Federal Reserve System Audits
Audits of the Federal Reserve System

The Board of Governors, the Federal

Reserve Banks, and the Federal Reserve

System as a whole are all subject to

several levels of audit and review. The

Board’s financial statements, and its

compliance with laws and regulations

affecting those statements, are audited

annually by an outside auditor retained

by the Board’s Office of Inspector General. The Office of Inspector General

also conducts audits, reviews, and investigations relating to the Board’s programs and operations as well as to Board

functions delegated to the Reserve

Banks.

The Reserve Banks’ finan

ments are audited annually by 

pendent outside auditor retain

Board of Governors. In add

Reserve Banks are subject 

examination by the Board. As 

in the chapter ‘‘Federal Reserv

the Board’s examination includ

range of ongoing oversight 

conducted on and off site by s

Board’s Division of Reserve 

erations and Payment Systems

Federal Reserve operations 

subject to review by the Go

Accountability Office. 
Board of Governors Financial Statements

The financial statements of the Board for 2006 and 2005 were audited

by KPMG LLP, independent auditors.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTE

BALANCE SHEETS

As of Decem

2006 

Assets

Current Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,030,706 

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,625,907 

Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,260,507 

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,917,120 

Noncurrent Assets

Property and equipment, net (Note 4) ...................................... 151,205,386 

Total noncurrent assets ............................................. 151,205,386 

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,122,506 

Liabilities and Cumulative Results of Operations

Current Liabilities

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,950,470 

Accrued payroll and related taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,421,666 

Accrued annual leave . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,334,512 

Capital lease payable (current portion) ..................................... 327,663 

Unearned revenues and other liabilities ..................................... 366,304 

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,400,615 

Long-term Liabilities

Capital lease payable (non-current portion) ................................. 108,755 

Accumulated retirement benefit obligation (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . 1,354,662 

Accumulated postretirement benefit obligation (Note 6) . . . . . . . . . . . . . . . . . . . . . 8,111,829 

Accumulated postemployment benefit obligation (Note 7) . . . . . . . . . . . . . . . . . . . 6,515,301 

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,090,547 

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,491,162 

Cumulative Results of Operations

Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,844,168 

Unfunded long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,325,986) 

Net investment in property and equipment .................................. 150,768,968 

Accumulated other comprehensive income (loss) (Note 8) . . . . . . . . . . . . . . . . . . . (1,655,806) 

Total cumulative results of operations ............................... 168,631,344 

Total liabilities and cumulative results of operations .................. $218,122,506 

See accompanying notes to financial statements.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTE

STATEMENTS OF REVENUES AND EXPENSES

AND CHANGES IN CUMULATIVE RESULTS OF OPERATIONS

For the years ended D

2006 

Board Operating Revenues

Assessments levied on Federal Reserve Banks for Board

operating expenses and capital expenditures ........................ $301,013,500 $

Other revenues (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,508,949 

Total operating revenues ........................................ 309,522,449 

Board Operating Expenses

Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,239,595 

Retirement and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,853,297 

Contractual services and professional fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,944,564 

Depreciation, amortization, and net losses on disposals. . . . . . . . . . . . . . . . . . . 13,058,667 

Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,185,840 

Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,820,503 

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,637,765 

Postage and supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,560,368 

Repairs and maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,634,459 

Printing and binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505,470 

Other expenses (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,435,067 

Total operating expenses ........................................ 295,875,595 

Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,646,854 

Issuance and Redemption of Federal Reserve Notes

Assessments levied on Federal Reserve Banks

for currency costs................................................. 491,962,202 

Expenses for currency printing, issuance,

retirement, and shipping .......................................... 491,962,202 

Currency Assessments over (under) Expenses......................... 0 

Total Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,646,854 

Cumulative Results of Operations, Beginning of year ................. 156,640,296 

Other Comprehensive Income

Adjustment to initially apply FASB Statement No. 158 (Note 8) . . . . . . . . . 1, ( ) 655,806 

Total Other Compehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ( ) 655,806

Cumulative Results of Operations, End of year........................ $168,631,344 $

See accompanying notes to financial statements.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

STATEMENTS OF CASH FLOWS

For the years ended D

2006 

Cash Flows from Operating Activities

Results of Operations ................................................. $13,646,854 

Adjustments to reconcile results of operations

to net cash provided by (used in) operating activities:

Depreciation and net losses on disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,058,667 

Increase in assets:

Accounts receivable, and prepaid expenses and other assets ............ (812,482) 

Increase (decrease) in liabilities:

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,955,880) 

Accrued payroll and related taxes .................................... 561,094 

Accrued annual leave ................................................ 878,028 

Unearned revenues and other liabilities ............................... (417,407) 

Accumulated retirement benefit obligation ............................ 541,165 

Accumulated postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . 1,874,539 

Accumulated postemployment benefit obligation . . . . . . . . . . . . . . . . . . . . . . 1,403,936 

Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,655,806) 

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,122,708 

Cash Flows from Investing Activities

Proceeds from disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,212 

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,829,712) 

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,822,500) 

Cash Flows from Financing Activities

Capital lease payments ................................................... (239,937) 

Net cash used in financing activities ............................... (239,937) 

Net Increase (Decrease) in Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,060,271 

Cash Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,970,435 

Cash Balance, End of year ................................................ $60,030,706 

See accompanying notes to financial statements.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

NOTES TO FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2006 AND 2005

(1) Structure

The Federal Reserve System was established by Congress in 1913 and consists of the Board of Governors

(Board), the Federal Open Market Committee, the twelve

regional Federal Reserve Banks, the Federal Advisory

Council, and the private commercial banks that are members of the System. The Board, unlike the Reserve Banks,

was established as a federal government agency and is

supported by Washington DC based staff numbering approximately 1,800, as it carries out its responsibilities in

conjunction with other components of the Federal Reserve System.

The Board is required by the Federal Reserve Act to

report its operations to the Speaker of the House of

Representatives. The Act also requires the Board, each

year, to order a financial audit of each Federal Reserve

Bank and to publish each week a statement of the financial condition of each such Reserve Bank and a consolidated statement for all of the Reserve Banks. Accordingly, the Board believes that the best financial disclosure

consistent with law is achieved by issuing separate financial statements for the Board and for the Reserve Banks.

Therefore, the accompanying financial statements include

only the results of operations and activities of the Board.

Combined financial statements for the Federal Reserve

Banks are included in the Board’s annual report to the

Speaker of the House of Representatives.

(2) Operations and Services

The Board’s responsibilities require thorough analysis

of domestic and international financial and economic

developments. The Board carries out those responsibilities in conjunction with other components of the Federal

Reserve System. The Board also supervises and regulates

the operations of the Federal Reserve Banks, exercises

broad responsibility in the nation’s payments system, and

administers most of the nation’s laws regarding consumer

credit protection. Policy regarding open market operations is established by the Federal Open Market Committee. However, the Board has sole authority over changes

in reserve requirements, and it must approve any change

in the discount rate initiated by a Federal Reserve Bank.

The Board also plays a major role in the supervision

and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are

members of the Federal Reserve System, bank holding

companies, foreign activities of member banks, and U.S.

activities of foreign banks.

(3) Significant Accounting Policies

Basis of Accounting—The financial statements have

been prepared on the accrual basis of accounting.

Revenues—Assessments for operating 

additions to property are based on expected 

Issuance and Redemption of Federal Re

The Board incurs expenses and assesse

Reserve Banks for currency printing, iss

ment, and shipping of Federal Reserve 

assessments and expenses are separately r

statements of revenues and expenses bec

passed through the Board account and a

operating transactions.

Property, Equipment, and Software—

property, buildings, equipment, and softwa

cost less accumulated depreciation and am

preciation and amortization is calculated on 

basis over the estimated useful lives of the 

range from 3 to 10 years for furniture an

10 to 50 years for building equipment and 

2 to 10 years for software. Upon the sale o

sition of a depreciable asset, the cost and re

lated depreciation or amortization are rem

accounts and any gain or loss is recognized

Art Collections—The Board has collect

of art, historical treasures, and similar asse

lections are maintained and held for public 

furtherance of public service. Proceeds fro

collections are used to acquire other items f

As permitted by Statement of Financial Ac

dards Number 116, Accounting for Con

ceived and Contributions Made, the cost 

purchased by the Board is charged to expen

purchased and donated collection items are 

The value of the Board’s collections 

determined.

Estimates—The preparation of financial 

conformity with accounting principles gene

in the United States requires management 

mates and assumptions that affect the report

assets and liabilities and the disclosure 

assets and liabilities at the date of the finan

and the reported amounts of revenues and 

ing the reporting period. Actual results cou

those estimates.

Reclassifications—Certain 2005 amoun

reclassified to conform with the 2006 prese

Implementation of FASB Statement No. 

ers’ Accounting for Defined Benefit Pensi

Postretirement Plans—The Board initiall

provisions of FASB Statement No. 158, E

counting for Defined Benefit Pension and 

tirement Plans, at December 31, 2006. Th

standard requires recognition of the overfun

funded status of a defined benefit postretir

the Balance Sheets, and recognition of c

funded status in the years in which the 

through comprehensive income. The trans

implementing the standard require applyi

sions as of the end of the year of initial im

with no retrospective application.
(4) Property and Equipment

The following is a summary of the components of the

Board’s property and equipment, at cost, net of accumulated depreciation and amortization.

As of December 31,

2006 2005

Land . . . . . . . . . . . . . . . . $ 18,640,314 $ 18,640,314

Buildings and

improvements . . . 147,504,169 135,152,735

Furniture and

equipment . . . . . . . 47,271,434 39,926,270

Software in use . . . . . . 13,681,508 12,415,000

Software in process . . . 941,912 575,050

Construction in

process .......... 360,966 13,928,149

228,400,304 220,637,518

Less accumulated

depreciation and

amortization . . . . . (77,194,918) (65,195,965)

Property and

equipment, net . . . $151,205,386 $155,441,553

Furniture and equipment includes $1,230,000 each year

for capitalized leases as of December 31, 2006 and 2005.

Accumulated depreciation includes $867,000 and

$612,000 for capitalized leases as of December 31, 2006

and 2005, respectively. The Board paid interest related to

these capital leases in the amount of $54,000 and $83,000

for 2006 and 2005, respectively.

Construction in process includes costs incurred in 2006

and 2005 for long-term security projects and building

enhancements.

The future minimum lease payments required under

the capital leases and the present value of the net minimum lease payments as of December 31, 2006, are as

follows:

Year

ending

December 31 Amount

2007 $ 463,491

2008 138,279

2009 . . .

Total minimum lease

payments ............. 601,770

Less: Amount representing

maintenance included

in total amounts above . . (130,540)

Net minimum lease

payments ............. 471,230

Less: Amount representing

interest . . . . . . . . . . . . . . . (34,812)

Present value of net

minimum lease

payments ............. 436,418

Less: Current maturities

of capital lease

obligations . . . . . . . . . . . . (327,663)

Long-term capital lease

obligations . . . . . . . . . . . . $ 108,755

(5) Accumulated Retirement Benefits

The following information provides disc

ments contained in Statement of Financi

Standards No. 132, Employers’ Disclosur

sions and Other Postretirement Benefits.

