior

experience). The difference between actuarial

gains and losses and prior service costs (or

gains) is that the former are the normal result of

actuarial estimation and may occur annually, while

prior service costs are incurred only when the

plan is amended. Also, actuarial gains and losses

may tend to even out over time, unlike prior

service costs.

168 FASAB concluded that actuarial gains and

losses should receive the same treatment as prior

service costs (or gains). They should be charged

to the administrative entity. The employer
entities should recognize an expense only for the

service cost[FN 69: "Service cost" is defined as

the actuarial present value of benefits attributed

by the plan's benefits formula to services

rendered by employees during an accounting period.

The term is synonymous with "normal cost".] of

their employees for the period less the amount

contributed by the employees, if any. Like prior

service costs, the actuarial losses are sunk costs

(or sunk gains) attributable to services rendered

in prior years and therefore should be excluded

from data used for managerial or policy decisions.

169 For the same reasons as were given for prior

service costs, actuarial gains and losses should

be recognized immediately by the administrative

entity. There is no benefit in delaying

recognition or reducing volatility in the cost

measures and the financial reports of the

administrative entity.

Recognition and Measurement

170 The Board's conclusions discussed immediately

above are reflected in the accounting treatment of

pensions. The employer entity should recognize an

annual pension expense as a cost of operations.

When the employer entity's contributions are less

than its pension expense, the employer entity

should recognize an imputed financing source for

the expenses paid by other entities. To the extent

that it receives contributions from the employer

entity, the administrative entity should recognize

an intragovernmental revenue.

171 These transactions are intragovernmental.

For purposes of federal government-wide

consolidated financial reports, the employer's

pension expense should be offset against (1) the

administrative entity's contributions received

from employer entities and (2) the employer

entity's imputed financing source, if applicable.

172 The administrative entity should report the

pension liability. An increase in the liability
during the accounting period is an expense to the

administrative entity. The liability is increased

by the net total of the pension cost components

[normal cost, interest on the pension obligation,

prior service costs (gains), and actuarial gains

(losses)]. Thus, the administrative entity should

be providing information not only about the

actuarial liability but also about the

relationship between the full cost and the revenue

from employees, employer entities, interest, and

Treasury contributions.

173 Recognizing the pension cost components in

the administrative entity and also the normal cost

in the employer entities accomplishes two

objectives. First, the full cost and actuarial

liability are summarized and presented in one

place, i.e., in the administrative entity's

operating results and Balance Sheet. Second, each

employer entity reports its respective normal cost

as a cost of providing service. This is essential

to report properly the cost of delivering federal

government services. These entries are eliminated

during consolidation for federal government-wide

financial statements and, thus, no double counting

occurs.

Other Retirement Benefits

174 FASAB concluded that ORB are similar to

pension benefits and should be accounted for in a

similar way unless differences in substance

dictate otherwise. The predominant other

retirement benefit in the federal government is

health care benefits for retirees. These are

long-term and require actuarial estimation.

175 FASAB recognizes that future health care

benefits present unique measurement problems.

They are more uncertain than pensions since they

depend on the changing patterns of health care

delivery and utilization, on the price trends for

medical care, and on the benefits provided by

social insurance programs like Medicare.

176 Also, some federal retiree health benefits
are provided directly in federal government

hospitals and domiciliary facilities. The

liability in these cases also depends on the

amount that the Congress will appropriate in the

future to pay for the benefits, so the expense and

liability are more difficult to measure.

Notwithstanding the measurement difficulties,

because of the importance of approximating the

cost of services rendered at the time the service

is rendered, FASAB believes that in most cases,

the ORB costs and liabilities should be measured

for federal programs. However, as noted in the

discussion starting with paragraph 182, VA medical

care cost would be recognized in the period

medical care service is rendered.

ACCOUNTING FOR THE OTHER RETIREMENT

BENEFITS PLAN

Attribution Method

177 Unlike the situation regarding federal

pension plans, there is no established attribution

method for federal retirement medical care.

Although there are current proposals to do so, the

costs are not currently being funded.

