Federal Accounting Standards Advisory Board

Amendments to Accounting Standards for Loans and Loan Guarantees

May 2000

FASAB Federal Accounting Standards Advisory Board

Amendments To Accounting Standards

For Direct Loans and Loan Guarantees

In Statement of Federal Financial Accounting Standards No. 2

Statement of Federal Financial Accounting Standards No. 18

May 2000
2

THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

The Federal Accounting Standards Advisory Board (the FASAB or "the Board") was

established by the Secretary of the Treasury, the Director of the Office of

Management and Budget (OMB), and the Comptroller General in October 1990. It is

responsible for promulgating accounting standards for the United States Government.

An accounting standard is typically formulated initially as a proposal after considering

the financial and budgetary information needs of citizens (including the news media,

state and local legislators and executives, analysts from private firms, academe, and

other organizations), Congress, executive branch agencies, and other users of Federal

financial information. The proposed standard is published in an Exposure Draft for

public comment. A public hearing is sometimes held to receive oral comments in

addition to written comments. The Board considers comments and decides whether

to adopt the proposed standard with or without modification. The Board publishes

adopted standards in a Statement of Federal Financial Accounting Standards.

Additional background information is available from the FASAB:

"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," amended on October 1, 1999.

 "Mission Statement of the Federal Accounting Standards Advisory Board."

Federal Accounting Standards Advisory Board

441 G Street, NW, Suite 6814

Washington, D.C. 20548

Telephone (202) 512-7350

Fax (202) 512-7366

www.financenet.gov/fasab.htm
Federal Accounting Standards Advisory Board

Amendments to Accounting Standards for Direct Loans and Loan guarantees

May 2000

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EXECUTIVE SUMMARY

I. This Statement presents amendments to certain portions of Statement of Federal

Financial Accounting Standards No. 2, Accounting for Direct Loans and Loan

Guarantees, (SFFAS No. 2), which was issued in August 1993. The objective of these

amendments is to improve financial reporting for subsidy costs and performance of

Federal credit programs. 

II. During 1998 and early 1999, the Board discussed issues related to reporting the credit

subsidy expense and credit subsidy reestimates in general. The Board concluded that

certain portions of SFFAS No. 2 should be amended so that more useful information on

credit programs’ subsidy costs and performance will be provided to citizens, Congress,

program managers, and other users of Federal financial information. The amendments

were proposed for public comment in an Exposure Draft published in March 1999. After

considering comments, the Board decided to adopt the following amendments:

a. Report subsidy reestimates in two distinct components: the interest rate

reestimate and the technical/default reestimate. 

The former is a reestimate due to a change in interest rates from the rate

assumed in budget preparation and used in calculating the subsidy expense to

the rates that are prevailing at the time the direct or guaranteed loans are

disbursed. The latter is a reestimate due to changes made in projected cash

flows under the terms of the direct loans or loan guarantees after reevaluating all

the risk factors as of the financial statement date, except for the effect of interest

rate reestimates.

b. Display a reconciliation between the beginning and the ending balances of

the subsidy cost allowance for direct loans and the liability for loan

guarantees, reported in an entity’s balance sheet. 

The reconciliation displays activities that affect the subsidy cost allowance or the

loan guarantee liability, such as the subsidy expense for direct or guaranteed

loans disbursed during the reporting period, subsidy reestimates, fees received,

interest supplements paid, loans written off, claim payments made to lenders,

recoveries obtained, and other adjustments.

c. Provide a description of program characteristics and disclose: (i) the

amounts of direct or guaranteed loans disbursed in each program during

the reporting year, (ii) the estimated subsidy rates for the total subsidy and
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Amendments to Accounting Standards for Direct Loans and Loan guarantees

May 2000

3

the subsidy components at the program level in the current year’s budget

for the current year’s cohorts, (iii) events and changes in economic

conditions, other risk factors, legislation, credit policies, and subsidy

estimation methodologies and assumptions, that have had a significant and

measurable effect on subsidy rates, subsidy expense, and subsidy

reestimates, and (iv) events and changes in conditions that have occurred

and are more likely than not to have a significant impact but the effects of

which are not measurable at the reporting date.

Reporting entities should discuss how those events and changes have affected

or would affect credit programs’ subsidy costs, subsidy reestimates, and the

subsidy rates estimated in the budget.

III. In addition to requiring reconciliation for the balances of direct loan allowance and loan

guarantee liability on an entity-wide basis as prescribed in this statement, the Board

recognizes that reconciliation on a program-by-program basis can better reveal

information relevant to program performance. Since the program-by-program

reconciliation was not proposed for public comment in the March 1999 ED, the Board

has not received input on this option. Because the proposal appears to have merit, the

Board has decided to issue an exposure draft to propose program-by-program

reconciliation for major programs in addition to the entity-wide reconciliation. 
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May 2000

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TABLE OF CONTENTS

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

INTRODUCTION............................................................................................................................ 5

PURPOSE......................................................................................................................... 5

BACKGROUND ................................................................................................................ 5

EFFECTIVE DATE........................................................................................................... 7

ACCOUNTING STANDARDS

FOR DIRECT LOANS AND LOAN GUARANTEES................................................................. 8

SUBSIDY REESTIMATES - AN AMENDMENT TO SFFAS No. 2............................. 8

RECONCILIATION............................................................................................................ 9

DISCLOSURE AND DISCUSSION................................................................................ 9

APPENDIX A: BASIS FOR CONCLUSIONS..........................................................................11

SUBSIDY REESTIMATES.............................................................................................11

RECONCILIATION..........................................................................................................13

DISCLOSING SUBSIDY RATES ..................................................................................17

DISCLOSURE AND DISCUSSION..............................................................................19

THE EFFECTIVE DATE ................................................................................................23

VOTE FOR APPROVAL................................................................................................24

APPENDIX B: ILLUSTRATIVE REPORTING FORMATS......................................................25

APPENDIX C: THE ACCOUNTING STANDARDS

IN SFFAS No. 2...........................................................................................................................27

GLOSSARY.................................................................................................................................36
Federal Accounting Standards Advisory Board

Amendments to Accounting Standards for Direct Loans and Loan guarantees

May 2000

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INTRODUCTION

PURPOSE

1. The purpose of this Statement is to amend accounting standards for

direct loans and loan guarantees by adding the following requirements: (a)

report subsidy reestimates in two components: interest rate reestimates

and technical/default reestimates, (b) display in a note to financial

statements a reconciliation between the beginning and ending balances of

loan guarantee liability and the subsidy cost allowance for direct loans,

and (c) provide disclosure and discussion for changes in program subsidy

rates, subsidy expense, and subsidy reestimates.

BACKGROUND

2. During 1998 and 1999, the Board held discussions on what improvements

could be made to financial reporting for credit subsidy rates, subsidy

expense, and subsidy reestimates.3 During the discussions, the Board

directed its staff to conduct a survey in two issue areas: (a) How difficult is

it for agencies to prepare and report subsidy data, and (b) What subsidy

data are useful to users of Federal agency financial reports.

3. In June 1998, representatives of the Small Business Administration and

the Department of Education made presentations to the Board on their

experience and capabilities for preparing subsidy cost data for direct loans

and loan guarantees. The presentations indicated that to meet the

budgeting requirements, agencies must have systems and procedures to

estimate for each cohort of direct loans or loan guarantees the subsidy

rates, subsidy expense, and subsidy reestimates in components as

currently required in preparing the budget. The presentations indicated

that if a sound system is in place, the information on subsidy rates,

subsidy expense, and subsidy reestimates could be retrieved and

aggregated on a program or entity basis to meet the financial reporting

requirements.

 

 

3

The discussions were initiated by the Credit Reform Task Force of the Accounting and Auditing Policy

Committee (AAPC) which proposed that paragraph 25 in SFFAS No. 2 be amended to require disclosure of

subsidy rates estimated in the budget for the current year cohorts in lieu of reporting the dollar amounts of

the subsidy components. That proposal was discussed in the March 1999 ED. The Board accepted the

Task Force proposal for disclosing subsidy rates, but did not remove the requirement for reporting the dollar

amounts of subsidy expense components.
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May 2000

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4. A questionnaire on data usefulness was sent to congressional staff

members who had been involved in Federal credit programs. Oral and

written responses were received from a number of the staff members and

were presented to the Board at its October 1998 meeting. All of those

who responded indicated that for appropriation and oversight purposes,

they needed more rather than less detailed data on subsidy costs for

direct loans and loan guarantees. They preferred that subsidy data be

reported by component in both rates and dollar amounts. Furthermore,

they said that they would like to compare initial budget expectations with

current reestimates and to know causes that explain changes in subsidy

rates. 