Substantially all of the Board’s employ

in the Retirement Plan for Employees o

Reserve System (System Plan). The Sys

multi-employer plan which covers emp

Federal Reserve Banks, the Board, and 

Employee Benefits. No separate accounting 

of assets contributed by the participating e

Federal Reserve Bank of New York acts a

the System Plan, and the costs associated 

are not redistributed to other participating 

Employees of the Board who became e

to 1984 are covered by a contributory de

program under the System Plan. Employee

who became employed after 1983 are 

non-contributory defined benefits program 

tem Plan. Contributions to the System Plan 

determined and funded by participating em

on actuarial calculations, it was determined 

funding contributions were not required 

2006 and 2005, and the Board was not ass

bution for these years. Because the plan 

multi-employer plan, information as to ve

vested benefits, as well as plan assets, as i

to the Board, is not readily available.

Effective January 1, 1996, Board empl

under the System Plan are also covered un

Equalization Plan (BEP). Benefits paid und

limited to those benefits that cannot be 

System Plan due to limitations impo

tions 401(a)(17), 415(b), and 415(e) of the 

nue Code of 1986. Activity for the BEP 

2005 is summarized in the following table

2006 

Change in projected

benefit obligation

Benefit obligation at

beginning of year . . $ 536,339 

Service cost . . . . . . . . . . . . 185,483 

Interest cost . . . . . . . . . . . . 45,004 

Plan participants’

contributions . . . . . . 0 

Plan amendments ....... 0 

Actuarial (gain)/loss . . . . 596,114 

Benefits paid . . . . . . . . . . . 8, ( 278)

Benefit obligation at

end of year . . . . . . . . $1,354,662 

Change in plan assets

Fair value of plan assets

at beginning

of year ............ $ 0 

Actual return on plan

assets . . . . . . . . . . . . . 0 

Employer contributions. . 8,278 

Plan participants’

contributions . . . . . . 0 

Benefits paid . . . . . . . . . . . 8, ( 278) 

Fair value of plan assets

at end of year ..... $ 0 
2006 2005

Reconciliation of funded

status at end of year

Funded status . . . . . . . . . . $(1,354,662) $ (536,339)

Unrecognized net

actuarial (gain)/

loss . . . . . . . . . . . . . . . 580,386 (15,728)

Unrecognized prior

service cost . . . . . . . (247,417) (261,430)

Unrecognized net

transition

obligation . . . . . . . . . 0 0

Prepaid/(Accrued)

pension cost ....... $(1,021,693) $ (813,497)

Amounts recognized in

the financial statements

consist of

Prepaid benefit cost .... $ 0 $ 0

Accrued benefit

liability . . . . . . . . . . . (1,021,693) (813,497)

Intangible asset ......... 0 0

Accumulated other

comprehensive

income ............ (332,969) 0

Net amount

recognized ........ $(1,354,662) $ (813,497)

Information for pension

plans with an

accumulated benefit

obligation in excess of

plan asset:

Projected benefit

obligation . . . . . . . . . $ 1,354,662 $ 536,339

Accumulated benefit

obligation . . . . . . . . . $ 546,854 $ 278,252

Weighted-average

assumptions used to

determine benefit

obligation as of

December 31

Discount rate . . . . . . . . . . . 5.75% 5.75%

Rate of compensation

increase . . . . . . . . . . . 4.50% 4.50%

Components of net

periodic benefit cost

Service cost—benefits

earned during the

period . . . . . . . . . . . . . $ 185,483 $ 193,209

Interest cost on

projected benefit

obligation . . . . . . . . . 45,004 35,964

Expected return

on plan assets . . . . . 0 0

Amortization of

prior service cost . . (14,013) (14,013)

Amortization of

(gains)/losses . . . . . . 0 5,982

Amortization of initial

(asset)/obligation . . 0 0

Net periodic benefit

cost (credit) ....... $ 216,474 $ 221,142

Additional information:

Increase in minimum

liability included in

other comprehensive

income ............ $ 0 $ 0

2006 

Weighted-average

assumptions used to

determine net periodic

benefit cost for years

ended December 31

Discount rate . . . . . . . . . . . 5.75% 

Rate of compensation

increase . . . . . . . . . . . 4.50% 

A relatively small number of Board emp

pate in the Civil Service Retirement Syste

the Federal Employees’ Retirement Sy

These defined benefit plans are administer

Office of Personnel Management, which d

required employer contribution levels. The 

tributions to these plans totaled $334,000 an

2006 and 2005, respectively. The Board h

for future payments to retirees under these 

is not accountable for the assets of the plan

Employees of the Board may also par

Federal Reserve System’s Thrift Plan. 

butions to members’ accounts are based 

percentage of each member’s basic 

and were $8,964,000 and $8,617,000 in 2

respectively.

(6) Accumulated Postretirement Ben

The following information provides disc

ments contained in Statement of Financi

Standards No. 106, Employers’Accounting 

ment Benefits Other Than Pensions.

The Board provides certain life insurance 

its active employees and retirees. Activity 

2005 is summarized in the following table

2006 

Change in benefit

obligation

Benefit obligation at

beginning of year . . $ 8,273,831 

Service cost . . . . . . . . . . . . 230,567 

Interest cost . . . . . . . . . . . . 470,256 

Plan participants’

contributions . . . . . . 0 

Plan amendments ....... 0 

Actuarial (gain)/loss . . . . (603,500) 

Benefits paid ........... (259,325) 

Benefit obligation

at end of year . . . . . $ 8,111,829 

Change in plan assets

Fair value of plan

assets at beginning

of year ............ $ 0 

Actual return on

plan assets . . . . . . . . 0 

Employer contribution . . 259,325 

Plan participants’

contributions . . . . . . 0 

Benefits paid ........... (259,325) 

Fair value of plan

assets at end

of year ............ $ 0 
2006 2005

Reconciliation of

funded status

at end of year

Benefit obligations . . . . . $(8,111,829) $(8,273,832)

Unrecognized net

actuarial

(gain)/loss . . . . . . . . . 0 2,145,920

Unrecognized prior

service cost . . . . . . . 0 (109,378)

Amount recognized

at end of year . . . . . $(8,111,829) $(6,237,290)

Amounts recognized in

the financial statements

consist of:

Liability . . . . . . . . . . . . . . . $(8,111,829) $ 0

Accrued benefit cost . . . . 0 (6,237,290)

Accumulated other

comprehensive

income ........... 0 0

Net amount recognized . . $(8,111,829) $(6,237,290)

Amounts recognized in

accumulated other

comprehensive income

consist of:

Net actuarial loss/

(gain) . . . . . . . . . . . . . $1,422,398 $ 0

Prior service cost/

(credit) . . . . . . . . . . . . (99,560) 0

Transition obligation/

(asset) ............ 0 0

Deferred curtailment

(gain)/loss . . . . . . . . . 0 0

$1,322,838 $ 0

Expected cash flows

Expected employer

contributions:

2007 .............. $ 274,901

Expected benefit

payments:

2007 .............. $ 274,901

2008 .............. $ 296,030

2009 .............. $ 325,793

2010 .............. $ 350,050

2011 .............. $ 364,265

2012-2016 . . . . . . . . $ 2,132,108

The liability and costs for the postretirement benefit

plan were determined using discount rates of 5.75 percent

as of December 31, 2006 and 2005. Unrecognized losses

of $2,145,920 as of December 31, 2005 result from

changes in the discount rate used to measure the liabilities. The assumed salary trend rate for measuring the

increase in postretirement benefits related to life insurance was an average of 4.50 percent.

The above accumulated postretirement benefit obligation is related to the Board-sponsored life insurance programs. The Board has no liability for future payments to

employees who continue coverage under the federally

sponsored life and health programs upon retiring. Contributions for active employees participatin

sponsored health programs totaled $9

$8,933,000 in 2006 and 2005, respectively

(7) Accumulated Postemployment Ben

The following information provides disc

ments contained in Statement of Financi

Standards No. 112, Employers’ Accountin

ployment Benefits.

The Board provides certain postemploy

to eligible former or inactive employees an

dents during the period subsequent to em

prior to retirement. Costs were projected u

discount rates as were used for projecting 

costs. The accrued postemployment benef

nized by the Board for the years ended 

2006 and 2005, were $1,963,000 an

respectively.

(8) Accumulated Other Comprehensiv

Following is a reconciliation of beginni

balances of accumulated other comprehens

Amount related

to defined benefit

retirement plans

Am

to p

be

th

Balance

January 1,

2006 . . . . . . . . $(1,021,693) $(

Adjustment to

initially apply

Statement

No. 158 . . . . . (332,969) (

Balance

December 31,

2006 . . . . . . . . $(1,354,662) $(

Tota

othe

sive 

Balance

January 1,

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . $(

Adjustment to

initially apply

Statement

No. 158 . . . . . . . . . . . . . . . . . . . . . . . (

Balance

December 31,

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . $(

Additional detail regarding the classific

mulated other comprehensive income i

note 6.

(9) Other Revenues and Other Expen

The following are summaries of the c

Other Revenues and Other Expenses.
For the years ended

December 31,

2006 2005

Other revenues

Data processing

revenue . . . . . . . . . $4,180,692 $3,788,217

Rent . . . . . . . . . . . . . . . . . 2,450,576 2,433,833

Subscription

revenue ......... 716,294 782,743

Reimbursable

services to

other agencies . . . 599,827 664,755

Board sponsored

conferences ..... 0 250,650

Miscellaneous ........ 561,560 600,144

Total other

revenues . . . . . . . . $8,508,949 $8,520,342

Other expenses

Tuition, registration,

and membership

fees . . . . . . . . . . . . . $2,676,871 $2,573,028

Contingency

operations . . . . . . . 1,087,429 956,476

Public transportation

subsidy ......... 988,950 872,467

Subsidies and

contributions . . . . 706,497 656,150

Meals and

representation . . . 529,557 518,640

Equipment and

facilities rental . . . 393,122 336,342

Administrative

law judges ...... 105,587 268,228

Security

investigations . . . . 236,448 184,880

Former employee

related

payments . . . . . . . . 19,296 319,461

Miscellaneous ........ 691,309 800,486

Total other

expenses . . . . . . . . $7,435,067 $7,486,158

(10) Commitments and Contingencies

Leases

The Board has entered into several operating leases to

secure office, training, and warehouse space for remaining periods ranging from one to four years. Minimum

annual payments under the operating leases having an

initial or remaining noncancelable lease term in excess of

one year at December 31, 2006, are as follows:

2007 ............... $ 176,807

2008 ............... 183,880

2009 ............... 191,235

2010 ............... 198,884

2011 . . . . . . . . . . . . . . . 84,218

$ 835,024

Rental expenses under the operating leases were

$193,000 in 2006 and $157,000 in 2005.

Commitments

The Board has entered into an agreem

Federal Deposit Insurance Corporation and 

the Comptroller of the Currency, throug

Financial Institutions Examination Counci

cil’’) to fund a portion of enhancements an

fees for a central data repository project 

Estimated Board expense to support this eff

lion.