178 For retirement health care, FASAB found no

compelling reason to prefer an approach other than

the aggregate entry age normal used for pensions.

The employer's service cost however, should be

calculated differently for health care than for

pensions. For the pensions, costs are calculated

as a percent of payroll, but retirement health

care benefits are paid for each individual retiree

regardless of prior salary. Cost, therefore,

should be calculated on a per person basis because

that accurately represents how the cost is

incurred.

Assumptions

179 Although the general assumptions employed for

ORB should be the same as those for pensions, the

health care cost trend assumption is unique. The

standard gives general guidance regarding the use
of "Medicare projections or other authoritative

sources" for the trend assumption in order to

achieve consistency and set broad guidelines for

the estimates. The health care cost assumption

should reflect these sources adjusted for any

factors unique to the organization.

Other Postemployment Benefits

180 OPEB represent operating expenses of the

federal employer entity. Some might argue that

OPEB, like pensions and ORB, should be accrued as

employees perform services, as a cost of

operations, because (1) they believe the event is

occurring as the employees perform service, (2)

future OPEB payments are probable, and (3) they

can be measured. FASAB was not persuaded that

there was an adequate nexus between these cost and

the employee's daily, ongoing service; or that

these costs were sufficiently probable at that

point to warrant accrual.

181 FASAB believes that an accrual based on the

occurrence of an actual event, such as a jobrelated injury or a decision to reduce the

entity's workforce generally, is a reasonable

approach. Such an event makes the future outflow

of resources probable and measurable, may involve

long-term accruals in some cases, and provides an

accurate measure of expense in a way that is the

least burdensome to the reporting entities. [FN

70: The federal workers' compensation and

unemployment insurance programs are different from

the programs applicable to nonfederal workers.

The benefits for federal employees under these

programs are financed by direct reimbursement from

employer entities. Usually the reimbursement

period for workers' and unemployment compensation

is short-term, but under certain conditions,

workers' compensation may extend for many years.]

VA MEDICAL CARE COST

182 Although it might appear that medical

benefits provided by the Department of Veterans

Affairs should be treated like other retirement or
medical benefits, there are significant

differences between the two. Most often retiree

medical benefits are provided through a health

insurance provider, which receives premium

payments from the former employer. But, with VA

medical benefits, the former employer (the

government) provides the medical services through

VA facilities to veterans on an "as needed" and an

"as available" basis versus payment of health

insurance premiums for each veteran.

183 Eligibility for VA hospital care and nursinghome care is divided into mandatory and

discretionary categories. VA must provide

hospital care to veterans with service-connected

disabilities and others in the mandatory category.

Hospital care is considered discretionary if the

veteran has income above a specified limit and a

non-service-connected injury. Veterans in the

discretionary category may be required to pay fees

to receive VA hospital care. In addition, VA

medical care is financed by annual appropriations.

The entitlement to receive care does not guarantee

any particular level of care. The Congress

decides annually how adequately VA medical care

will be funded.

184 The Board believes that VA medical benefits,

for both mandatory and discretionary programs, are

best measured by the annual cost incurred rather

than by actuarially determined charges during the

veteran's military service. Medical care for

veterans does not satisfy the probability or

reasonably measurable criteria in this standard at

earlier dates, and therefore future medical

benefits do not constitute a long-term liability

to be recognized in the Balance Sheet. The Board

believes VA medical benefit liability and related

expenses should be recognized in the period

medical care service is rendered. The entity

should consider, however, what disclosures would

be appropriate for these costs under the

contingency standard.

CONCLUSION ON INSURANCE AND GUARANTEES
185 The Board considered two possible bases for

recognizing the liability of federal insurance

programs. One would recognize as a liability the

unpaid expected present value (PV) cost of insured

events that had occurred. The second would

recognize as a liability the unpaid expected PV

cost of risks that had been assumed (i.e., the

unpaid expected PV cost inherent in insurance

extended or in force). This second approach would

be similar to that taken by the Congress in

budgeting for direct loans and loan guarantees and

by FASAB in accounting for these transactions.