5. The Board agreed that the subsidy cost information reported by Federal

credit agencies could be improved by adopting the following requirements:

(a) report subsidy reestimates by component, (b) display in a note to

financial statements a reconciliation between the beginning and ending

balances of the subsidy cost allowance for direct loans and the liability for

loan guarantees, and (c) provide disclosure and discussion that would

help the reader understand the changes in Federal credit programs’

subsidy costs and performance. These requirements were proposed in

the Exposure Draft issued in March 1999 (the March 1999 ED).

6. The Board received comments from twelve respondents. Of those

respondents, ten were from Federal agencies (including the CFO Council

of the Federal Government), and two were from the private sector. They

were generally in favor of the Board’s proposals to improve financial

reporting for credit programs’ subsidy costs and performance. However,

some of them expressed different views on some of the proposals, which

are addressed in Appendix A, Basis for Conclusions. After considering

the comments, the Board decided to issue in this final statement all of the

amendments proposed in the March 1999 ED.

7. The Board considered and agreed with the view that reconciliations for

direct loan allowance and loan guarantee liability on a program-byprogram basis can better reveal variations in program characteristics and

performance. Since the program-by-program reconciliation was not

proposed for public comment in the March 1999 ED, the Board has not

received input on this option. Because the proposal appears to have

merit, the Board will issue an exposure Draft to propose reconciliation for

major programs in addition to the entity-wide reconciliation prescribed in
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Amendments to Accounting Standards for Direct Loans and Loan guarantees

May 2000

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this statement.

EFFECTIVE DATE

8. The accounting standards prescribed in this statement are effective for

periods beginning after September 30, 2000. Earlier implementation is

encouraged.
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May 2000

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ACCOUNTING STANDARDS

FOR DIRECT LOANS AND LOAN GUARANTEES

SUBSIDY REESTIMATES - AN AMENDMENT TO SFFAS No. 2

9. Paragraph 32 in SFFAS No. 2 is amended to read:

Credit programs should reestimate the subsidy cost allowance for

outstanding direct loans and the liability for outstanding loan guarantees as

required in this standard. There are two kinds of reestimates: (a) interest

rate reestimates, and (b) technical/default reestimates 4. Entities should

measure and disclose each programs reestimates in these two

components separately. An increase or decrease in the subsidy cost

allowance or loan guarantee liability resulting from the reestimates is

recognized as an increase or decrease in subsidy expense for the current

reporting period.

(A) An interest rate reestimate is a reestimate due to a change in

interest rates from the interest rates that were assumed in budget

preparation and used in calculating the subsidy expense to the

interest rates that are prevailing during the time periods in which

the direct or guaranteed loans are disbursed. Credit programs

may need to make an interest rate reestimate for cohorts from

which direct or guaranteed loans are disbursed during the

reporting year. If the assumed interest rates that were used in

calculating the subsidy expense for those cohorts differ from the

interest rates that are prevailing at the time of loan disbursement,

an interest rate reestimate for those cohorts should be made as of

the date of the financial statements.

(B) A technical/default reestimate is a reestimate due to changes in

projected cash flows of outstanding direct loans and loan

guarantees after reevaluating the underlying assumptions and

other factors that affect cash flow projections as of the financial

statement date, except for any effect of the interest rate

reestimates explained in (a) above. In making technical/default

 

 

4

The term “technical/default reestimate” used in this statement is identical in meaning to the term

“technical reestimate” used in OMB Circular A-11, as revised in July 1999. 
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reestimates, reporting entities should take into consideration all

factors that may have affected various components of the

projected cash flows, including defaults, delinquencies, recoveries,

and prepayments. The technical/default reestimate should be

made each year as of the date of the financial statements.

RECONCILIATION

10. In a note to the financial statements, reporting entities should display a

reconciliation between the beginning and ending balances of the subsidy

cost allowance for outstanding direct loans and the liability for outstanding

loan guarantees reported in the entities’ balance sheet. The reconciliation

is accomplished by adding to or subtracting from the beginning balance

the dollar amounts of the following items: (a) the subsidy expense

recognized in the four components as defined in paragraphs 25 through

29 for direct or guaranteed loans disbursed during the reporting year, (b)

the two types of subsidy reestimates as defined in paragraph 32, and (c)

other adjustments. For direct loans, the other adjustments include loan

modifications, fees received, loans written off, foreclosed property or other

recoveries acquired, and subsidy allowance amortization. For loan

guarantees, the other adjustments include loan guarantee modifications,

fees received, interest supplements paid, claim payments made to

lenders, foreclosed property or other recoveries acquired, and interest

accumulated on the loan guarantee liability. The requirement to display

reconciliation applies to direct loans and loan guarantees obligated or

committed on or after October 1, 1991, the effective date of the Federal

Credit Reform Act of 1990. Reporting entities are encouraged but not

required to display reconciliations for direct loans and loan guarantees

obligated or committed prior to October 1, 1991, in schedules separate

from the direct loans and loan guarantees obligated or committed after

September 30, 1991.

DISCLOSURE AND DISCUSSION

11. The disclosure and discussion requirements are prescribed in paragraphs

11(A) through 11(C):

(A) Reporting entities should provide a description of the

characteristics of the programs that they administer, and should

disclose for each program: (a) the total amount of direct or

guaranteed loans disbursed for the current reporting year and the
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preceding reporting year, (b) the subsidy expense by components

as defined in paragraphs 25 through 29, recognized for the direct

or guaranteed loans disbursed in those years, and (c) the subsidy

reestimates by components as defined in paragraph 32 for those

years.

(B) Reporting entities should also disclose, at the program level, the

subsidy rates for the total subsidy cost and its components for the

interest subsidy costs, default costs (net of recoveries), fees and

other collections, and other costs, estimated for direct loans and

loan guarantees in the current year’s budget for the current year’s

cohorts. Each subsidy rate is the dollar amount of the total

subsidy or a subsidy component as a percentage of the direct or

guaranteed loans obligated in the cohort. Entities may use trend

data to display significant fluctuations in subsidy rates. Such trend

data, if used, should be accompanied with analysis to explain the

underlying causes for the fluctuations.

(C) Reporting entities should disclose, discuss, and explain events

and changes in economic conditions, other risk factors, legislation,

credit policies, and subsidy estimation methodologies and

assumptions, that have had a significant and measurable effect on

subsidy rates, subsidy expense, and subsidy reestimates. The

disclosure and discussion should also include events and changes

that have occurred and are more likely than not to have a

significant impact but the effects of which are not measurable at

the reporting date. Changes in legislation or credit policies include,

for example, changes in borrowers' eligibility, the levels of fees or

interest rates charged to borrowers, the maturity terms of loans,

and the percentage of a private loan that is guaranteed.
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APPENDIX A: BASIS FOR CONCLUSIONS

SUBSIDY REESTIMATES

12. Paragraph 32 in SFFAS No. 2, as amended, requires that entities

measure and disclose reestimates in two components separately;

namely, the interest rate reestimate and the technical/default reestimate. 

The former is a reestimate made for differences between interest rate

assumptions at the time of budget formulation (the same assumption is

used at the time of obligation or commitment) and the actual interest rates

for the years of disbursement.5 The later is a reestimate due to changes

in projected cash flows as reflected in the direct loan allowance and loan

guarantee liabilities at the beginning of each fiscal year, after reevaluating

the underlying assumptions and other factors that affect cash flow

projections as of the financial statement date, except for any effect of

interest rate reestimates.

13. As explained in the March 1999 ED, the rationale for separating the two

reestimate components lies in the fact that interest rate reestimates and

technical/default reestimates differ in nature. The interest rate reestimate

depends on how close the assumed interest rate, which is initially used in

the budget, is to the actual interest rates prevailing at the time of loan

disbursement. The interest rate reestimate does not in itself indicate

changes in the quality of loan assets or the overall risk of loan guarantees,

nor does it have any implication for the quality of the agency's subsidy

estimation process. The technical/default reestimate, on the other hand,

reflects the latest developments in risk and program characteristics and

thus it indicates changes in the quality of loan portfolio or the overall risk of

loan guarantees. In some instances, a large technical/default reestimate

may indicate that the credit program management should find ways to

improve its subsidy estimation process and/or its portfolio management. 