Litigation

The Board is subject to contingent lia

include litigation cases. These contingent l

in the normal course of operations and 

disposition is unknown. Based on informa

available to management, it is management

the expected outcome of these matters, ind

the aggregate, will not have a materially ad

the financial statements. Management belie

has substantial defenses and that the lik

adverse judgement is remote.

One action currently pending in U.S. Dis

the District of Columbia alleges discrimina

of a class of African American secretarie

under Title VII of the Civil Rights Ac

amended. On January 31, 2007, the action 

for failure to exhaust administrative remed

tiffs have moved to alter or amend judg

ruling; that motion is pending. Should the 

stated either as a result of the pending mot

ing appeal, the Board believes it has substa

and intends to defend the case vigorously.

Four additional actions are pending in the 

District Court for the District of Columbia u

of the Civil Rights Act of 1964, as amend

Age Discrimination in Employment Act. 

believed to be without merit and are bei

contested.

Five additional matters alleging employm

nation are currently pending administrati

One case is related to, and likely will be 

case currently pending in district court. In 

other case there has not yet been an invest

Therefore, management is unable at this 

mine the potential for a materially adverse 

financial statements. Management believes 

hood of an unfavorable outcome in the re

cases is remote.

(11) Federal Financial Institutions

Examination Council

The Board is one of the five membe

the Council, and currently performs certain 

functions for the Council. The five agenc

represented on the Council are the Board, F

Insurance Corporation, National Credit Un

tration, Office of the Comptroller of the 

Office of Thrift Supervision. The Board’s f

ments do not include financial data for 

Activity related to the Board and Council 

2005 is summarized in the following table
2006 2005

Board paid to the

Council:

Assessments for

operating expenses

of the Council ..... $ 109,760 $ 83,811

Central Data

Repository ......... 740,003 1,096,062

Uniform Bank

Performance

Report ............. 204,617 202,666

Total Board

paid to the

Council . . . . . . . . . $1,054,380 $1,382,539

Council paid to the

Board:

Data processing

related services . . . . $3,429,499 $3,572,816

Administrative

services . . . . . . . . . . . 183,000 175,000

Total Council

paid to the

Board . . . . . . . . . . . $3,612,499 $3,747,816

Accounts receivable

due from the

Council ............ $ 395,551 $ 277,589

Accounts payable

due to the

Council . . . . . . . . . . . . $ 54,870 $ 104,864

(12) Federal Reserve Banks

The Board performs certain functions for the Reserve

Banks in conjunction with its responsibilities for the

Federal Reserve System, and the Federal Reserve Banks

provide certain administrative functions to the Board.

Activity related to the Board and Reserve Banks for 2006

and 2005 is summarized in the following table:

2006 

Board paid to the

Reserve Banks:

Assessments for

employee benefits . . $ 2,380,474 

Data processing and

communication .... 2,161,298 

Contingency site ........ 1,087,429 

Total Board paid

to the Reserve

Banks ........... $ 5,629,201 

Reserve Banks paid

to the Board:

Assessments for

currency costs ..... $491,962,202 

Assessments for

operating expenses

of the Board ....... 301,013,500 

Data processing ........ 731,999 

Total Reserve Banks

paid to the

Board ........... $793,707,701 

Accounts receivable

due from Federal

Reserve Banks ..... $ 854,142 

Accounts payable

due to Federal

Reserve Banks ..... $ 12,417 

(13) Noncash Financing Activities

In 2005, the Board billed a federal gover

$1,096,557 for rent and leasehold improvem

the federal government agency provided eq

ware, and services valued at $392,301 to 

paid the balance of $704,256 in 2006. In 20

billed the same agency $143,772 for rent, a

provided telecommunication equipment an

ued at $124,720 to the Board and paid t

$19,052 in 2006.


Exhibit I

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Significant Deficiency

December 31, 2006

Improvement is needed in Internal Controls over Financial Reporting

Management is responsible for developing

and maintaining effective internal controls to

provide reasonable assurance that the Board

has the ability to initiate, authorize, record,

process, and report financial data reliably in

accordance with generally accepted accounting principles. Internal controls help ensure

that reliable and timely information is obtained, maintained, reported, and used for

decision making.

Appropriate internal controls should be

integrated into each policy and procedure

established by the Board to direct and guide

its operations. Monitoring the effectiveness

of internal controls should occur in the normal course of business throughout the year.

Periodic reviews, reconciliations, or comparisons of data should be included as part of

staff’s regularly assigned duties. In addition,

periodic assessments should be integrated

into management’s continuous monitoring of

internal controls to help provide assurance

that weaknesses in the design or operation of

internal control, which could adversely affect the Board’s ability to meet its financial

reporting objectives, are prevented or detected in a timely manner.

Board management is committed to improving its internal control environment as

demonstrated by its ability to resolve prior

year findings.

The following paragraphs discuss weaknesses noted in the Board’s internal control

over financial reporting that could adversely

affect the Board’s ability to produce accurate

and timely financial statements. None of

these deficiencies individually would be considered a significant deficiency. However,

the combination of these deficiencies is considered to be a significant deficiency.

Recording Accounts Payable, A

abilities, and Prepaid Expenses

During 2006, the Managemen

identified and processed transa

journal entries to reclassify/and 

several transactions that were init

to a different general ledger acc

corded in a different accounting 

noted that the original transaction

tially reviewed and approved by a 

and all the required changes were 

fied during this initial review as f

• Two disbursements totaling $11

115 disbursement transactions t

ing $18,473,927, were initially 

different general ledger accoun

2007 transactions that were r

2006 transactions. One trans

$5,980 was identified and adju

management’s review prior to 

and one transaction for $5,250 

rected as a post closing entry.

• Two accounts payable transactio

$45,709, of the 21 accounts p

voices tested totaling $2,969,59

ceived in 2006 for services to b

in 2007. These were initially r

accounts payable in 2006. Bo

tions were corrected as a post cl

• One prepaid expense totaling $

the 19 prepaid expenses test

$1,758,579, was a 2007 invoic

paid in 2006 and was initially r

2006 expense. This was subsequ

tified and adjusted during ma

review prior to year end.

We commend the Board for ident

of these entries prior to year end

the Board should strengthen its 

for posting and reviewing all en

sure initial posting to the proper ac

accounting period.
Posting Accrued Annual Leave

We noted that the annual leave accrual was

overstated by $301,600 at December 31,

2006, because the annual leave report did not

reflect the proper year end information for all

employees. The Board subsequently recorded

a post closing entry to reflect the appropriate

amounts.

Billing of Accounts Receivable

We noted that the Board did not record a

year-end receivable from the Bank for International Settlements (BIS) for $157,317 representing services performed in 2006. Although the invoice for the 2006 services was

not finalized, recorded, and submitted until

2007, this amount should have been recorded

as a receivable at December 31, 2006. As a

result of our audit, the Board recorded a post

closing entry for this amount.

Monitoring Miscellaneous Receivables

During our audit, we noted that the Board

does not have specific policies and procedures for monitoring miscellaneous receivables related to relocation expenses to determine if amounts are considered collectible

and appropriately recorded. As a result of our

audit, the Board recorded post closing entries

to write off three accounts receivables

amounting to $105,599 for relocation expenses that were not considered collectible.

Recording Property Transactions

During our audit of property and equipment,

we noted that the Board inappropriately processed property and equipment additions and

adjustments as follows.

• Two assets purchased for $113,016 in 2006

were recorded at an acquisition value of

$109,259. As a result, the asset was overstated by $3,757.

• Three assets valued at $329,375 were put

into service with the incorrect in-service

dates. As a result, the 2006 depreciation

expense was overstated by $25,700.

• One asset was placed in service on March

1, 2006 for $811,756, but did not have any

depreciation recorded in 2006. As a result,

the Board’s depreciation expense was understated by $20,294.

• Three adjustments related to 22 

quired via trade-in were overst

depreciation schedule in 2005. 

depreciation for 2005 was ov

$27,294 and correspondingly 

by the same amount in 2006.

During our physical inspection te

property and equipment, we noted 

the 22 items inspected, valued a

was included on the asset listi

Board’s contingency site, althou

physically located in the Board’

ton, DC, facility. Our inspection 

that the asset tag number for one i

at $7,042 was not identified in t

financial system.

Recording Financial Statement D

During our audit, we noted insta

the Board needs to improve its 

and review process for the fina

ments as follows.

• Assets traded in for other assets 

rectly recorded as Proceeds from 

and Capital Expenditures in the 

of Cash Flows. The entrie

$159,519, represent non-cash t

and should not have been inclu

Proceeds from Disposals or t

Expenditures sections of the St

Cash Flows.

• In Footnote 4, Property and 

Construction in Process was i

ported as zero, and in the cor

roll-forward schedule, the ba

$360,966.

• In Footnote 7, Accumulated P

ment Benefit Plan, the Board i

derstated the accrued postemplo

efits costs for FY2006. T

originally reported $1,828,000

this amount did not reflect th

actuary’s revised calculation, 

sulted in an upward adju

$134,000.

The Board subsequently made al

adjustments in the financial statem

Recommendations

To strengthen internal controls ov

reporting, we recommend that the 
• Strengthen the control process over the

initial input and review of disbursement

transactions to ensure that they are properly coded and recorded in the general

ledger. We also recommend that management conduct periodic training for all relevant personnel, including end users, to

help ensure the proper use of general ledger accounts.

• Enhance the process for determining the

accrued annual leave to ensure that the

reports generated include the appropriate

amounts as of the end of the reporting

period. The process should include matching a selection of employees’ leave balances and other information included in the

report to data in the Board’s Human Resources system.

• Implement policies and procedures that require the calculation and reconciliation of

amounts due from BIS on a regular basis.

Once amounts due are determined, the applicable adjustments should be promptly

recorded in the general ledger.

• Enhance its policies and procedures to include a documented periodic review and

analysis of all accounts receivables, to determine if an allowance is required or if the

amounts should be written off. Further, management should also review the accounting

treatment required for all transactions.

• Strengthen its policies and procedures to

improve communication between the divisions and the accounting staff to ensure the

appropriate accounting entries f

transactions are recorded timely 

eral ledger. The communicati

include, but not be limited to

asset was placed in service, the 

asset, the asset’s location and t

and any additional information 

for the accounting division to 

appropriate entries. The Board 

enhance its review and appro

dures over property transaction

that the appropriate entries 

recorded.

• Strengthen its process over the 

and review of the financial sta

ensure information is accurately 

Management’s Response

KPMG offers six recommendation

strengthening the Board’s intern

over financial reporting. In its di

these recommendations and the 

audit findings, KPMG does not co

individual finding to be a signif

ciency. In combination, howev

concludes that the audit findings 

significant deficiency. While m

does not concur with this conclus

agree that KPMG’s recommend

strengthen the Board’s system 

controls, and we will implement 

mended actions.
Exhibit II

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

STATUS OF PRIOR YEAR REPORTABLE CONDITION

December 31, 2006

Reported Issue Prior Year Recommendation 2006 

Improvement is needed in Internal Control over Financial Reporting

Control over accounts

payable and accrued

liabilities

1. Establish policies and procedures for processing year-end accounts payables and accruals to

include the requirements for management to

review and approve all entries and supporting

documents before they are recorded. Management should also perform a review of the yearend accounts payable listings and subsequent

disbursements to ensure that the transactions

reported at year end are appropriately stated.