(See Statement of Federal Financial Accounting

Standards Number 2, "Accounting for Direct Loans

and Loan Guarantees").

186 Several Board members believe that this

second approach has merit from a conceptual

standpoint. However, the Board has concerns about

the measurability of the risk assumed,

particularly in the context of pension guarantees.

There may also be some question as to the exact

nature or categorization of some assumed risks in

the absence of written contracts. The Board

concluded that it would continue the traditional

practice of recognizing the effect of events that

had occurred on the face of the financial

statements. However, it also decided to require

reporting as RSSI the estimated PV cost of the

risk assumed for all programs, except social

insurance, life insurance, and loan guarantee

programs.

187 Accrual accounting for insurance programs

attempts to report the expenses of operations for

each period and the unpaid liability at the end of

the period. Projections of future claims,

including renewed, expanded, and new business,

also provide important information for policy

decisions about what rates should be charged to

cover all expected future losses, what additional

insurance should be extended, and similar

decisions. Management of reporting entities may

wish to include such projections in financial

reports as other accompanying information, and may

do so on a voluntary basis, but the Board is not
presently making any specific recommendations

about this, beyond those required by this

Statement and those to be further considered in

"Supplementary Stewardship Reporting."

188 During the Exposure Draft stage of the

Liability Standard, the Board asked respondents

whether the Standard provided sufficient guidance

on how the risk assumed amount should be measured.

Two of the fifty five respondents asked for

additional guidance but did not mention

measurement possibilities.

189 At the discussion stages of the final

Statement the Board contemplated two possible

measurement perspectives for reporting the risk

assumed. The Statement requires that all federal

insurance programs (except social insurance, life

insurance, and loan guarantee programs) report the

risk assumed amount as supplementary information.

The risk assumed calculation as presented in the

Exposure Draft measured the cost of the coverage

outstanding during the reporting year. For annual

term insurance programs, under this approach the

risk assumed amount might not be significantly

different from the sum of recognized liabilities

and contingent liabilities reported on the Balance

Sheet. However, the Board believes that requiring

disclosure or supplementary reporting of a risk

assumed number that is similar in concept and

amount to the liability recognized could be

confusing and would not add informational value.

190 In the second perspective, the risk assumed

amount would be a broader and longer term measure

of the government's potential cost for on-going

insurance programs. Under some measures, this

second approach to risk assumed could be regarded

as an indicator of the "fair" or "full cost"

premium that should be charged if taxpayers are

not to subsidize the program. This measure would

be a probabilistic estimate of the expected cost

under certain assumed economic factors. The Board

found merits in this calculation, and believes it

can provide important additional information

beyond that contained in the accrual. Although
they believe the measure to be important,

proponents of this approach acknowledge that the

measure may be difficult to measure precisely.

Accordingly, they would treat it as RSSI. The

Board currently has a project at the Exposure

Draft stage, "Supplementary Stewardship

Reporting", that will provide further details on

the measurement and reporting of "risk assumed" in

its final statement.

191 The Board also considered the liability

recognition of whole life insurance programs. The

federal government has a small number of whole

life insurance programs that are administered by

federal entities. The most significant programs

(mutual enterprise-type whole life insurance) are

through the Department of Veteran Affairs (VA).

192 At the time the exposure draft on liabilities

was issued, there were no established accounting

standards for mutual enterprise-type whole life

insurance within the federal government, state and

local government, or the private sector.

Therefore VA followed the statutory requirements

for accounting purposes as well as statutory

insurance reporting.

193 In January 1995, the FASB and AICPA issued a

standard and a statement of position,

respectively, that specified accounting for mutual

whole life insurance enterprises. Due to the

similarities between the federal programs and the

insurance enterprises covered in the FASB and

AICPA documents, the Board decided that the

private sector standards would be appropriate for

the applicable federal programs. Therefore the

Board concluded that federal entities with whole

life insurance programs would follow the standards

as prescribed in the private sector standards (and

as these private sector standards are amended)

when reporting the liability for future policy

benefits, along with the additional disclosures

prescribed by this Statement. The Board further

concluded that disclosure of the components of the

liability was necessary to adequately inform the

financial statement users of the projected use and
any other potential uses of the liability

components and associated assets.