Because of the difference in the nature of the two components, separate

reporting would provide better information to users of the financial reports.

14. All of the 12 respondents to the March 1999 ED agreed with the Board’s

proposal for reporting subsidy reestimates in those two components. The

 

 

5

See OMB Circular A-11, sec. 85.5 (a), revised in July 1999. The interest rate reestimate does not

involve any change in original assumptions other than the interest rates.
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respondents believe that reporting the two reestimate components

separately will provide information to reveal the causes of the reestimates.

 They believe that such information can help program managers improve

credit program performance and subsidy estimation methodology.

15. Although in support for the proposal, one respondent commented on the

controllability argument. Since it was discussed in the March 1999 ED

that the magnitude of an interest rate reestimate is beyond agencies’

control, the respondent pointed out that some default factors, such as

changes in economic conditions and natural disasters, are also beyond

the control of credit programs. While it was stated in the March 1999 ED

that “the assumed rate is determined by the Administration and is beyond

the control of the agency,” that statement does not imply that credit

programs can control changes in economic conditions or all of the other

events that would impact default rates. However, the Board believes that

a reliable assessment of the economic changes and other risk factors in

making default subsidy reestimates, whether or not controllable by the

agency, can help credit programs better manage program costs and

performance. 

16. Another respondent stated that analyses performed by his agency

indicated that in past years, changes in interest rates produced relatively

minor changes in that agency’s overall subsidy rates. Thus, the

respondent suggested that the Board consider whether it is cost-beneficial

to separate out the interest rate reestimates.

17. The interest rate reestimates vary in magnitude from year to year. For

some years, the assumed and the actual rates may be fairly close,

whereas in other years they differ significantly and could produce a

material effect on the overall subsidy rate. For example, the subsidy

reestimate data provided USDA Rural Development Water and Waste

Direct Loan program indicated that for fiscal years 1992 through 1994, the

amounts of interest rate reestimates exceeded the amounts of

technical/default reestimates. In 1995, the interest rate reestimate

accounted for 84 percent of the total subsidy reestimate. In more recent

years, the impact of interest rate reestimates was relatively small. In any

case, we do not believe one can rely on the past experience for any

particular year to make a conclusion about interest variations in future

years. 

RECONCILIATION
Federal Accounting Standards Advisory Board

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May 2000

13

18. It is prescribed as an accounting standard in this statement that reporting

entities display in a note to financial statements a reconciliation between

the beginning and ending balances of the subsidy cost allowance for

outstanding direct loans and the liability for outstanding loan guarantees

reported in the entities’ balance sheet.

19. During its discussions about the subsidy expense and subsidy

reestimates, the Board held the view that it is not adequate or desirable to

report annual subsidy expense and reestimates in an isolated fashion. The

Board concluded that additional information is needed to provide a full

picture about a credit program’s performance. The Board believes that

the reconciliation can be used as an effective vehicle to provide such

information. 

20. As explained in the March 1999 ED, an advantage of displaying the

reconciliation is to show in one place the activities that affect the subsidy

cost allowance or the loan guarantee liability. In addition to the subsidy

expense and reestimates, which are based on projections of future cash

flows, the reconciliation schedule also displays data on actual

performance, such as fees received, loans written off, claim payments

made to lenders, and foreclosed property, loans receivable, or other

recoveries acquired during the reporting year. These actual performance

data and the data on subsidy cost estimates would be a useful tool to

begin assessing the actual performance of a reporting entity’s lending or

loan guarantee activities against its budget expectations.

21. The Board noted as another advantage that the reconciliation process

would enhance credit agencies’ internal control. To comply with the

requirement, entities must make the subsidy data elements consistent,

accurate, and thus reconcilable. In conjunction with credit agencies’ loan

monitoring systems, the reconciliation process can serve as a tool to

foster a discipline in organizing data related to subsidy costs and

performance in a systematic manner.

22. A majority of the respondents supported the Board’s proposal for

displaying the reconciliation. They believed that the reconciliation will

provide useful information to Congress, program managers, and other

users of financial statements. One respondent stated that once required

as a part of the financial statements, the reconciliation will be subject to

validation through audit and thus will become a reliable source of
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information for those who make decisions and evaluate results for credit

activities.

23. Several respondents, however, expressed disagreements or reservations

about the proposed reconciliation. Some of them commented that

compiling the reconciliation data would be a burdensome process. We

believe that performing the reconciliation would initially require some staff

training and computer programming. However, the effort will be

worthwhile because the process will help agencies organize the

necessary data in an orderly manner. When properly programmed, the

reconciliation process can become a routine and systematic process. In

fact the reconciliation requires no more data than those that are

necessary in deriving the ending balances of the subsidy cost allowance

and loan guarantee liability from their beginning balances of a reporting

period. Thus, all the data necessary for the reconciliation should be

available and verifiable if the ending balances are accurate.

24. It should be noted that it is not unusual to require reconciliation in credit

activities. In its Industry Guide No. 3, the Securities and Exchange

Commission (SEC) requires bank holding companies to provide an

analysis of the allowance of loan losses in their financial statements.6 The

analysis is equivalent to the reconciliation of the subsidy cost allowance

required in this statement. The SEC Guide requires that the beginning

and ending balances of the allowance be reconciled with charge-offs

(loans written off), recoveries, and additions charged to operations

(equivalent to subsidy reestimates). The charges-offs and recoveries are

displayed by type of loans (such as consumer installments, commercial,

real estate, and lease financing, as so forth). A similar requirement is

prescribed by the Financial Accounting Standards Board (FASB) in

paragraph 20, FAS No. 114, as amended by FAS 118, for impaired loans

accounted for on a present value basis:

For each period for which results of operations are presented, a creditor

also shall disclose the activity in the total allowance for credit losses

related to loans, including the balance in the allowance at the beginning

and end of each period, additions charged to operations, direct write-downs

 

 

6

SEC Accounting Rules, & 8303, 1984 Commerce Clearing House, Inc. [Additional reference:

Securities Act Guide 3 adopted in Release No. 34-12784, amended by Release Nos. 33-6221, 33-6383, FR11, FR-13 and FR-27]
Federal Accounting Standards Advisory Board

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charged against the allowance, and recoveries of amounts previously

charged off. The total allowance for credit losses related to loans includes

those amounts that have been determined in accordance with FASB

Statement No. 5, Accounting for Contingencies, and with this Statement.

25. Some of those who disagreed with the reconciliation proposal recognized

merits in reconciling subsidy cost allowance for direct loans and liability for

loan guarantees, but doubted whether the reconciliation on an entity basis

would provide useful information. They pointed out that the programs their

agencies administer vary in characteristics and subsidy rates, and that the

reconciliation at the entity level will aggregate the program data and, as a

result, will not reveal the characteristics and operating results of individual

programs.

26. The Board was aware that programs administered by an agency often

differ in characteristics and subsidy rates. The Board agrees with the

view that the entity-wide reconciliation in itself would not reveal variations

in program performance. The Board thus decided to issue an exposure

draft, soon after issuing this statement, to propose a display of a programby-program reconciliation for major programs. Nevertheless the Board

sees value in the entity-wide reconciliation itself. With respect to the

subsidy cost allowance and the loan guarantee liability reported on an

entity’s balance sheet, the entity-wide reconciliation shows changes in

those balances. Those changes indicate the entity’s aggregate

performance results for all the credit activities under the entity’s

management.

27. The Board considered two primary reasons for adopting the entity-wide

reconciliation in this statement, rather than postpone it until the programby-program reconciliation is proposed and considered. First, by making

the entity-wide reconciliation effective as early as possible, agencies can

begin to get their personnel and systems resources ready for

implementing the requirement without further delay. Second, by requiring

the display of the entity-wide reconciliation, it is likely that program-byprogram reconciliation data would be available for users. This is based on

the rationale that in order to display the entity level reconciliation, the

reporting entity would normally first reconcile the balances of individual

programs. If they do so, program managers as well as auditors will have

access to the program reconciliation data to validate the entity-wide

reconciliation and to use the program-based data in program analysis and

evaluation. If requested by Congress, special reports for any particular
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program can also be made available to Congress.