Further, a reconciliation of the GSA account

should be performed timely, to identify any

discrepancies on the invoices received.

Significant D

(see revised 

Exhibit I).

Control of Census Data 2. Confirm the data used by the actuary in the

pension liability calculation prior to recording

the entries in the general ledger.

Completed.

3. Implement recommendations made by the OIG

in their report titled “Evaluation of Service

Credit Computations.” This would include

performing periodic reconciliations of the census data between the Board’s system and the

data used by the actuary; reducing or eliminating the number of data transcriptions; requiring

automated verifications for all census data

transmissions; and updating the existing service credit form to clearly document all prior

government service.

Substantially 

See revised 

the 2006 ma

letter.


Federal Reserve Banks

Combined Financial Statements

The combined financial statements of the Federal Reserve Banks were au

by PricewaterhouseCoopers LLP, independent auditors, for the years end

December 31, 2006 and 2005.

Report of Independent Auditors

To the Board of Governors of the Federal Reserve System

and the Board of Directors of the Federal Reserve Banks:

We have audited the accompanying combined statements of condition 

Federal Reserve Banks (the ‘‘Reserve Banks’’) as of December 31, 2006 and 

and the related combined statements of income and changes in capital for the 

then ended, which have been prepared in conformity with the accounting 

ciples, policies, and practices established by the Board of Governors of the F

Reserve System. These combined financial statements are the responsibility 

Reserve Banks’ management. Our responsibility is to express an opinion on 

combined financial statements based on our audits.

We conducted our audits in accordance with auditing standards gen

accepted in the United States of America. Those standards require that we pla

perform the audit to obtain reasonable assurance about whether the com

financial statements are free of material misstatement. An audit includes ex

ing, on a test basis, evidence supporting the amounts and disclosures 

financial statements. An audit also includes assessing the accounting prin

used and significant estimates made by management, as well as evaluatin

overall financial statement presentation. We believe that our audits prov

reasonable basis for our opinion.

As described in Note 3, these combined financial statements were prepa

conformity with the accounting principles, policies, and practices establish

the Board of Governors of the Federal Reserve System. These principles, po

and practices, which were designed to meet the specialized accountin

reporting needs of the Federal Reserve System, are set forth in the Fin

Accounting Manual for Federal Reserve Banks and constitute a compreh

basis of accounting other than accounting principles generally accepted 

United States of America.

In our opinion, the combined financial statements referred to above p

fairly, in all material respects, the combined financial position of the R

Banks as of December 31, 2006 and 2005, and the combined results of 

operations for the years then ended, on the basis of accounting described in N

March 30, 2007

Washington, D.C.
FEDERAL RESERVE BANKS

COMBINED STATEMENTS OF CONDITION

(in millions)

Decem

Assets 2006 

Gold certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,037 

Special drawing rights certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 

Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801 

Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,486 

Loans to depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 

Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,750 

U.S. government securities, net ....................................................... 783,619 

Investments denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,482 

Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,761 

Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,376 

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,785 

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $873,364 

Liabilities and Capital

Liabilities

Federal Reserve notes outstanding, net ............................................. $783,019 

Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,615 

Deposits

Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,699 

U.S. Treasury, general account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,708 

Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 

Deferred credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,813 

Interest on Federal Reserve notes due to U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 

Accrued benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,314 

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 

Total liabilities ............................................................... 842,716 

Capital

Capital paid-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,324 

Surplus (including accumulated other comprehensive loss

of $1,849 million at December 31, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,324 

Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,648 

Total liabilities and capital .................................................... $873,364 

The accompanying notes are an integral part of these combined financial statements.
FEDERAL RESERVE BANKS

COMBINED STATEMENTS OF INCOME

(in millions)

For the y

Decem

2006 

Interest income

Interest on U.S. government securities ............................................... $36,452 

Interest on investments denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 

Interest on loans to depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,833 

Interest expense

Interest expense on securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . 1,342 

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,491 

Other operating income (loss)

Income from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 

Reimbursable services to government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 

Foreign currency gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,186 

Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 

Total other operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,664 

Operating expenses

Salaries and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880 

Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 

Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 

Assessments by the Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 835 

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,960 

Net income prior to distribution ....................................................... $34,195 

Distribution of net income

Dividends paid to member banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 871 

Transferred to surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,272 

Payments to U.S. Treasury as interest on Federal Reserve notes . . . . . . . . . . . . . . . . . . . . . . . 29,052 

Total distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,195 

The accompanying notes are an integral part of these combined financial statements.
FEDERAL RESERVE BANKS

COMBINED STATEMENTS OF CHANGES IN CAPITAL

for the years ended December 31, 2006 and 2005

(in millions)

Surplus

Capital

paid-in

Net

income

retained

Accumulated

other

comprehensive

loss

Total

surplus

Balance at January 1, 2005

(238 million shares) ............ $11,914 $11,630 $ . . . $11,630 

Net change in capital stock issued

(32 million shares) . . . . . . . . . . . . . 1,622 . . . . . . ... 

Transferred to surplus. . . . . . . . . . . . . . . . 1,271 ... 1,271 

Balance at December 31, 2005

(270 million shares) ............ $13,536 $12,901 $ . . . $12,901 

Net change in capital stock issued

(36 million shares) . . . . . . . . . . . . . 1,788 . . . . . . ... 

Transferred to surplus . . . . . . . . . . . . . . . 4,272 . . . 4,272 

Adjustment to initially apply

FASB Statement No. 158 ....... . . . ... (1,849) (1,849) 

Balance at December 31, 2006

(306 million shares) ............ $15,324 $17,173 $ (1,849) $15,324 

The accompanying notes are an integral part of these combined financial statements.

Notes to the Combined Financial Statements of the Federal Reserve 

(1) Structure

The twelve Federal Reserve Banks (“Reserve Banks”) are

part of the Federal Reserve System (“System”) created by

Congress under the Federal Reserve Act of 1913 (“Federal Reserve Act”), which established the central bank of

the United States. The Reserve Banks are chartered by the

federal government and possess a unique set of governmental, corporate, and central bank characteristics.

In accordance with the Federal Reserve Act, supervision and control of each Reserve Bank are exercised by a

board of directors. The Federal Reserve Act specifies the

composition of the board of directors for each of the

Reserve Banks. Each board is composed of nine members

serving three-year terms: three directors, including those

designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve

System (“Board of Governors”) to represent the public,

and six directors are elected by member banks. Banks that

are members of the System include all national banks and

any state-chartered banks that apply and are approved for

membership in the System. Member banks are divided

into three classes according to size. Member banks in

each class elect one director representing member banks

and one representing the public. In any election of directors, each member bank receives one vote, regardless of

the number of shares of Reserve Bank stock it holds.

The System also consists, in part, of the Board of

Governors and the Federal Open Market Committee

(“FOMC”). The Board of Governors, an independent

federal agency, is charged by the Federal Reserve Act

with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed

of members of the Board of Governors, the president of

the Federal Reserve Bank of New York (“F

on a rotating basis four other Reserve Bank 

(2) Operations and Services

The Reserve Banks perform a variety of 

operations. Functions include participation 

and conducting monetary policy; participat

ments system including large-dollar trans

automated clearinghouse (“ACH”) operatio

collection; distribution of coin and currency

of fiscal agency functions for the U.S. Tr

federal agencies, and other entities; serving 

government’s bank; provision of short-t

depository institutions; service to the con

community by providing educational mater

mation regarding consumer laws; and super

holding companies, state member banks, an

of foreign banking organizations. The Rese

provide certain services to foreign central b

ments, and international official institution

The FOMC, in the conduct of monetary 

lishes policy regarding domestic open mark

oversees these operations, and annually iss

tions and directives to the FRBNY for it

transactions. The FRBNY is authorized an

the FOMC to conduct operations in dom

including the direct purchase and sale of U.

securities, the purchase of securities under 

resell, the sale of securities under agreem

chase, and the lending of U.S. government 

FRBNY executes these open market trans

direction of the FOMC and holds the resul

with the exception of securities purchased 
Notes to the Combined Financial Statements of the Federal Reserve Banks—

ments to resell, in the portfolio known as the System

Open Market Account (“SOMA”).

In addition to authorizing and directing operations in

the domestic securities market, the FOMC authorizes and

directs the FRBNY to execute operations in foreign markets for major currencies in order to counter disorderly

conditions in exchange markets or to meet other needs

specified by the FOMC in carrying out the System’s

central bank responsibilities. The FRBNY is authorized

by the FOMC to hold balances of, and to execute spot and

forward foreign exchange (“FX”) and securities contracts

for, nine foreign currencies and to invest such foreign

currency holdings ensuring adequate liquidity is maintained. The FRBNY is authorized and directed by the

FOMC to maintain reciprocal currency arrangements

(“FX swaps”) with two central banks, and “warehouse”

foreign currencies for the U.S. Treasury and Exchange

Stabilization Fund (“ESF”) through the Reserve Banks.

In connection with its foreign currency activities, the

FRBNY may enter into transactions that contain varying

degrees of off-balance-sheet market risk that results from

their future settlement and counter-party credit risk. The

FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and performing daily

monitoring procedures.

Although the Reserve Banks are separate legal entities,

in the interests of greater efficiency and effectiveness they

collaborate in the delivery of certain operations and services. The collaboration takes the form of centralized

operations and product or service offices that have responsibility for the delivery of certain services on behalf of the

Reserve Banks. Various operational and management

models are used and are supported by service agreements

between the Reserve Bank providing the service and the

other eleven Reserve Banks. In some cases, costs incurred

by a Reserve Bank for services provided to other Reserve

Banks are not shared; in other cases, the Reserve Banks

are billed for services provided to them by another

Reserve Bank.

During 2005, the Federal Reserve Bank of Atlanta

(“FRBA”) was assigned the overall responsibility for

managing the Reserve Banks’ provision of check services

to depository institutions and, as a result, recognizes total

System check revenue on its Statements of Income. Because the other eleven Reserve Banks incur costs to

provide check services, a policy was adopted by the

Reserve Banks in 2005 that required that the FRBA

compensate the other Reserve Banks for costs incurred to

provide check services. In 2006 this policy was extended

to the ACH services, which are managed by the FRBA, as

well as to Fedwire funds transfer and securities transfer

services, which are managed by the FRBNY. The FRBA

and the FRBNY compensate the other Reserve Banks for

the costs incurred to provide these services.

(3) Significant Accounting Policies

Accounting principles for entities with the unique powers

and responsibilities of the nation’s central bank have not

been formulated by various accounting standard-setting

bodies. The Board of Governors has developed specialized accounting principles and practices that it considers

to be appropriate for the nature and functio

bank, which differ significantly from those 

sector. These accounting principles and 

documented in the Financial Accounting 

Federal Reserve Banks (“Financial Accoun

which is issued by the Board of Governo

Reserve Banks are required to adopt and a

ing policies and practices that are consi

Financial Accounting Manual and the f

ments have been prepared in accordance w

cial Accounting Manual.