**************************************************

APPENDIX B: LIABILITY RECOGNITION AND MEASUREMENT

MATRIX

**************************************************

********** APPENDIX B: "LIABILITY RECOGNITION AND

MEASUREMENT MATRIX APPEARED HERE IN THE HARD COPY

TEXT **********

**************************************************

GLOSSARY

**************************************************

Actuarial cost methods - A recognized actuarial

technique used for establishing the amount and the

incidence of employer contributions or accounting

charges for pension costs under a pension plan.

Actuarial liability - A liability based on

statistical calculations and actuarial assumptions

(actuarial assumptions are conditions used to

resolve uncertainties in the absence of

information concerning future events affecting

insurance, pension expenses, etc.). (Adapted from

"Webster's Ninth New Collegiate Dictionary" and

"Kohler's Dictionary for Accountants" sixth

edition, [Cooper & Ijiri])

Actuarial present value - The value of an amount

or series of amounts payable or receivable at

various times, determined as of a given date by

the application of a particular set of actuarial

assumptions. (Actuarial Standards of Practice No.

4)

Aggregate entry age normal - A system of applying

the entry age normal actuarial cost methodology

using aggregate population models or groups

instead of applying it individual by individual.
Attribution - The process of assigning pension

benefits or costs to periods of employee service.

[SFAS 87]

Budget Authority - The authority provided by

federal law to incur financial obligations, as

follows:

 -- Provisions of law that make funds

available for obligation and expenditure (other

than borrowing authority), including the authority

to obligate and expend the proceeds of offsetting

receipts and collections.

 -- Borrowing authority or authority to

borrow and obligate and expend the borrowed funds,

including issuance of promissory notes or other

monetary credits.

 -- Contract authority, or the making of funds

available for obligation but not for expenditure.

(Statutory authority under which contracts or

other obligations may be entered into before an

appropriation for the payment of such obligations.

The later appropriation provides cash to liquidate

such obligations. See OMB Circular A-34.)

 -- Offsetting receipts and collections as

negative budget authority and the reduction

thereof as positive budget authority. (Omnibus

Budget Reconciliation Act of 1990 [Pub. L. 101-

508], sec. 13211)

Budget authority may be classified by period of

availability (1-year, multiple-year, and no-year),

by nature of authority (current or permanent), by

the manner of determining the amount available

(definite or indefinite), or as gross (without

reduction of offsetting collections) and net (with

reductions of offsetting collections). (SFFAS

Number 1, "Accounting for Selected Assets and

Liabilities")

Capital leases - Leases that transfer

substantially all the benefits and risks of

ownership to the lessee.
Contingency - An existing condition, situation, or

set of circumstances involving uncertainty as to

possible gain or loss to an entity that will

ultimately be resolved when one or more future

events occur or fail to occur.

Discount rate - The interest rate used to adjust

for the time value of money.

Dividend fund interest rate - The interest rate

determined at policy issuance used to determine

the amount of the dividend fund. It is the rate

used to credit interest to the dividend fund, and

against which experience is measured to determine

the amount of the interest portion of dividends

paid to individual policyholders. [AICPA SOP 95-

1, Glossary, p. 33]

Earmarked taxes -Taxes levied by the federal

government to finance a specific federal program.

Entitlement program - A program in which the

federal government becomes automatically obligated

to provide benefits to members of a specific group

who meet the requirements established by law.

Entitlement period - The period (such as, monthly)

for which benefits become due.

Entry age normal actuarial method - A method under

which the actuarial present value of projected

benefits of each employee is allocated on a level

basis over the earnings or the service of the

employee between entry age and assumed exit age.