28. One respondent pointed out that loan guarantee programs sometimes

acquire guaranteed loans for direct collection upon paying default claims

for those loans. He asked whether the subsidy cost allowance of those

loans should be reconciled in a separate schedule. Under credit reform

accounting, guaranteed loans acquired by the loan guarantee program

upon paying default claims are carried at their present value and the

present value is reestimated annually before the loans are collected or

written off. The amount of those loans and their allowance are reported in

Note 7 in OMB Bulletin 97-01, Form and Content of Agency Financial

Statements. Since the acquired loans do not represent a primary line of

business for loan guarantee programs, the Board does not believe that a

display of reconciliation for those acquired loans should be required.

29. One respondent asked whether the reconciliation requirement applies to

pre-credit reform direct loans and loan guarantees as well as post-credit

reform direct loans and loan guarantees. The Board considered the issue

and concluded that the reconciliation requirement applies only to postcredit reform direct loans and loan guarantees, i.e., direct loan and loan

guarantees obligated or committed after September 30, 1991. One of the

principal objectives for the reconciliation requirement is to provide

information that can be used to compare initial budget expectations with

operating results. This is achievable with direct loans and loan

guarantees that were obligated or committed after September 30, 1991,

because under credit reform, budgeting and financial reporting for credit

activities are performed on the same present value basis. This is not the

case with pre-credit reform direct loans and loan guarantees.

30. However, aside from the basic objective discussed above, the other

advantages of the reconciliation are valid for both pre and post- credit

reform direct loans and loan guarantees. Those advantages include: (a)

revealing information on activities that affect the balances, and (b)

enhancing accounting integrity and internal control. Agencies are

encouraged, but not required, to reconcile the direct loan allowance and

loan guarantee liability balances for direct loans and loan guarantees

obligated or committed prior to October 1, 1991. Since the measurement

bases differ between pre and post-credit reform direct loans and loan

guarantees, agencies should use separate reconciliation schedules for

pre and post-credit reform direct loans and loan guarantees.
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DISCLOSING SUBSIDY RATES

31. A disclosure provision has been prescribed in this statement to require

that reporting entities disclose, at the program level, the rates for the total

estimated subsidy cost and the subsidy cost components in the current

year’s budget for the current year’s cohorts. Each rate equals the amount

of the total subsidy or a subsidy component divided by the amount of

direct or guaranteed loans obligated in the cohort for the reporting year. 

The Board members believed that the budget subsidy rates for the

reporting year are highly important because they represent budget

expectations that reflect the most recent program characteristics.

32. The standard provides that reporting entities may use trend data to display

significant fluctuations in a program’s subsidy rates. To avoid excessive

and purposeless presentation of historical data, the use of trend data

should be limited to the subsidy rate for the total subsidy or for a subsidy

component of a particular program that has experienced significant

fluctuations in recent years. The presentation of trend data should be

accompanied by analysis to explain causes of the fluctuations. 

33. A majority of the respondents supported the proposal for disclosing the

estimated subsidy rates for cohorts of the current year. The arguments

for the proposal they presented include: (a) those subsidy rates estimated

in the current year’s budget “give the reader the most up-to-date

information on cohorts as established by appropriation law,” (b) those

rates reflect the most recent program characteristics, and (c) the subsidy

rates reported for a number of recent years can form a trend for

comparison and analysis.

34. One respondent requested clarification for the phrase “in the current

year’s budget for the current year’s cohorts.” The required disclosure is

for budget subsidy rates for the cohorts of the current reporting year, i.e.,

the year for which the financial reports are published. For example, in the

financial reports for the 2001 fiscal year, the budget subsidy rates in the

FY 2001 budget for the FY 2001 cohorts should be complied and

disclosed at the program level. The standard does not require disclosure

of subsidy rates for cohorts of previous years, although some of the

cohorts may continue to disburse loans during the current reporting year. 

However, as provided in the standard, entities may use trend data to

display significant fluctuations in subsidy rates over a number of the most

recent years.
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35. Those who were opposed to the disclosure for subsidy rates presented

the following arguments: (a) budget subsidy rates for all credit programs

are published in the Federal Credit Supplement to the Budget of the U.S.

Government, and it is unnecessary to duplicate the same data in financial

reports, (b) the inclusion of budget subsidy rates in financial reports would

appear to invite calculation of subsidy costs by applying the subsidy rates

to disbursements, and such calculation could produce confusing results,

and (c) the subsidy rates in the budget are estimated before all the data

concerning the reporting year are available, and are subject to changes.

36. The Board was aware that the budget subsidy rates are published in the

Federal Credit Supplement to the Budget of the U.S. Government. 

However, the inclusion of those subsidy rates in the financial reports will

provide the reader of the financial statements with an easy access to the

budget data. The Board was also aware that one cannot calculate the

subsidy expense for the current year by applying the estimated subsidy

rates of the current year cohorts to the amount of direct or guaranteed

loans disbursed during the current year. Such calculation may give

erroneous results because some of the loans disbursed during the current

year may belong to previous years’ cohorts. The disclosure of budget

subsidy rates was initially proposed by the AAPC Credit Reform

Accounting Task Force. When proposing the disclosure, the AAPC Credit

Reform Accounting Task Force suggested that the disclosure be

accompanied by a narrative explaining in conceptual terms how the total

subsidy rate differs from the total subsidy expense recognized in the

financial statements. The Board believes that it is necessary to have

such a narrative to avoid confusion between the subsidy rates of the

current year cohorts and the subsidy expense recognized for the current

reporting year.

37. It is true that the estimated subsidy rates for a program in the current

year’s budget reflect budget expectations for that program, and do not

reflect the program’s operating results for the current reporting year. The

actual performance of a program can be viewed from such data as

subsidy reestimates, loans written off, default claims paid, and fees

received. One of the purposes for the disclosure of the budget subsidy

rates is to provide an indication of budget expectations of the most recent

cohorts.

38. The Board believes that the disclosure for the subsidy rates for the
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cohorts of the current reporting year will prove beneficial as they are

important indicators for management’s latest expectations reflecting the

programs’ current characteristics. The disclosure requirement is adopted

because the advantages of the disclosure outweigh its disadvantages. 

DISCLOSURE AND DISCUSSION

39. The Board holds the view that merely reporting the figures for the subsidy

expense and subsidy reestimates would not provide complete and

understandable information to users of Federal agency financial reports. 

The Board believes that to make the figures meaningful, significant events

and changes in assumptions underlying the cost estimates should be

disclosed and their impact should be discussed. The disclosure and

discussion should help explain the subsidy cost data. In other words, the

Board believes that it is necessary to tell the stories behind the figures.

40. Reporting entities are required to provide a description of the programs

that they administer and disclose at the program level the amounts of

direct or guaranteed loans disbursed during the reporting year. This

information would provide the reader with an indication of the programs’

characteristics and the magnitude of their credit activities. With the

information on amounts disbursed, analysts can calculate the subsidy

expense, or one of its components, as a ratio to the amount of the loans

disbursed and can compare the ratios among programs or over time.

41. Reporting entities are required to disclose events and changes that have

had a significant and measurable effect on subsidy costs. These would

include changes in economic conditions and risk factors, changes in

legislation and policies regarding direct loans or loan guarantees, and

changes in methodologies and assumptions used in making subsidy

estimates and reestimates. Credit agencies are also required to disclose

and discuss events and changes that have occurred and are more likely

than not to have a significant impact on subsidy rates, subsidy expense,

and subsidy reestimates but the effects of which are not measurable at

the reporting date. These include events and changes that have occurred

after the reestimation cut off date and will be taken into consideration in

making reestimates for the following year. Reporting entities should

discuss how those events and changes have or would have impacted the

various components of subsidy expense, subsidy rates, and subsidy

reestimates.
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42. The Board noted in particular that changes in legislation and credit policies

could significantly alter a program’s characteristics and thus affect its

subsidy rates. These changes include, for example, changes in

borrowers’ eligibility, the level of fees or interest rates charged borrowers,

the maturity terms of loans, and the percentage of a private loan that is

guaranteed. If such a change occurs during a reporting year, the reporting

entity should disclose and explain the nature of the change and discuss its

impact on program characteristics and its estimated subsidy rates.