Differences exist between the account

and practices in the Financial Accounting 

generally accepted accounting principles 

States of America (“GAAP”), primarily due 

nature of the Reserve Banks’ powers and r

as part of the nation’s central bank. The p

ence is the presentation of all securitie

amortized cost, rather than using the fair v

tion required by GAAP. Amortized cost m

ately reflects the Reserve Banks’ securities 

their unique responsibility to conduct mo

While the application of current market 

securities holdings may result in values 

above or below their carrying values, th

changes in value would have no direct 

quantity of reserves available to the bankin

the prospects for future Reserve Bank earni

Both the domestic and foreign components 

portfolio may involve transactions that res

losses when holdings are sold prior to matu

regarding securities and foreign currency 

including their purchase and sale, are motiv

tary policy objectives rather than profit. 

market values, earnings, and any gains or l

from the sale of such securities and curre

dental to the open market operations and d

these activities or policy decisions.

In addition, the Board of Governors an

Banks have elected not to present a State

Flows because the liquidity and cash p

Reserve Banks are not a primary concer

unique powers and responsibilities. A Stat

Flows, therefore, would not provide any ad

ingful information. Other information 

Reserve Banks’ activities is provided in

derived from, the Statements of Condition

Changes in Capital. There are no other sig

ences between the policies outlined in 

Accounting Manual and GAAP.

The preparation of the financial s

conformity with the Financial Accoun

requires management to make certain 

assumptions that affect the reported amo

and liabilities, the disclosure of continge

liabilities at the date of the financial statem

reported amounts of income and expens

reporting period. Actual results could diff

estimates. Certain amounts relating to the p

been reclassified to conform to the current-

tion. Unique accounts and significant accou

are explained below.
Notes to the Combined Financial Statements of the Federal Reserve Banks—

(A) Gold and Special Drawing Rights Certificates

The Secretary of the U.S. Treasury is authorized to issue

gold and special drawing rights (“SDR”) certificates to

the Reserve Banks.

Payment for the gold certificates by the Reserve Banks

is made by crediting equivalent amounts in dollars into

the account established for the U.S. Treasury. The gold

certificates held by the Reserve Banks are required to be

backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and

the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury’s account is charged,

and the Reserve Banks’ gold certificate accounts are

reduced. The value of gold for purposes of backing the

gold certificates is set by law at $42 2/9 a fine troy ounce.

The Board of Governors allocates the gold certificates

among Reserve Banks once a year based on the average

Federal Reserve notes outstanding in each Reserve Bank.

SDR certificates are issued by the International Monetary Fund (“Fund”) to its members in proportion to each

member’s quota in the Fund at the time of issuance. SDR

certificates serve as a supplement to international monetary reserves and may be transferred from one national

monetary authority to another. Under the law providing

for United States participation in the SDR system, the

Secretary of the U.S. Treasury is authorized to issue SDR

certificates, somewhat like gold certificates, to the

Reserve Banks. When SDR certificates are issued to the

Reserve Banks, equivalent amounts in dollars are credited

to the account established for the U.S. Treasury, and the

Reserve Banks’ SDR certificate accounts are increased.

The Reserve Banks are required to purchase SDR certificates, at the direction of the U.S. Treasury, for the purpose

of financing SDR acquisitions or for financing exchange

stabilization operations. At the time SDR transactions

occur, the Board of Governors allocates SDR certificate

transactions among Reserve Banks based upon each

Reserve Bank’s Federal Reserve notes outstanding at the

end of the preceding year. There were no SDR transactions in 2006 or 2005.

(B) Loans to Depository Institutions

Depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in

regulations issued by the Board of Governors, have borrowing privileges at the discretion of each of the Reserve

Banks. Borrowers execute certain lending agreements and

deposit sufficient collateral before credit is extended.

Outstanding loans are evaluated for collectibility, and

currently all are considered collectible and fully collateralized. If loans were ever deemed to be uncollectible, an

appropriate reserve would be established. Interest is accrued using the applicable discount rate established at

least every fourteen days by the Board of Directors of the

Reserve Bank, subject to review and determination by the

Board of Governors.

(C) U.S. Government Securities and Investments

Denominated in Foreign Currencies

U.S. government securities and investments denominated

in foreign currencies comprising the SOMA are recorded

at cost, on a settlement-date basis, and adju

tization of premiums or accretion of di

straight-line basis. Interest income is a

straight-line basis. Gains and losses result

of securities are determined by specific is

average cost. Foreign-currency-denomina

revalued daily at current foreign cur

exchange rates in order to report these 

dollars. Realized and unrealized gains a

investments denominated in foreign curr

ported as “Foreign currency gains (losses

Statements of Income.

Activity related to U.S. government secu

ing the premiums, discounts, and realized 

gains and losses, is allocated to each o

Banks on a percentage basis derived fro

settlement of interdistrict clearings that occ

each year. The settlement equalizes Reser

certificate holdings to Federal Reserve not

in each District. Activity related to investm

nated in foreign currencies is allocated to 

Bank based on the ratio of each Reserve 

and surplus to aggregate capital and surplus 

ing December 31.

(D) Securities Purchased under Agreemen

Securities Sold under Agreements to R

and Securities Lending

The FRBNY may engage in tri-party purch

ties under agreements to resell (“tri-party 

Tri-party agreements are conducted with tw

custodial banks that manage the clearing 

of collateral. Collateral is held in excess o

amount. Acceptable collateral under tri-par

primarily includes U.S. government sec

through mortgage securities of the Govern

Mortgage Association, Federal Home L

Corporation, and Federal National Mortgag

STRIP securities of the U.S. Government, 

securities of other government agencies. 

agreements are accounted for as financing 

with the associated interest income accrue

of the agreement.

Securities sold under agreements to r

accounted for as financing transactions and 

interest expense is recognized over the life 

tion. These transactions are reported in the 

Condition at their contractual amounts an

accrued interest payable is reported as a 

“Other liabilities.”

U.S. government securities held in the S

to U.S. government securities dealers in ord

the effective functioning of the domestic s

ket. Securities-lending transactions are fu

ized by other U.S. government securities a

eral taken is in excess of the market value o

loaned. The FRBNY charges the dealer a f

ing securities and the fees are reported as a 

“Other income.”

Activity related to securities sold under 

repurchase and securities lending is alloca

the Reserve Banks on a percentage basis de
Notes to the Combined Financial Statements of the Federal Reserve Banks—

annual settlement of interdistrict clearings. Securities purchased under agreements to resell are allocated to the

FRBNY and not to the other Reserve Banks.

(E) FX Swap Arrangements and Warehousing Agreements

FX swap arrangements are contractual agreements

between two parties, the FRBNY and an authorized foreign central bank, to exchange specified currencies, at a

specified price, on a specified date. The parties agree to

exchange their currencies up to a pre-arranged maximum

amount and for an agreed-upon period of time (up to

twelve months), at an agreed-upon interest rate. These

arrangements give the FOMC temporary access to the

foreign currencies it may need to intervene to support the

dollar and give the authorized foreign central bank temporary access to dollars it may need to support its own

currency. Drawings under the FX swap arrangements can

be initiated by either party acting as drawer, and must be

agreed to by the drawee party. The FX swap arrangements are structured so that the party initiating the transaction bears the exchange rate risk upon maturity. The

FRBNY will generally invest the foreign currency received under an FX swap arrangement in interest-bearing

instruments.

Warehousing is an arrangement under which the

FOMC agrees to exchange, at the request of the U.S.

Treasury, U.S. dollars for foreign currencies held by the

U.S. Treasury or ESF over a limited period of time. The

purpose of the warehousing facility is to supplement the

U.S. dollar resources of the U.S. Treasury and ESF for

financing purchases of foreign currencies and related

international operations.

FX swap arrangements and warehousing agreements

are revalued daily at current market exchange rates. Activity related to these agreements, with the exception of

the unrealized gains and losses resulting from the daily

revaluation, is allocated to each Reserve Bank based on

the ratio of each Reserve Bank’s capital and surplus to

aggregate capital and surplus at the preceding December

31. Unrealized gains and losses resulting from the daily

revaluation are allocated to the FRBNY and not allocated

to the other Reserve Banks.

(F) Bank Premises, Equipment, and Software

Bank premises and equipment are stated at cost less

accumulated depreciation. Depreciation is calculated on a

straight-line basis over the estimated useful lives of the

assets, which range from two to fifty years. Major alterations, renovations, and improvements are capitalized at

cost as additions to the asset accounts and are depreciated

over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor

replacements are charged to operating expense in the year

incurred.

Costs incurred for software during the application development stage, either developed internally or acquired

for internal use, are capitalized based on the cost of direct

services and materials associated with designing, coding,

installing, or testing software. Capitalized software costs

are amortized on a straight-line basis over the estimated

useful lives of the software applications, which range

from two to five years. Maintenance co

software are charged to expense in the yea

Capitalized assets including software, bu

hold improvements, furniture, and equip

paired when events or changes in circumst

that the carrying amount of assets or asset 

recoverable and significantly exceeds their 

(G) Federal Reserve Notes

Federal Reserve notes are the circulating c

United States. These notes are issued throu

Federal Reserve agents (the chairman of 

directors of each Reserve Bank and their de

Reserve Banks upon deposit with such agen

classes of collateral, typically U.S. governm

These notes are identified as issued to a sp

Bank. The Federal Reserve Act provides t

eral tendered by the Reserve Bank to the Fe

agent must be equal to the sum of the notes 

such Reserve Bank.

Assets eligible to be pledged as collatera

the Reserve Banks’ assets. The collateral va

the book value of the collateral tendered, w

tion of securities, for which the collateral va

the par value of the securities tendered. Th

securities pledged for securities sold under 

repurchase is deducted.

The Board of Governors may, at any tim

Reserve Bank for additional collateral fo

Reserve notes. To satisfy the obligation to 

cient collateral for outstanding Federal Res

Reserve Banks have entered into an agree

vides for certain assets of the Reserve Bank

pledged as collateral for the Federal Reserv

to all Reserve Banks. In the event that th

insufficient, the Federal Reserve Act prov

eral Reserve notes become a first and para

all the assets of the Reserve Banks. Fi

Reserve notes are obligations of the United 

backed by the full faith and credit of the 

government.

“Federal Reserve notes outstanding, net

ments of Condition represents Federal R

outstanding, reduced by the currency 

Reserve Banks but not in circulation, of $1

and $148,152 million at December 31, 20

respectively.

At December 31, 2006, all Federal Rese

fully collateralized. All gold certificates, al

ing right certificates, and $769,782 millio

securities and securities purchased under 

resell were pledged as collateral. At Decem

no loans or investments denominated in f

cies were pledged as collateral.

(H) Items in Process of Collection and

Deferred Credit Items

“Items in process of collection” in the 

Condition primarily represents amounts 

checks that have been deposited for collecti

of the balance sheet date, have not yet bee
Notes to the Combined Financial Statements of the Federal Reserve Banks—

the paying bank. “Deferred credit items” are the counterpart liability to “items in process of collection,” and the

amounts in this account arise from deferring credit for

deposited items until the amounts are collected. The

balances in both accounts can vary significantly.