The portion of this actuarial present value

allocated to a valuation year is called the normal

cost. The portion of this present value not

provided for at a valuation date by the present

value of future normal cost is called the

actuarial accrued liability. The assumption is

made under this method that every employee entered

the plan (entry age) at the time of initial

employment or at the earliest eligibility date, if

the plan had been in existence, and that

contributions have been made from the entry age to
the date of the actuarial valuation. The term

"aggregate entry age normal" refers to an approach

whereby costs are determined for the group as a

whole rather than for each individual participant

separately.

Event - A happening of consequence to an entity.

It may be an internal event that occurs within an

entity, such as the transforming of raw materials

into a product. Or it may be an external event

that involves interaction between an entity and

its environment, such as a transaction with

another entity, an act of nature, theft,

vandalism, a tort caused by negligence, or an

accident. (Adapted from FASB Statement of

Financial Accounting Concepts No. 6, "Elements of

Financial Statements")

Exchange transaction - A transaction that arises

when each party to the transaction sacrifices

value and receives value in return.

Executory contract - A contract which has not been

performed by all parties to it. (Trascona, Joseph

L., "Business Law", William C. Brown C.

Publishers, 1981)

Executory costs - Those costs such as insurance,

maintenance, and taxes incurred for leased

property, whether paid by the lessor or lessee.

(SFAS #13)

Expected value - A statistical measurement

attribute that is the sum of the products of each

potential outcome multiplied by the probability of

that potential outcome.

Fixed value securities - Securities that have a

known maturity or redemption value at the time of

issue.

Government-acknowledged events - Events that are

not a liability in themselves, but are those

events that are "of financial consequence" to the

federal government because it chooses to respond

to the event.
Government-related events - Nontransaction-based

events that involve interaction between federal

entities and their environment.

Insurance and guarantee programs - Federal

government programs that provide protection to

individuals or entities against specified risks.

Because the federal government frequently

commingles aspects of insurance and guarantees

within the same program, this Statement treats the

terms as a single type of activity. (Also see

separate definition of social insurance).

Interest method - Under the interest method of

amortization, an amount of interest equal to the

carrying amount of the investment times the

effective interest rate is calculated for each

accounting period. This calculated interest is

the effective interest of the investment (referred

to as "effective yield" in some literature). The

effective interest is compared with the stated

interest of the investment. (The stated interest

is the interest that is payable to the investor

according to the stated interest rate.) The

difference between the effective interest and the

stated interest is the amount by which the

discount or the premium should be amortized (i.e.,

reduced) for the accounting period. (SFFAS Number

1, "Accounting for Selected Assets and Liabilities").

Liability - For federal accounting purposes, a

probable future outflow or other sacrifice of

resources as a result of past transactions or

events.

Measurable - Reasonably estimable.

Net level premium reserve - The excess, if any, of

the present value of future guaranteed death

endowment benefits over the present value of

future net premiums. The net level premium

reserve should be calculated based on the dividend

fund interest rate, if determinable, and mortality

rates guaranteed in calculating the cash surrender

values described in the contracts. [AICPA SOP 95-1]
Nonexchange transaction - A transaction that

arises when one party to a transaction receives

value without giving or promising value in return

or one party to a transaction gives or promises

value without receiving value in return.

Normal cost - That portion of the actuarial

present value of pension plan benefits and

expenses that is allocated to a valuation year by

the actuarial cost method. (From Actuarial

Standard of Practice No. 4)

Operating lease - An agreement conveying the right

to use property for a limited time in exchange for

periodic rental payments.

Other postemployment benefits (OPEB) - Forms of

benefits provided to former or inactive employees,

their beneficiaries, and covered dependents

outside pension or ORB plans.

Other retirement benefits (ORB) - Forms of

benefits, other than retirement income, provided

by an employer to retirees. Those benefits may be

defined in terms of specified benefits, such as

health care, tuition assistance, or legal

services, which are provided to retirees as the

need for those benefits arises, such as certain

health care benefits. Or they may be defined in

terms of monetary amounts that become payable on

the occurrence of a specified event, such as life

insurance benefits. (FASB Statement of Financial

Accounting Standard No. 106, "Employers'

Accounting for Postretirement Benefits Other than

Pensions")

Premium deficiency - A condition under which a

liability for future policy benefits using current

conditions exceeds the liability for future policy

benefits using contract conditions. In such

cases, the difference should be recognized as a

charge to operations in the current period.