43. Most respondents supported the Board proposal. They believed that to

make the reported financial figures meaningful, significant events and

changes in assumptions underlying those figures should be disclosed and

their effect should be discussed. Some of the respondents provided

examples of events that can affect default rates. For example, drought,

flood, tornadoes, and other natural disasters may affect some regions or

some sectors of the economy, and consequently, affect borrowers’ ability

to make loan payments. Those respondents also noted that changes in

economic conditions, such as interest and employment rates, could an

also have a significant impact on credit risks and performance. Some of

them stated that legislative and policy changes could have a direct impact

on the costs and performance of certain affected programs. They

contend that without disclosing those events and changes and discussing

their impact, the reader cannot fully understand the financial figures, such

as subsidy rates, expenses, and reestimates.

44. One respondent noted that the same type of disclosure and discussion

that is now required for credit subsidies is not usually required for many

other operating costs, such as employees salary, rent, and computer

service costs. The respondent questioned why the disclosure and

discussion for credit activities are more critical than other costs reported

in the statement of net cost. To address this issue, we can provide at

least two reasons for this difference. First, unlike salary, rent, or the

costs of other services, the credit subsidy costs are under a greater

degree of uncertainty, as they are exposed to many risk factors external to

the government. Many factors discussed in the March 1999 ED and by

other respondents, such as changes in interest and employment rates

and disastrous events, would cause the subsidy costs to vary from their

estimates in the budget. Second, unlike most other cost items, the credit

subsidy costs are reported in present values of future cash flows

projected over the life of the underlying direct loans and loan guarantees. 

To a large extent, the reliability of the subsidy cost information depends on
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the factors considered in making the cash flow projections. The reliability

is also affected by the quality of the agency’s data and its estimation

methodology. The narrative disclosure and discussion would help the

user to understand the factors that cause significant changes in the

subsidy costs during the reporting year, which do not usually occur in

salary, rent, or other operating costs.

45. Two respondents, however, were opposed to the narrative disclosure and

discussion requirement on the grounds that it would be burdensome for

entities with varied programs to present the required information. These

respondents may have come under a mis-perception about the disclosure

and discussion requirement. They may have perceived that the standard

would require an excessively detailed description of all the technical

aspects of the subsidy estimation methodologies and assumptions, and

an extensive analysis of all risk factors in the programs and even subprograms administered by the reporting entity. Thus, they concluded the

requirement is extremely burdensome. However, such detailed disclosure

and discussion were not intended. It was stated in paragraph 50 of the

March 1999 ED:

While the Board members believe that the proposed disclosure and

discussion are necessary, they prefer that entity financial reports would

not be overwhelmed with detailed numbers and ratios that may overburden

the reader of the financial reports. The Board members believe that to the

extent possible, the narrative discussion should be written in non-technical

language so that the average reader can understand the data and the

explanations.

46. The primary emphasis of the disclosure and discussion requirement is on

significant changes in subsidy rates and reestimates. The disclosure and

discussion should be focused on events that have occurred and have

caused those significant changes. In addition, the disclosure and

discussion should also include events that have occurred and are more

likely than not to have a significant impact on subsidy rates and

reestimates but the effects for which are not measurable at the reporting

date.

47. Some respondents believed that the narrative disclosure and discussion

should more appropriately belong to the Management Discussion and

Analysis (MD&A) section of financial reports. The Board disagrees with

this view. The narrative disclosure and discussion required in this

statement should be specifically tailored to address credit subsidy
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activities. As such, it differs from the MD&A requirements in breadth,

depth, and detail. The Board believes that the disclosure and discussion

required in this statement belong in a note to financial statements, such as

Note 7 in OMB Bulletin 97-01, the Form and Content of Agency Financial

Statements, in which all the data on direct loan assets, loan guarantee

liabilities, subsidy rates, subsidy expenses, and reestimates are reported.

 By including the narrative disclosure and discussion in the same note, the

reader would find all the information in one place. However, this does not

preclude entity management from including a discussion and analysis to

highlight credit activities in MD&A, so long as entity management

determines that such a discussion and analysis meets the MD&A

requirements in SFFAS 15.

48. Audit efforts for information provided in a footnote to financial statements

differ from those for information provided in MD&A. MD&A is regarded as

required supplementary information (RSI) and is subject to less stringent

audit than basic financial statements and their notes.7 The Board believes

that program subsidy data should be reported in a note to agency financial

statements because they are directly related to information reported in the

financial statements. Those program subsidy data should be audited as

basic financial information. Based on the preceding paragraph, it might

appear that including the narrative disclosure and discussion in the same

footnote with the subsidy data (instead of in MD&A) would expand the

audit burden associated with credit subsidies. However, since the auditor

already needs to test the reliability of the estimates and reestimates in the

context of auditing the basic program subsidy data8, the Board believes

that there would be no substantial increase in audit burden from including

the narrative disclosure and discussion in a footnote instead of in MD&A. 

In fact, the process of generating the required disclosure and discussion

for the footnote should provide information on risk factors underlying the

subsidy estimates and reestimates and thus should facilitate the audit of

the basic subsidy data.

 

 

7

See Statement of Recommended Accounting Standards No. 15, Management Discussion and

Analysis, (April 1999) par. 18.

 

8

For example, Federal Financial Accounting and Auditing Technical Release No. 3, Preparing and

Auditing Direct Loan and Loan Guarantee Subsidies under the Federal Credit Reform Act (July 1999),

requires auditors to identify significant external and internal factors that may affect the credit subsidy

estimates and reestimates. External factors include economic conditions, current political climate, and

relevant legislation. Internal factors include the size of the agency’s budget and accounting staff

qualifications of key personnel, turnover of key personnel, and system capabilities.
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49. One respondent commented that there may not be a basis to audit future

events and their effect disclosed in the narrative. The required disclosure

is for events that have occurred, but does not include events that are

anticipated to occur. Also, the provision does not require quantifying the

effect of an event that has occurred but whose effects cannot be

measured at the reporting date.

THE EFFECTIVE DATE

50. In the March 1999 ED, it was proposed that the amendments be made

effective for periods beginning after September 30, 1999. Two

respondents requested that the effective date be made for periods

beginning after September 30, 2000. They argued that many agencies

were still having difficulties in implementing existing credit reform

requirements and that the new requirements would require revisions in

accounting procedures and systems. The CFO Council stated that many

agencies are busy with resolving Y2K problems, and would not be able to

initiate new systems changes until some time in year 2000.

51. There were arguments against postponing the effective date. First, the

requirements prescribed in this statement do not require any new data. 

For example, the data needed for the reconciliation schedules should be in

the system. Without that data, agencies could not report the ending

balances of the subsidy cost allowance and the loan guarantee liability at

the end of each fiscal year. Second, the proposed effective date,

beginning with fiscal year 2000, provides adequate time because financial

statements for that year will be issued in early calendar year 2001.

52. On the other hand, the Board recognizes that staff training and computer

re-programming may be necessary to implement the new requirements. 

Therefore, the Board considered and granted a delay for the effective date

to periods beginning after September 30, 2000. However, the Board

emphasizes that this should not be considered a precedent for postponing

implementation of adopted accounting standards. The Board encourages

early implementation of the standards.

VOTE FOR APPROVAL

53. The accounting standards prescribed in this statement are approved by

the Board unanimously. 
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APPENDIX B: ILLUSTRATIVE REPORTING FORMATS

The following two schedules illustrate the reconciliation between beginning and ending balances of

the subsidy cost allowance for direct loans and the liability for loan guarantees. 