(I) Capital Paid-In

The Federal Reserve Act requires that each member bank

subscribe to the capital stock of the Reserve Banks in an

amount equal to 6 percent of the capital and surplus of the

member bank. These shares are nonvoting with a par

value of $100 and may not be transferred or hypothecated. As a member bank’s capital and surplus changes,

its holdings of Reserve Bank stock must be adjusted.

Currently, only one-half of the subscription is paid-in and

the remainder is subject to call. By law, each Reserve

Bank is required to pay each member bank an annual

dividend of 6 percent on the paid-in capital stock. This

cumulative dividend is paid semiannually. A member

bank is liable for Reserve Bank liabilities up to twice the

par value of stock subscribed by it.

(J) Surplus

The Board of Governors requires the Reserve Banks to

maintain a surplus equal to the amount of capital paid-in

as of December 31 of each year. This amount is intended

to provide additional capital and reduce the possibility

that the Reserve Banks would be required to call on

member banks for additional capital.

Accumulated other comprehensive income is treated as

a component of surplus in the Statements of Condition

and the Statements of Changes in Capital. The balance of

accumulated other comprehensive income is comprised

of expenses, gains, and losses related to defined benefit

pension plans and other postretirement benefit plans that

under accounting principles are included in comprehensive income but excluded from net income. Additional

information regarding the classifications of accumulated

other comprehensive income is provided in Notes 8, 9,

and 10.

(K) Interest on Federal Reserve Notes

The Board of Governors requires the Reserve Banks to

transfer excess earnings to the U.S. Treasury as interest

on Federal Reserve notes, after providing for the costs of

operations, payment of dividends, and reservation of an

amount necessary to equate surplus with capital paid-in.

This amount is reported as a component of “Payments to

U.S. Treasury as interest on Federal Reserve notes” in the

Statements of Income and is reported as a liability in the

Statements of Condition. Weekly payments to the U.S.

Treasury may vary significantly.

In the event of losses or an increase in capital paid-in at

a Reserve Bank, payments to the U.S. Treasury are suspended and earnings are retained until the surplus is equal

to the capital paid-in.

In the event of a decrease in capital paid-in, the excess

surplus, after equating capital paid-in and surplus at

December 31, is distributed to the U.S. Treasury in the

following year.

Due to the substantial increase in capital paid-in at one

Reserve Bank, surplus was not equated to capital at

December 31, 2005. The amount of additional surplus

required due to these events exceeded the 

ings in 2005.

(L) Income and Costs Related to U.S. Trea

The Reserve Banks are required by the Fe

Act to serve as fiscal agents and depos

United States. By statute, the Department o

is permitted, but not required, to pay for th

(M) Assessments by the Board of Governo

The Board of Governors assesses the Res

fund its operations based on each Reserve 

and surplus balances as of December 31 o

year. The Board of Governors also assesses 

Bank for the expenses incurred for the U.

issue and retire Federal Reserve notes b

Reserve Bank’s share of the number of not

the System’s net liability for Federal Res

December 31 of the previous year.

(N) Taxes

The Reserve Banks are exempt from fede

local taxes, except for taxes on real prop

taxes on certain construction projects. Real 

were $33 million and $32 million for th

December 31, 2006 and 2005, respectivel

ported as a component of “Occupancy exp

(O) Restructuring Charges

In 2003, the Reserve Banks began the re

several operations, primarily check, cash, a

sury services. The restructuring included st

management and support structures, redu

creasing the number of processing location

ing processing capacity in some locations. 

turing activities continued in 2004 through 

Note 11 describes the restructuring and p

mation about the Reserve Banks’ costs 

associated with employee separations and c

nations. The costs associated with the i

certain of the Reserve Banks’ assets are dis

6. Costs and liabilities associated with enh

benefits in connection with the restructurin

all of the Reserve Banks are recorded on th

FRBNY as discussed in Note 8. Costs 

associated with enhanced post-retiremen

discussed in Note 9.

(P) Implementation of FASB Statement No

Employers’ Accounting for Defined B

and Other Postretirement Plans

The Reserve Banks initially applied the 

FASB Statement No. 158, Employers’ A

Defined Benefit Pension and Other Postret

at December 31, 2006. This accounting sta

recognition of the overfunded or underfund

defined benefit postretirement plan in the 

Condition, and recognition of changes i

status in the years in which the changes 

comprehensive income. The transition ru

menting the standard require applying the p
Notes to the Combined Financial Statements of the Federal Reserve Banks—

the end of the year of initial implementation with no

retrospective application. The incremental effects on the

line items in the Statement of Condition at December 31,

2006, were as follows (in millions):

Before

Application of

Statement

158

Adjustments

After

Application of

Statement

158

Other Assets . . . . . . $ 3,277 $ (1,492) $ 1,785

Total assets . . . . $874,856 $ (1,492) $873,364

Accrued benefit

costs . . . . . . . . 957 357 1,314

Total liabilities . $842,359 $ 357 $842,716

Surplus . . . . . . . . . . . 17,173 (1,849) 15,324

Total capital . . . . $ 32,497 $ (1,849) $ 30,648

(4) U.S. Government Securities, Securities

Purchased under Agreements to Resell,

Securities Sold under Agreements

to Repurchase, and Securities Lending

The FRBNY, on behalf of the Reserve Banks, holds

securities bought outright in the SOMA.

Total securities held in the SOMA at December 31,

were as follows (in millions):

2006 2005

Par value

U.S. government

Bills .................... $277,019 $271,270

Notes . . . . . . . . . . . . . . . . . . . 402,367 380,118

Bonds . . . . . . . . . . . . . . . . . . 99,528 92,827

Total par value . . . . . . 778,914 744,215

Unamortized premiums . . . . . . . 8,708 8,813

Unaccreted discounts ......... (4,003) (2,826)

Total . . . . . . . . . . . . . . . $783,619 $750,202

At December 31, 2006 and 2005, the fair value of the

U.S. government securities held in the SOMA, excluding

accrued interest, was $795,900 million and $767,472

million, respectively, as determined by reference to

quoted prices for identical securities.

Although the fair value of security holdings can be

substantially greater or less than the carrying value at any

point in time, these unrealized gains or losses have no

effect on the ability of the Reserve Banks, as a central

bank, to meet its financial obligations and responsibilities, and should not be misunderstood as representing a

risk to the Reserve Banks, their shareholders, or the

public. The fair value is presented solely for informational purposes.

The maturity distribution of U.S. government securities

bought outright, securities purchased under agreements to

resell, and securities sold under agreements to repurchase,

that were held in the SOMA at December 31, 2006, was

as follows (in millions):

U.S.

government

securities

(Par

value)

Securitie

purchased

under

agreements to

resell

(Contrac

amount)

Within 15 days . . . $ 40,588 $40,750

16 days to 90 days . 180,893 . . . 

91 days to 1 year . 185,132 . . . 

Over 1 year to

5 years ...... 224,177 . . . 

Over 5 years to

10 years . . . . . 67,645 . . . 

Over 10 years . . . . 80,479 ... 

Total . . . $778,914 $40,750 

At December 31, 2006 and 2005, U.S

securities with par values of $6,855 millio

million, respectively, were loaned from the 

At December 31, 2006 and 2005, the 

amount of securities sold under agreements 

was $29,615 million and $30,505 million

At December 31, 2006 and 2005, securit

agreements to repurchase with a par valu

million and $30,559 million, respectively, w

ing. The contract amount for securities sol

ments to repurchase approximates fair valu

(5) Investments Denominated in

Foreign Currencies

The FRBNY, on behalf of the Reserve 

foreign currency deposits with foreign cen

with the Bank for International Settlements 

foreign government debt instruments. Fo

ment debt instruments held include both sec

outright and securities purchased under 

resell. These investments are guaranteed a

and interest by the issuing foreign governm

Total investments denominated in forei

including accrued interest, and valued at c

currency market exchange rates at Decemb

follows (in millions):

2006 

European Union euro

Foreign currency deposits . . . . . $ 6,24

Securities purchased under

agreements to resell . . . . . . 2,21

Government debt instruments . . 4,07

Japanese yen

Foreign currency deposits . . . . . 2,60

Government debt instruments . . 5,35

Total . . . . . . . . . . . . . . . . . . $20,48

At December 31, 2006 and 2005, the fa

total System investments denominated in f

cies, including accrued interest, was $20,43

$18,965 million, respectively. The fair val

ment debt instruments was determined by 
Notes to the Combined Financial Statements of the Federal Reserve Banks—

quoted prices for identical securities. The cost basis of

foreign currency deposits and securities purchased under

agreements to resell, adjusted for accrued interest, approximates fair value. Similar to the U.S. government

securities discussed in Note 4, unrealized gains or losses

have no effect on the ability of a Reserve Bank, as a

central bank, to meet its financial obligations and responsibilities.

The maturity distribution of investments denominated

in foreign currencies at December 31, 2006, was as

follows (in millions):

European

euro Japanese

yen Total

Within 15 days . . . . . . . . . . . $ 4,359 $2,601 $ 6,960

16 days to 90 days . . . . . . . . 2,378 1,208 3,586

91 days to 1 year . . . . . . . . . 2,442 2,213 4,655

Over 1 year to 5 years . . . . . 3,351 1,930 5,281

Over 5 years to 10 years . . . . . . . . . ...

Over 10 years ............. . . . . . . ...

Total . . . . . . . . . . . . $12,530 $7,952 $20,482

At December 31, 2006 and 2005, there were no material open foreign exchange contracts.

At December 31, 2006 and 2005, the warehousing facility was $5,000 million, with no balance outstanding.

(6) Bank Premises, Equipment, and Software

A summary of bank premises and equipment at December 31 is as follows (in millions):

2006 2005

Bank premises and

equipment

Land . . . . . . . . . . . . . . . . . . . . . . . . . $ 306 $ 295

Buildings . . . . . . . . . . . . . . . . . . . . . 1,817 1,787

Building machinery and

equipment . . . . . . . . . . . . . . . . 393 387

Construction in progress . . . . . . . 220 86

Furniture and equipment . . . . . . . 1,156 1,162

Subtotal . . . . . . . . . . . . . . . . . . 3,892 3,717

Accumulated depreciation ........ (1,516) (1,465)

Bank premises and equipment,

net . . . . . . . . . . . . . . . . . . . . . . . . . $2,376 $2,252

Depreciation expense, for the

year ended

December 31 . . . . . . . . . . . . . . . $ 186 $ 175

The Federal Reserve Bank of Kansas City (FRBKC) is

constructing a new building to replace its head office.

Approximately $29 million of costs associated with the

acquisition of land and site preparation for the new

building are included in the “Land” account, and approximately $114 million of costs associated with the construction of the new building are included in the “Construction

in progress” account. In July 2005, the FRBKC completed the sale and leaseback of its head office, and will

lease the space from the purchaser until the new building

is completed in 2008.

Bank premises and equipment at December 31 include

the following amounts for leases that have been capitalized (in millions):

2

Leased premises and equipment

under capital leases . . . . . . . . . . . . . 

Accumulated depreciation ........... 