Probable - That which can reasonably be expected

or believed to be more likely than not on the
basis of available evidence or logic but which is

neither certain nor proven.

Projected unit credit actuarial method - A method

under which the projected benefits of each

individual included in an actuarial present

valuation are allocated by a consistent formula to

valuation years. The actuarial present value of

benefits allocated to the valuation year is called

the normal cost. The actuarial present value of

benefits allocated to all periods before a

valuation year is called actuarial liability.

(Actuarial Standard of Practice

No. 4)

Social insurance programs - Income transfer

programs financed by compulsory earmarked taxes

and also, in certain cases, general revenues of

the federal government. (Also see separate

definition of insurance and guarantees).

Terminal dividends - Dividends to policyholders

calculated and paid upon termination of a

contract, such as on death, surrender, or

maturity. If the payment of terminal dividends is

probable and the amount can be reasonably

estimated, the liability should be recognized.

AICPA SOP 95-1.

Transaction - A particular kind of external event

involving the transfer of something of value

concerning two or more entities. The transfer

may be a two way or one way flow of resources or

of promises to provide resources. (Adapted from

FASB Statement of Financial Accounting Concepts

No. 6, "Elements of Financial Statements")

Variable value securities - Securities that have

unknown redemption or maturity values at the time

of issue. Values of these securities can vary on

the basis of regulation or specific language in

the offering.

Whole life policies - Policies that provide

insurance over the insured's entire life and the

proceeds (face amount) are paid only upon death of
the insured.

**************************************************

Major Contributors

**************************************************

This document reflects extensive input from a

number of individuals,

including those listed below.

Christine Bonham General Accounting Office

Debra Carey Department of the Interior

Sheila Conley Office of Management and Budget

John Crowley Bureau of Public Debt

Tom Cuny Congressional Budget Office

Benjamin Gottlieb Department of Defense

Ron Gresh Office of Personnel Management

Larry Jacobson Office of Management and Budget

Bob Kilpatrick Office of Management and Budget

Allan Lund Department of the Treasury

JoEllen McCormack General Accounting Office

Nancy Nichak Office of Personnel Management

John Reilly General Accounting Office

Justine Rodriguez Office of Management and Budget

Debra Sebastian General Accounting Office

Laura Triggs General Accounting Office

Mike Virga Office of Personnel Management
*************From Inside Back Cover***********

THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

Elmer B. Staats, Chairman

James L. Blum

Donald H. Chapin

Martin Ives

Norwood Jackson

Gerald Murphy

James E. Reid

Cornelius E. Tierney

Alvin Tucker

The Secretary of the Treasury, the Director of the

Office of Management and Budget, and the

Comptroller General established the Federal

Accounting Standards Advisory Board (the FASAB or

"the Board") in October 1990 to consider and

recommend accounting principles for the United

States Government.

The Board communicates its recommendations by

publishing recommended accounting standards after

considering the financial and budgetary

information needs of Congress, executive branch

agencies, and other users of federal financial

information. The Board also considers comments

from the public on its proposed recommendations,

which are published for comment as "exposure

drafts." The Board's sponsors, i.e., the officials

who established the Board, then decide whether to

adopt the recommendations. If they do, the

standard 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 Accounting Office,

the Department of the Treasury, and the Office of

Management and Budget, on Federal Government

Accounting Standards and a Federal Accounting

Standards Advisory Board" and (2) the "Mission

Statement of the Federal Accounting Standards

Advisory Board."
FASAB STAFF:

Ronald S. Young, Executive Director

Project Staff:

Robert W. Bramlett

Richard Fontenrose

Monica R. Valentine

MAILING ADDRESS AND TELEPHONE NUMBER

Federal Accounting Standards Advisory Board

750 First Street, NE, Room 1001

Washington, DC 20002

Telephone (202) 512-7350

Fax (202) 512-7366