A: Schedule for Reconciling Subsidy Cost Allowance Balances

In thousands of dollars

Beginning Balance, Changes, and Ending Balance FY 2000 FY 2001

Beginning balance of the subsidy cost allowance $ $

Add: subsidy expense for direct loans disbursed during the reporting

years by component:

 (a) Interest subsidy costs

 (b) Default costs (net of recoveries)

 (c) Fees and other collections

 (d) Other subsidy costs

 Total of the above subsidy expense components

Adjustments:

 (a) Loan modifications

 (b) Fees received

 (c) Foreclosed property acquired

 (d) Loans written off

 (e) Subsidy allowance amortization

 (f) Other

Ending balance of the subsidy cost allowance before reestimates

Add or subtract subsidy reestimates by component

 (a) Interest rate reestimate

 (b) Technical/default reestimate

 Total of the above reestimate components

Ending balance of the subsidy cost allowance
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B: Schedule for Reconciling Loan Guarantee Liability Balances

In Thousands of dollars

Beginning Balance, Changes, and Ending balance FY 2000 FY 2001

Beginning balance of the loan guarantee liability $ $

Add: subsidy expense for guaranteed loans disbursed during the

reporting years by component: 

 (a) Interest subsidy costs

 (b) Default costs (net of recoveries)

 (c) Fees and other collections

 (d) Other subsidy costs

 Total of the above subsidy expense components

Adjustments:

 (a) Loan guarantee modifications

 (b) Fees received

 (c) Interest supplements paid

 (d) Foreclosed property and loans acquired

 (e) Claim payments to lenders

 (f) Interest accumulation on the liability balance

 (g) Other

Ending balance of the loan guarantee liability before reestimates

Add or subtract subsidy reestimates by component:

 (a) Interest rate reestimate

 (b) Technical/default reestimate

 Total of the above reestimate components

Ending balance of the loan guarantee liability

Note: The schedules provided in this Appendix are for illustration only. These schedules, with their format and

content, are not a part of the accounting standards. 
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APPENDIX C: THE ACCOUNTING STANDARDS

IN SFFAS No. 2

The following standards are prescribed in SFFAS No. 2. The texts of the paragraphs,

and paragraph numbers reproduced in this Appendix are the same as those that appear in

SFFAS No. 2. (The original footnote numbers are indicated in the footnotes) The shaded

paragraph is affected by SFFAS No. 18.

Explanation

21. These standards concern the recognition and measurement of direct

loans, the liability associated with loan guarantees, and the cost of direct

loans and loan guarantees. The standards apply 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.

Accounting Standards

Post-1991 Direct Loans

22. Direct loans disbursed and outstanding are recognized as assets at the

present value of their estimated net cash inflows. The difference between

the outstanding principal of the loans and the present value of their net

cash inflows is recognized as a subsidy cost allowance.

Post-1991 Loan Guarantees

23. For guaranteed loans outstanding, the present value of estimated net cash

outflows of the loan guarantees is recognized as a liability. Disclosure is

made of the face value of guaranteed loans outstanding and the amount

guaranteed.

Subsidy Costs of Post-1991 Direct Loans and Loan Guarantees

24. For direct or guaranteed loans disbursed during a fiscal year, a subsidy

expense is recognized. The amount of the subsidy expense equals the

present value of estimated cash outflows over the life of the loans minus

the present value of estimated cash inflows, discounted at the interest rate
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of marketable Treasury securities with a similar maturity term applicable

to the period during which the loans are disbursed (hereinafter referred to

as the applicable Treasury interest rate).

25. For the fiscal year during which new direct or guaranteed loans are

disbursed, the components of the subsidy expense of those new direct

loans and loan guarantees are recognized separately among interest

subsidy costs, default costs, fees and other collections, and other subsidy

costs.

26. The interest subsidy cost of direct loans is the excess of the amount of

the loans disbursed over the present value of the interest and principal

payments required by the loan contracts, discounted at the applicable

Treasury rate. The interest subsidy cost of loan guarantees is the present

value of estimated interest supplement payments.

27. The default cost of direct loans or loan guarantees results from any

anticipated deviation, other than prepayments, by the borrowers from the

payments schedule in the loan contracts. The deviations include

delinquencies and omissions in interest and principal payments. The

default cost is measured at the present value of the projected payment

delinquencies and omissions minus net recoveries. Projected net

recoveries include the amounts that would be collected from the

borrowers at a later date or the proceeds from the sale of acquired assets

minus the costs of foreclosing, managing, and selling those assets.

28. The present value of fees and other collections is recognized as a

deduction from subsidy costs.

29. Other subsidy costs consist of cash flows that are not included in

calculating the interest or default subsidy costs, or in fees and other

collections. They include the effect of prepayments within contract terms.

Subsidy Amortization and Reestimation

30. The subsidy cost allowance for direct loans is amortized by the interest

method using the interest rate that was originally used to calculate the

present value of the direct loans when the direct loans were disbursed. 

The amortized amount is recognized as an increase or decrease in

interest income.
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31. Interest is accrued and compounded on the liability of loan guarantees at

the interest rate that was originally used to calculate the present value of

the loan guarantee liabilities when the guaranteed loans were disbursed. 

The accrued interest is recognized as interest expense.

32. The subsidy cost allowance for direct loans and the liability for loan

guarantees are reestimated each year as of the date of the financial

statements. Since the allowance or the liability represents the present

value of the net cash outflows of the underlying direct loans or loan

guarantees, the reestimation should take into account all factors that may

have affected the estimate of each component of the cash flows, including

prepayments, defaults, delinquencies, and recoveries. Any increase or

decrease in the subsidy cost allowance or the loan guarantee liability

resulting from the reestimates should be recognized as a subsidy

expense (or a reduction in subsidy expense). Reporting the subsidy cost

allowance of direct loans (or the liability of loan guarantees) and

reestimates by component is not required.

Criteria for Default Cost Estimates

33. The criteria for default cost estimates provided in this and the following

paragraphs apply to both initial estimates and subsequent reestimates. 

Default costs are estimated and reestimated for each program on the

basis of separate cohorts and risk categories. The reestimates take into

account the differences in past cash flows between the projected and

realized amounts and changes in other factors that can be used to predict

the future cash flows of each risk category.

34. In estimating default costs, the following risk factors are considered: (1)

loan performance experience; (2) current and forecasted international,

national, or regional economic conditions that may affect the performance

of the loans; (3) financial and other relevant characteristics of borrowers;

(4) the value of collateral to loan balance; (5) changes in recoverable value

of collateral; (6) newly developed events that would affect the loans'

performance; and (7) improvements in methods to reestimate defaults.

35. Each credit program should use a systematic methodology, such as an

econometric model, to project default costs of each risk category. If

individual accounts with significant amounts carry a high weight in risk

exposure, an analysis of the individual accounts is warranted in making

the default cost estimate for that category.
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36. Actual historical experience of the performance of a risk category is a

primary factor upon which an estimation of default cost is based. To

document actual experience, a data base should be maintained to provide

historical information on actual payments, prepayments, late payments,

defaults, recoveries, and amounts written off.

Revenues and Expenses

37. Interest accrued on direct loans, including amortized interest, is

recognized as interest income. Interest accrued on the liability of loan

guarantees is recognized as interest expense. Interest due from Treasury

on uninvested funds is recognized as interest income. Interest accrued

on debt to Treasury is recognized as interest expense.

38. Costs for administering credit activities, such as salaries, legal fees, and

office costs, that are incurred for credit policy evaluation, loan and loan

guarantee origination, closing, servicing, monitoring, maintaining

accounting and computer systems, and other credit administrative

purposes, are recognized as administrative expense. Administrative

expenses are not included in calculating the subsidy costs of direct loans

and loan guarantees.

Pre-1992 Direct Loans and Loan Guarantees

39. The losses and liabilities of direct loans obligated and loan guarantees

committed before October 1, 1992, are recognized when it is more likely

than not that the direct loans will not be totally collected or that the loan

guarantees will require a future cash outflow to pay default claims. The

allowance of the uncollectible amounts and the liability of loan guarantees

should be reestimated each year as of the date of the financial

statements. In estimating losses and liabilities, the risk factors discussed

in the previous section should be considered. Disclosure is made of the

face value of guaranteed loans outstanding and the amount guaranteed.

40. Restatement of pre-1992 direct loans and loan guarantees on a present

value basis is permitted but not required.

Modification of Direct Loans and Loan Guarantees

41. The term modification means a federal government action, including new
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legislation or administrative action, that directly or indirectly alters the

estimated subsidy cost and the present value of outstanding direct loans,

or the liability of loan guarantees.

42. Direct modifications are actions that change the subsidy cost by altering

the terms of existing contracts or by selling loan assets. Existing

contracts may be altered through such means as forbearance,

forgiveness, reductions in interest rates, extensions of maturity, and

prepayments without penalty. Such actions are modifications unless they

are considered reestimates, or workouts as defined below, or are

permitted under the terms of existing contracts.

43. Indirect modifications are actions that change the subsidy cost by

legislation that alters the way in which an outstanding portfolio of direct

loans or loan guarantees is administered. Examples include a new

method of debt collection prescribed by law or a statutory restriction on

debt collection.