Leased premises and equipment

under capital leases, net ......... 

Certain of the Reserve Banks lease sp

tenants with remaining lease terms rangin

fourteen years. Rental income from such l

million and $23 million for the years ended 

2006 and 2005, respectively, and is reporte

nent of “Other income.” Future minimum l

that the Bank will receive under nonca

agreements in existence at December 31

follows (in millions):

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . 

The Reserve Banks have capitalized so

net of amortization, of $155 million and $

December 31, 2006 and 2005, respectively

expense was $66 million and $55 million 

ended December 31, 2006 and 2005, respe

talized software assets are reported as a 

“Other assets” and the related amortization 

a component of “Other expenses.”

Several of the Reserve Banks have impai

result of the System’s restructuring plan, a

Note 11. Impaired assets include softwa

leasehold improvements, furniture, and equ

impairment losses related to the check and 

turings of $15 million and $50 million f

ending December 31, 2006 and 2005, resp

determined using fair values based on q

values or other valuation techniques and ar

component of “Other expenses.”

(7) Commitments and Contingencies

At December 31, 2006, the Reserve Banks 

under noncancelable leases for premises a

with remaining terms ranging from one to 

seventeen years. These leases provide for in

payments based upon increases in real esta

ating costs, or selected price indices.

Rental expense under operating leases fo

ating facilities, warehouses, and data proc

fice equipment (including taxes, insuranc

nance when included in rent), net of sublea

$31 million and $26 million for the years 

ber 31, 2006 and 2005, respectively. C

Reserve Banks’ leases have options to rene

Future minimum rental payments under 

operating leases, net of sublease rentals, w

terms of one year or more, at December 3

follows (in millions):
Notes to the Combined Financial Statements of the Federal Reserve Banks—

Operating

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12

2008 ......................................... 9

2009 ......................................... 8

2010 ......................................... 8

2011 ......................................... 7

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Future minimum rental payments .............. $146

At December 31, 2006, the Reserve Banks had other

commitments and long-term obligations extending

through the year 2017 with a remaining amount of $336

million. As of December 31, 2006, commitments of $219

million were recognized. Purchases of $92 million and

$98 million were made against these commitments during

2006 and 2005, respectively. These commitments are for

goods and services to maintain currency machines, for

software licenses and maintenance, for services related to

check processing equipment and transportation, and have

variable and/or fixed components. The variable portion of

the commitments is for additional services above fixed

contractual service limits. The fixed payments for the

next five years under these commitments are as follows

(in millions):

Fixed

commitment

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

The Reserve Banks are involved in certain legal actions

and claims arising in the ordinary course of business.

Although it is difficult to predict the ultimate outcome of

these actions, in management’s opinion, based on discussions with counsel, the aforementioned litigation and

claims will be resolved without material adverse effect on

the financial position or results of operations of the

Reserve Banks.

(8) Retirement and Thrift Plans

Retirement Plans

The Reserve Banks currently offer three defined benefit

retirement plans to their employees based on length of

service and level of compensation. Substantially all of the

Reserve Banks’, Board of Governors’, and the Office of

Employee Benefits of the Federal Reserve System’s employees participate in the Retirement Plan for Employees

of the Federal Reserve System (“System Plan”). Employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (“BEP”) and certain

Reserve Bank officers participate in the Supplemental

Employee Retirement Plan (“SERP”).

The System Plan is a multi-employer plan with contributions funded by participating employers. Participating

employers are the Federal Reserve Banks, the Board of

Governors, and the Office of Employee Benefits of the

Federal Reserve Employee Benefits System. No separate

accounting is maintained of assets contributed by the

participating employers. The FRBNY acts as the sponsor

of the System Plan and the costs associated 

are not redistributed to other participating 

Following is a reconciliation of the b

ending balances of the System Plan benefit 

millions):

2006 

Estimated actuarial present value

of projected benefit

obligation at January 1 . . . . . . . $4,78

Service cost—benefits earned

during the period . . . . . . . . . . . . . 13

Interest cost on projected

benefit obligation . . . . . . . . . . . . 27

Actuarial loss . . . . . . . . . . . . . . . . . . . . . 13

Contributions by plan participants . . 

Special termination benefits loss . . . 

Benefits paid ..................... (25

Plan amendments . . . . . . . . . . . . . . . . . 6

Estimated actuarial present value

of projected benefit

obligation at December 31 . . . . $5,14

Following is a reconciliation of the b

ending balance of the System Plan asset

status, and the prepaid pension benefit cost

2006 

Estimated fair value of plan

assets at January 1 . . . . . . . . . . . $5,86

Actual return on plan assets . . . . . . . 71

Contributions by the employer ..... ..

Contributions by plan participants . . 

Benefits paid ..................... (25

Estimated fair value of plan

assets at December 31 . . . . . . . . $6,33

Funded status . . . . . . . . . . . . . . . . . . . . . $1,18

Unrecognized prior service cost . . . . 

Unrecognized net actuarial loss . . . . 

Prepaid pension benefit costs . . . . . . 

Amounts included in accumulated

other comprehensive

loss (in millions)

Prior service cost . . . . . . . . . . . . . . . (1

Net actuarial loss . . . . . . . . . . . . . . . (1,30

Total accumulated other

comprehensive loss . . . . . . . . . . $(1,4

Prepaid pension benefit costs are repor

assets’’ in the Statements of Condition.

The accumulated benefit obligation fo

Plan, which differs from the estimated ac

value of the projected benefit obligation 

based on current rather than future compe

was $4,522 million and $4,162 million at 

2006 and 2005, respectively.

The weighted-average assumptions used 

the projected pension benefit obligation f

Plan as of December 31 were as follows:

200

Discount rate . . . . . . . . . . . . . . . . . . . . . . . 6.00

Rate of compensation increase . . . . . . 4.50
Notes to the Combined Financial Statements of the Federal Reserve Banks—

Net periodic benefit expenses are actuarially determined using a January 1 measurement date. The

weighted-average assumptions used in developing net

periodic benefit expenses for the System Plan for the

years at January 1 were as follows:

2006 2005

Discount rate . . . . . . . . . . . . . . . . . . . . . . . 5.75% 5.75%

Expected asset return . . . . . . . . . . . . . . . 8.00% 8.25%

Rate of compensation increase . . . . . . 4.50% 4.25%

Discount rates reflect yields available on high-quality

corporate bonds that would generate the cash flows necessary to pay the plan’s benefits when due. The expected

long-term rate of return on assets was based on a combination of methodologies including the System Plan’s

historical returns, surveys of other plans’ expected rates

of return, building a projected return for equities and

fixed income investments based on real interest rates,

inflation expectations, equity risk premiums, and, finally,

surveys of expected returns in equity and fixed income

markets.

The components of net periodic pension benefit expense (credit) for the System Plan for the years ended

December 31 are shown below (in millions):

2006 2005

Service cost—benefits earned

during the period . . . . . . . . . . . . . . $ 134 $ 123

Interest cost on projected

benefit obligation . . . . . . . . . . . . . 278 263

Amortization of prior service

cost . . . . . . . . . . . . . . . . . . . . . . . . . . 23 24

Amortization of actuarial

loss . . . . . . . . . . . . . . . . . . . . . . . . . . 75 49

Expected return on plan assets ...... (460) (476)

Net periodic pension expense/

(credit) . . . . . . . . . . . . . . . . . . . . . . 50 (17)

Special termination benefits losses . . 3 6

Total periodic pension expense/

(credit) . . . . . . . . . . . . . . . . . . . . . . . $ 53 $ (11)

Estimated amounts that will be

amortized from accumulated

other comprehensive loss

into net periodic pension

expense in 2007

(in millions):

Prior service cost . . . . . . . . . . . . . . . . . . $ 29

Actuarial loss . . . . . . . . . . . . . . . . . . . . . 66

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95

The recognition of special termination benefits losses

is the result of enhanced retirement benefits provided to

employees during the restructuring described in Note 11.

Following is a summary of expected benefit payments

(in millions):

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2012–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

The Federal Reserve System’s pension p

average asset allocations at December 31, 

gory, were as follows:

200

Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.

Fixed income . . . . . . . . . . . . . . . . . . . . . 34.4

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0

The System’s Committee on Investmen

(CIP) contracts with investment manager

sponsible for implementing the System Pla

policies. The managers’ performance is me

a trailing 36-month benchmark of 60 perce

value weighted index of predominantly la

tion stocks trading on the New York Stock 

American Stock Exchange, and the Nation

of Securities Dealers Automated Quotation 

ket System and 40 percent of a broad

investment-grade fixed income index 

monthly). The managers invest plan fund

established guidelines for investment in equ

income instruments. Equity investment

between 40 percent and 80 percent of 

Investments, however, cannot be concentra

lar industries and equity securities holdin

company are limited. Fixed income secu

investment grade and the effective duratio

income portfolio must remain within a ran

cent and 150 percent of a broadly diversifie

grade fixed income index. CIP guidelines 

gin, short sale, foreign exchange, and 

trading as well as investment in bank, 

company, savings and loan, and governm

dealers’ stocks. In addition, investments 

denominated securities are prohibited; how

portion of the portfolio can be invested 

Depositary Receipts/Shares and foreign-

denominated fixed income securities.

Contributions to the System Plan may 

using different assumptions than those requ

cial reporting. The System does not expect 

contribution to the System Plan during 200
Notes to the Combined Financial Statements of the Federal Reserve Banks—

The Reserve Banks’ projected benefit obligation,

funded status, and net pension expenses for the BEP and

the SERP at December 31, 2006 and 2005, and for the

years then ended, are not material.

Thrift Plan

Employees of the Reserve Banks may also participate in

the defined contribution Thrift Plan for Employees of the

Federal Reserve System (“Thrift Plan”). The Reserve

Banks’ Thrift Plan contributions totaled $66 million and

$63 million for the years ended December 31, 2006 and

2005, respectively, and are reported as a component of

“Salaries and other benefits” in the Statements of Income.

The Reserve Banks match employee contributions based

on a specified formula. For the years ended December 31,

2006 and 2005, the Reserve Banks matched 80 percent on

the first 6 percent of employee contributions for employees with less than five years of service and 100 percent on

the first 6 percent of employee contributions for employees with five or more years of service.

(9) Postretirement Benefits Other Than Pensions

and Postemployment Benefits

Postretirement Benefits Other Than Pensions

In addition to the Reserve Banks’ retirement plans, employees who have met certain age and length-of-service

requirements are eligible for both medical benefits and

life insurance coverage during retirement.

The Reserve Banks fund benefits payable under the

medical and life insurance plans as due and, accordingly,

have no plan assets.

Following is a reconciliation of beginning and ending

balances of the benefit obligation (in millions):

2006 2005

Accumulated postretirement benefit

obligation at January 1 . . . . . . . . . . $ 947 $869

Service cost—benefits earned during

the period . . . . . . . . . . . . . . . . . . . . . . 27 32

Interest cost of accumulated

benefit obligation . . . . . . . . . . . . . . . 54 49

Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . 188 45

Contributions by plan participants . . . . 13 11

Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . (60) (59)

Plan amendments ................... (5) ...