44. The term modification does not include subsidy cost reestimates, the

routine administrative workouts of troubled loans, and actions that are

permitted within the existing contract terms. Workouts are actions taken

to maximize repayments of existing direct loans or minimize claims under

existing loan guarantees. The expected effects of work-outs on cash

flows are included in the original estimate of subsidy costs and

subsequent reestimates.

A. Modification of Direct Loans

45. With respect to a direct or indirect modification of pre-1992 or post-1991

direct loans, the cost of modification is the excess of the pre-modification
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value9 of the loans over their post-modification value10. The amount of the

modification cost is recognized as a modification expense when the loans

are modified.

46. When post-1991 direct loans are modified, their existing book value is

changed to an amount equal to the present value of the loans' net cash

inflows projected under the modified terms from the time of modification to

the loans' maturity and discounted at the original discount rate (the rate

that is originally used to calculate the present value of the direct loans,

when the direct loans were disbursed).

47. When pre-1992 direct loans are directly modified, they are transferred to a

financing account and their book value is changed to an amount equal to

their post-modification value. Any subsequent modification is treated as a

modification of post-1991 loans. When pre-1992 direct loans are indirectly

modified, they are kept in a liquidating account. Their bad debt allowance

is reassessed and adjusted to reflect amounts that would not be collected

due to the modification.

48. The change in book value of both pre-1992 and post-1991 direct loans

resulting from a direct or indirect modification and the cost of modification

will normally differ, due to the use of different discount rates or the use of

different measurement methods. Any difference between the change in

book value and the cost of modification is recognized as a gain or loss. 

For post-1991 direct loans, the modification adjustment transfer11 paid or

 

 9(Original Footnote No. 3) The term "pre-modification value" is the present value of the net cash

inflows of direct loans estimated at the time of modification under pre-modification terms and discounted at

the interest rate applicable to the time when the modification occurs on marketable Treasury securities that

have a comparable maturity to the remaining maturity of the direct loans under pre-modification terms

(simply stated, the pre-modification terms at the current rate).

 10 (Original footnote No. 4) The term "post-modification value" is the present value of the net cash

inflows of direct loans estimated at the time of modification under post-modification terms and discounted at

the interest rate applicable to the time when the modification occurs on marketable Treasury securities that

have a comparable maturity to the remaining maturity of the direct loans under post-modification terms

(simply stated, the post-modification terms at the current rate).

 

11(Original footnote No. 5) OMB instructions provide that if the decrease in book value exceeds the cost

of modification, the reporting entity receives from the Treasury an amount of "modification adjustment

transfer" equal to the excess; and that if the cost of modification exceeds the decrease in book value, the

reporting entity pays to the Treasury an amount of "modification adjustment transfer" to offset the excess. 

(See OMB Circular A-11.)
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received to offset the gain or loss is recognized as a financing source (or

a reduction in financing source).

B. Modification of Loan Guarantees

49. With respect to a direct or indirect modification of pre-1992 or post-1991

loan guarantees, the cost of modification is the excess of the

post-modification liability12 of the loan guarantees over their

pre-modification liability13. The modification cost is recognized as

modification expense when the loan guarantees are modified.

50. The existing book value of the liability of modified post-1991 loan

guarantees is changed to an amount equal to the present value of net

cash outflows projected under the modified terms from the time of

modification to the loans' maturity, and discounted at the original discount

rate (the rate that is originally used to calculate the present value of the

liability when the guaranteed loans were disbursed).

51. When pre-1992 loan guarantees are directly modified, they are transferred

to a financing account and the existing book value of the liability of the

modified loan guarantees is changed to an amount equal to their postmodification liability. Any subsequent modification is treated as a

modification of post-1991 loan guarantees. When pre-1992 direct loan

guarantees are indirectly modified, they are kept in a liquidating account. 

The liability of those loan guarantees is reassessed and adjusted to reflect

any change in the liability resulting from the modification.

52. The change in the amount of liability of both pre-1992 and post-1991 loan

guarantees resulting from a direct or indirect modification and the cost of

 

 

12(Original footnote 6) The term "post-modification liability" is the present value of the net cash outflows

of the loan guarantees estimated at the time of modification under the post-modification terms, and

discounted at the interest rate applicable to the time when the modification occurs on marketable Treasury

securities that have a comparable maturity to the remaining maturity of the guaranteed loans under postmodification terms (simply stated, the post-modification terms at the current rate).

 

13 (Original footnote NO. 7) The term "pre-modification liability" is the present value of the net cash

outflows of loan guarantees estimated at the time of modification under the pre-modification terms and

discounted at the interest rate applicable to the time when the modification occurs on marketable Treasury

securities that have a comparable maturity to the remaining maturity of the guaranteed loans under premodification terms (simply stated, the pre-modification terms at the current rate).
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modification will normally differ, due to the use of different discount rates

or the use of different measurement methods. The difference between

the change in liability and the cost of modification is recognized as a gain

or loss. For post-1991 loan guarantees, the modification adjustment

transfer14 paid or received to offset the gain or loss is recognized as a

financing source (or a reduction in financing source).

C. Sale of Loans

53. The sale of post-1991 and pre-1992 direct loans is a direct modification. 

The cost of modification is determined on the basis of the pre-modification

value of the loans sold. If the pre-modification value of the loans sold

exceeds the net proceeds from the sale, the excess is the cost of

modification, which is recognized as modification expense.

54. For a loan sale with recourse, potential losses under the recourse or

guarantee obligations are estimated, and the present value of the

estimated losses from the recourse is recognized as subsidy expense

when the sale is made and as a loan guarantee liability.

55. The book value loss (or gain) on a sale of direct loans equals the existing

book value of the loans sold minus the net proceeds from the sale. Since

the book value loss (or gain) and the cost of modification are calculated on

different bases, they will normally differ. Any difference between the book

value loss (or gain) and the cost of modification is recognized as a gain or

loss.15 For sales of post-1991 direct loans, the modification adjustment

transfer16 paid or received to offset the gain or loss is recognized as a

financing source (or a reduction in financing source).

D. Disclosure

 

 

14(Original footnote 8) OMB instructions provide that if the increase in liability exceeds the cost of

modification, the reporting entity receives from the Treasury an amount of "modification adjustment transfer"

equal to the excess; and that if the cost of modification exceeds the increase in liability, the reporting entity

pays to the Treasury an amount of "modification adjustment transfer" to offset the excess. (See OMB

Circular A-11.)

 

15(Original footnote No. 9) If there is a book value gain, the gain to be recognized equals the book value

gain plus the cost of modification.

 

16(Original footnote No. 19) See footnote No. 7 for an explanation for "modification adjustment transfer".
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56. Disclosure is made in notes to financial statements to explain the nature

of the modification of direct loans or loan guarantees, the discount rate

used in calculating the modification expense, and the basis for recognizing

a gain or lose related to the modification.

Foreclosure of Post-1991 Direct and Guaranteed Loans

57. When property is transferred from borrowers to a federal credit program,

through foreclosure or other means, in partial or full settlement of post1991 direct loans or as a compensation for losses that the government

sustained under post-1991 loan guarantees, the foreclosed property is

recognized as an asset at the present value of its estimated future net

cash inflows discounted at the original discount rate.

58. If a legitimate claim exists by a third party or by the borrower to a part of

the recognized value of the foreclosed assets, the estimated amount of

the claim is recognized as a special contra valuation allowance.

59. At a foreclosure of guaranteed loans, a federal guarantor may acquire the

loans involved. The acquired loans are recognized at the present value of

their estimated net cash inflows from selling the loans or from collecting

payments from the borrowers, discounted at the original discount rate.

60. When assets are acquired in full or partial settlement of post-1991 direct

loans or guaranteed loans, the present value of the government's claim

against the borrowers is reduced by the amount settled as a result of the

foreclosure.

Write-off of Direct Loans

61. When post-1991 direct loans are written off, the unpaid principal of the

loans is removed from the gross amount of loans receivable. 

Concurrently, the same amount is charged to the allowance for subsidy

costs. Prior to the write-off, the uncollectible amounts should have been

fully provided for in the subsidy cost allowance through the subsidy cost

estimate or reestimates. Therefore, the write-off would have no effect on

expenses.
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GLOSSARY

Included in this Glossary are terms that are used in this Statement. Most of the terms

were also defined in the Glossary of SFFAS No. 2, but some of them have been updated based

on the recent version of OMB Circular A-11. Readers are advised to rely on the latest OMB

Circulars A-11 and A-34 for proper usage of federal budgetary terms and their definitions. 