Accumulated postretirement benefit

obligation at December 31 . . . . . . $1,164 $947

At December 31, 2006 and 2005, the weighted-average

discount rate assumptions used in developing the postretirement benefit obligation were 5.75 percent and 5.50

percent, respectively.

Discount rates reflect yields available on high-quality

corporate bonds that would generate the cash flows necessary to pay the plan’s benefits when due.

Following is a reconciliation of the beginning and

ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement

benefit costs (in millions):

2

Fair value of plan assets

at January 1 .................. $. 

Contributions by the employer . . . . . . 

Contributions by plan participants . . . 

Benefits paid ...................... 

Fair value of plan assets at

December 31 ................. $ 

.

Unfunded postretirement benefit

obligation . . . . . . . . . . . . . . . . . . . . . $1,

Unrecognized prior service cost . . . . . 

Unrecognized net actuarial loss ..... 

Accrued postretirement benefit costs . 

Amounts included in accumulated

other comprehensive

loss (in millions):

Prior service cost . . . . . . . . . . . . . . . . . . . $ 

Net actuarial loss . . . . . . . . . . . . . . . . . . . (4

Deferred curtailment gain ............ 

Total accumulated other

comprehensive loss ............. $(

Accrued postretirement benefit costs are 

component of “Accrued benefit costs” in t

of Condition.

For measurement purposes, the assume

cost trend rates at December 31 are as follo

200

Health care cost trend rate

assumed for next year . . . . . . . . . . 9.00

Rate to which the cost trend rate

is assumed to decline

(the ultimate trend rate) . . . . . . . . 5.00

Year that the rate reaches the

ultimate trend rate . . . . . . . . . . . . . 20

Assumed health care cost trend rates hav

effect on the amounts reported for health 

one percentage point change in assumed h

trend rates would have the following effec

ended December 31, 2006 (in millions):

One percentage

point increase

On

po

Effect on aggregate

of service and

interest cost

components of

net periodic

postretirement

benefit expense . . . . . $ 12 

Effect on accumulated

postretirement

benefit obligation . . . 128 

The following is a summary of the comp

periodic postretirement benefit expense 

ended December 31 (in millions):
Notes to the Combined Financial Statements of the Federal Reserve Banks—

2006 2005

Service cost—benefits earned during

the period . . . . . . . . . . . . . . . . . . . . . . . . $ 27 $ 32

Interest cost on accumulated benefit

obligation . . . . . . . . . . . . . . . . . . . . . . . . 54 49

Amortization of prior service cost . . . . . . (23) (21)

Amortization of actuarial loss . . . . . . . . . . . 22 13

Total periodic expense . . . . . . . . . . . . . . . . . 80 73

Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . (5) ...

Net periodic postretirement

benefit expense . . . . . . . . . . . . . . . . . . . $ 80 $ 68

Estimated amounts that will be

amortized from accumulated

other comprehensive loss

into net periodic benefit

expense in 2007

(in millions):

Prior service cost . . . . . . . . . . . . . . . . . . . . . (22)

Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . 45

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23

Net postretirement benefit expense is actuarially determined using a January 1 measurement date. At January 1,

2006 and 2005, the weighted-average discount rate assumptions used to determine net periodic postretirement

benefit expense were 5.50 percent and 5.75 percent,

respectively.

Net periodic postretirement benefit expense is reported

as a component of “Salaries and other benefits” in the

Statements of Income.

The 2005 service cost contains an adjustment by one

Reserve Bank that resulted from a review of plan terms

and assumptions. A plan amendment that modified the

credited service period eligibility requirements created

curtailment gains in 2005. A deferred curtailment gain,

which was recorded in 2006 as a component of accumulated other comprehensive loss, is expected to be recognized in net income in 2008 when the related employees

terminate employment.

The Medicare Prescription Drug, Improvement and

Modernization Act of 2003 established a prescription

drug benefit under Medicare (“Medicare Part D”) and a

federal subsidy to sponsors of retiree health care benefit

plans that provide benefits that are at least actuarially

equivalent to Medicare Part D. The benefits provided

under the Reserve Banks’ plan to certain participants are

at least actuarially equivalent to the Medicare Part D

prescription drug benefit. The estimated effects of the

subsidy, retroactive to January 1, 2004, are reflected in

actuarial loss in the accumulated postretirement benefit

obligation and net periodic postretirement benefit

expense.

The Reserve Banks account for the Medicare subsidies

as a reduction to benefits payments. The Reserve Banks

expect to receive approximately $4 million in subsidies in

the year ending December 31, 2007 that relate to benefit

payments made in the year ended December 31, 2006.

Following is a summary of expected postretirement

benefit payment (in millions):

Witho

subsid

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63 

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 

2012–2016 . . . . . . . . . . . . . . . . . . . . . . . 476 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $843 

Postemployment Benefits

The Reserve Banks offer benefits to form

employees. Postemployment benefit costs 

determined using a December 31, 2006 mea

and include the cost of medical and den

survivor income, and disability benefits. 

postemployment benefit costs recognized b

Banks at December 31, 2006 and 2005 wer

and $124 million, respectively. This cost is 

component of “Accrued benefit costs” in t

of Condition. Net periodic postemployme

pense included in 2006 and 2005 operating 

$20 million and $14 million, respectively, a

as a component of “Salaries and other be

Statements of Income.

(10) Accumulated Other Comprehen

Following is a reconciliation of beginnin

balances of accumulated other comprehens

to

Defined

Benefit

Retirement

Plans

Amount

Amount Related

Related to Postretiremen

Benefits

Other

than

Pensions

Balance at

December 31,

2005 .......... $ . . . $...

Adjustment to

initially apply

FASB Statement

No. 158 . . . . . . . . (1,492) (357) 

Balance at

December 31,

2006 . . . . . . . . . . $ (1,492) $ (357 ) 

Additional detail regarding the classific

mulated other comprehensive income is inc

8 and 9.

(11) Business Restructuring Charges

In 2003, several Reserve Banks announ

restructuring to streamline operations and 

including consolidation of check operati

reductions in various functions of the B

through 2006, additional consolidation and 
Notes to the Combined Financial Statements of the Federal Reserve Banks—

initiatives were announced in the check, cash, purchasing,

and Treasury operations. These actions resulted in the

following business restructuring charges (in millions):

Total

estimated

costs

Employee separation . . . . . . . . . . . . . . . . . . . . . . . $49

Contract termination . . . . . . . . . . . . . . . . . . . . . . . . 1

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51

Year-ended

12/31/2006

Accrued

liability

12/31/05

Total

charges

Total

paid

Accrued

liability

12/31/06

Employee

separation . . . . $17 $9 $(12) $14

Contract

termination . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . $17 $9 $(12) $14

Adjustments to the accrued liability due to changes in

the estimated restructuring costs were offset against total

charges. Without these offsets, total charges would have

been $10 million in 2006.

Employee separation costs are primar

costs related to identified staff reduction

mately 1,949, including 286 and 292 st

related to restructuring announced in 20

respectively. Costs related to staff reduction

ended December 31, 2006 and 2005 are 

component of “Salaries and other benefits

ments of Income. Contract termination co

charges resulting from terminating exist

other contracts and are shown as a compon

expenses.” Other costs include the cont

noncancelable lease agreement and asso

maintenance and are shown as a compon

pancy expenses.”

Restructuring costs associated with impa

tain Reserve Bank assets, including softw

leasehold improvements, furniture, and e

discussed in Note 6. Costs associated w

pension benefits for all Reserve Banks ar

the books of the FRBNY as discussed in 

associated with enhanced postretirement be

closed in Note 9.

Future costs associated with the announ

ing plans are estimated at $4 million.

The Reserve Banks anticipate substantia

their announced plans in 2008.

Office of Inspector General Activities

The Board of Governors’ Office of Inspector General (OIG) functions in accordance with the Inspector General Act

of 1978, as amended. In addition to

retaining an independent auditor each

year to audit the Board’s financial statements, the OIG plans and conducts audits, reviews, and investigations relating

to the Board’s programs and operations

and its delegated functions at the Federal Reserve Banks. The OIG also reviews existing and proposed legislation

and regulations for their impact on the

economy and efficiency of the Board’s

programs and operations. It recommends

policies, and it supervises and conducts

activities to promote economy and efficiency and to prevent and detect waste,

fraud, and abuse in Board an

delegated programs and oper

well as in activities administe

nanced by the Board. The O

the Congress and the Chairm

Board of Governors fully 

about serious abuses and de

and about the status of any 

actions.

During 2006, the OIG c

eight audits, reviews, and oth

ments and conducted a nu

follow-up reviews to evalua

taken on earlier recommendat

OIG also closed eight investig

performed numerous legisla

regulatory reviews.

OIG Audits, Reviews, and Assessments Completed during 2006

Report title Mo

External Quality Control Review of the National Science Foundation Inspector General

Audit Organization ...................................................................... Fe

Audit of the FFIEC’s Financial Statements (Year Ended December 31, 2005) . . . . . . . . . . . . . . . . . . M

Inspection of the Board’s Security Services Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M

Audit of the Board’s Implementation of Electronic Authentication Requirements . . . . . . . . . . . . . . . M

Audit of the Board’s Financial Statements (Year Ended December 31, 2005) . . . . . . . . . . . . . . . . . . M

Audit of the Board’s Information Security Program .......................................... Se

Security Control Review of the Common Document and Text Repository System

(Internal Report) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O

Audit of the Board’s Payroll Process ........................................................ D
Government Accountability Office Reviews

Under the Federal Banking Agency

Audit Act (Public Law 95–320), most

Federal Reserve System operations are

under the purview of the Government

Accountability Office (GAO). In 2006,

the GAO completed six reports on selected aspects of Federal Reserve operations (table). In addition, seven projects

concerning the Federal Reserv

various stages of completion a

(table). The Federal Reserve 

vided information to the GA

the year on numerous oth

investigations.

The reports are available 

from the GAO.

Reports Completed during 2006

Report title Report number Mo

Credit Cards: Customized Minimum Payment Disclosure

Would Provide More Information to Consumers, but

Impact Could Vary .................................................. GAO-06-434 A

Bank Secrecy Act: Opportunities Exist for FinCEN and the

Banking Regulators to Further Strengthen the

Framework for Consistent BSA Oversight ............................ GAO-06-386 M

Information Security: Federal Reserve Needs to Address

Treasury Auction Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GAO-06-659 A

Alternative Mortgage Products: Impact on Defaults Remains

Unclear, but Disclosure of Risks to Borrowers Could

Be Improved ....................................................... GAO-06-1021 Se

Minority Banks: Regulators Need to Better Assess

Effectiveness of Support Efforts ...................................... GAO-07-6 O

Credit Cards: Increased Complexity in Rates and Fees Heightens

Need for More Effective Disclosures to Consumers ................... GAO-06-929 O

Projects Active at Year-End 2006

Subject of project Month 

Consolidated supervision of financial institutions ........................................ Novem

Prompt Corrective Action (PCA) program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 

Basel II Capital Accord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 

Financial markets preparedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 

Financial regulatory agencies’ performance pay systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2

Financial regulatory agencies’ compensation programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2

Hedge funds and federal regulatory oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Octob