Book value - The net amount at which an asset or liability is carried on the books of account

(also referred to as carrying value or amount). It equals the gross or nominal amount of any

asset or liability minus any allowance or valuation amount.

Cohort - A budget term which refers to all direct loans or loan guarantees of a program for

which a subsidy appropriation is provided for a given fiscal year, even if disbursements occur in

subsequent years. For direct loans and loan guarantees for which a subsidy appropriation is

provided for one fiscal year, the cohort will be defined for that fiscal year. For direct loans and

loan guarantees for which multiple year or no-year appropriations are provided, the cohort is

defined by the year of obligation.

Credit program - For the purpose of this Statement, a federal program that makes loans and/or

loan guarantees to nonfederal borrowers.

Direct loan - A disbursement of funds by the government to a nonfederal borrower under a

contract that requires the repayment of such funds with or without interest. The term includes

the purchase of, or participation in, a loan made by a non-Federal lender.

Direct loan obligation - A binding agreement by a Federal agency to make a direct loan when

specified conditions are fulfilled by the borrower.

Econometric model - An equation or a set of related equations used to analyze economic data

through mathematical and statistical techniques. Such models may be devised in order to

depict the essential quantitative impact of alternative assumptions or government policies. 

(Dictionary of Banking and Finance, Jerry M. Rosenberg, Ph.D., Wiley & Sons, New York, 1982,

hereafter cited as Rosenberg's Dictionary)

Foreclosure - A method of enforcing payment of a debt secured by a mortgage by seizing the

mortgaged property. Foreclosure terminates all rights that the mortgagor has in the mortgaged

property upon completion of due process through the courts. (Treasury Financial Manual

Supplement)

Interest method - A method used to amortize the premium or discount of an investment in
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bonds, or, as used in this Statement, to amortize the subsidy cost allowance of direct loans. 

Under this method, the amortization amount of the subsidy cost allowance equals the effective

interest minus the nominal interest of the direct loans. The effective interest equals the present

value of the direct loans times the effective interest rate (the discount rate). The nominal interest

equals the nominal amount (face amount) of the direct loans times the stated interest rate (the

rate stated in the loan agreements).

Interest rate reestimate - A reestimate for the subsidy cost of direct loans or loan guarantees

due to a change in the interest rates used in present value calculations from the assumed

interest rates used in budget preparations to the interest rates that are applicable to the periods

in which the direct or guaranteed loans are disbursed.

Loan guarantee - 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, except for the insurance of deposits, shares, or other withdrawable accounts in financial

institutions.

Loan guarantee commitment - A binding agreement by a federal agency to make a loan

guarantee when specified conditions are fulfilled by the borrower, the lender, or any other party to

the guarantee agreement.

Modification - A federal government action, including new legislation or administrative action,

that directly or indirectly alters the estimated subsidy cost and the present value of outstanding

direct loans (or direct loan obligations), or the liability of loan guarantees (or loan guarantee

commitments). Direct modifications are such actions that change the subsidy cost by altering

the terms of existing contracts, selling loan assets, and purchasing loans under guarantee from

a private lender. Indirect modifications change the subsidy cost by legislation that alters the way

in which an outstanding portfolio of direct loans or loan guarantees is administered. (According

to OMB Circular A-11, the term modification does not include a Government action that is

assumed in the baseline cost estimate, as long as the assumption is documented and has been

approved by OMB. For example, modification does not include routine administrative workouts

of troubled loans or loans in imminent default, and the borrower’s or the Government’s exercise

of an option that is permitted within the terms of an existing contract, such as prepaying the loan.

OMB Circular A-11, sec. 85.3 (n) July 1999)

Modification adjustment transfer - A non-expenditure transfer from a credit program to the

Treasury, or vice versa, to offset the difference between the amount appropriated for the cost of

modification of direct loans (or loan guarantees) and the change in the book value of direct loans

(or loan guarantee liabilities).

Nominal (or face or par) value or amount - The amount of a bond, note, mortgage, or other
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security as stated in the instrument itself, exclusive of interest or dividend accumulations. The

nominal amount may or may not coincide with the price at which the instrument was first sold,

its present market value, or its redemption price. Often referred to as the stated value. (Adapted

from Kohler's Dictionary for Accountants, 6th ed., hereafter cited as Kohler's Dictionary)

Present value (PV) - The value of future cash flows discounted to the present at a certain

interest rate (such as the reporting entity's cost of capital), assuming compound interest. 

(Adapted from Kieso and Weygandt, Intermediate Accounting, 7th ed., p. 264.) 

Recourse - The rights of a holder in due course of a financial instrument (such as a loan) to

force the endorser on the instrument to meet his or her legal obligations for making good the

payment of the instrument if dishonored by the maker or acceptor. The holder in due course

must have met the legal requirements of presentation and delivery of the instrument to the maker

of a note or acceptor of a draft and must have found that this legal entity has refused to pay for or

defaulted in payment of the instrument. (Rosenberg's Dictionary) 

Reestimate - Revisions of the subsidy cost allowance for outstanding direct loans or the liability

of outstanding loan guarantees, through reestimating the subsidy costs of those direct loans and

loan guarantees. See “interest rate reestimate” and “technical/default reestimate.”

Restatement (of direct loans or loan guarantees) - For the purposes of this Statement,

refers to establishing a new book value of a direct loan or the liability of a loan guarantee.

Risk category - Subdivisions of a cohort of direct loans or loan guarantees into groups of loans

that are relatively homogeneous in cost, given the facts known at the time of obligation or

commitment. Risk categories will group all direct loans or loan guarantees within a cohort that

share characteristics predictive of defaults and other costs.

Subsidy cost - The cost of a grant of financial aid, usually by a governmental body, to some

person or institution for particular purposes. (Kohler's Dictionary)

Credit subsidy cost is the estimated long-term cost to the government of direct loans or

loan guarantees calculated on a net present value basis, excluding administrative costs.

Direct loan subsidy cost is the estimated long-term cost to the government of direct

loans, calculated on a present value basis, excluding administrative costs. The cost is

the net present value of estimated cash flows at the time the direct loans are disbursed. 

The discount rate used for the calculation is the average interest rate (yield) on

marketable Treasury securities of similar maturity to the loans’ cash flows, applicable to

the time when the loans are disbursed.
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Loan guarantee subsidy cost - The estimated long-term cost to the government of loan

guarantees calculated on a present value basis, excluding administrative costs. The

cost is the net present value of estimated cash flows at the time the guaranteed loans

are disbursed by the lender. The discount rate used for the calculation is the average

interest rate (yield) on marketable Treasury securities of similar maturity to the cash

flows projected under the terms of the loan guarantees, applicable to the time when the

guaranteed loans are disbursed.

Technical/default reestimate - A reestimate of the subsidy cost of direct loans or loan

guarantees based the latest projections on defaults, delinquencies, recoveries, and

prepayments, and other cash flow components. 

Write-off - An action to remove an amount from an entity's assets. A write-off of a loan occurs

when an agency official determines that the loan will not be collected or, after all appropriate

collection tools have been used, that the loan is uncollectible. Active collection on an account

ceases, and the account is removed from an entity's receivables. (Treasury Financial Manual

Supplement)
FASAB Board Members

 

David Mosso, Chairman

Barry Anderson

Philip T. Calder

Donald H. Chapin

Sheila Conley*

Joseph L. Kull

James M. Patton

Robert N. Reid

Nelson Toye

 Kenneth J. Winter

 *Term expired in April 2000. 

FASAB Staff

Wendy M. Comes, Executive Director

Project Staff:

Richard Mayo

Lucy Lomax

_______________________________________

Federal Accounting Standards Advisory Board

441 G Street NW

Suite 6814

Washington, DC 20548

Telephone (202) 512-7350

FAX (202) 512-7366

www.financenet.gov/fasab.htm
FASAB

Federal Accounting Standards Advisory Board

U.S. General Accounting Office

441 G Street, NW, Suite 6814

Mail Stop 6K17V

Washington, DC 20548

Official Business

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ees Paid

GAO

ermit No.

1001