FASAB

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ACCOUNTING FOR REVENUE

AND

OTHER FINANCING SOURCES

AND

 CONCEPTS FOR RECONCILING

 BUDGETARY AND FINANCIAL ACCOUNTING

Statement of Recommended Accounting Standards Number 7

April 1996
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APPLICABILITY, MATERIALITY, AND TERMINOLOGY

These standards apply to general purpose financial reports of

U.S. Government reporting entities. These standards need not be

applied to immaterial items unless otherwise noted. Statement of

Federal Financial Accounting Concepts No. 2 (SFFAC No. 2),

Entity and Display, lists criteria for defining Government

reporting entities. Paragraph 78 of Entity and Display notes

that some of a reporting entity's components may be required by

law or policy to issue financial statements in accordance with

accounting standards other than those recommended by the FASAB

and issued by the OMB and the GAO, e.g., accounting standards

issued by the Financial Accounting Standards Board or by a

regulatory agency. Those components should continue to issue the

required reports. The reporting entities of which the components

are a part, however, need to be sensitive to differences that

may arise because of different accounting standards. If these

differences are material, the standards recommended by the FASAB

and issued by the OMB and the GAO should be applied. The

components would need to provide any additional disclosures or

different recognition and measurement required by the accounting

standards issued by the OMB and the GAO that are not required by

other standards.

"Disclosure" in this document indicates providing information in

notes or narrative regarded as an integral part of the basic

financial statements. "Supplementary" indicates providing

information that is regarded as "required supplementary

information" as that term is used in accounting and auditing

standards. The limited auditing procedures for this information

are defined in auditing standards. "Other accompanying

information" refers to unaudited information that accompanies

the audited financial statements. It is not regarded as

essential for "fair presentation." Another kind of supplementary

information is "Required Supplementary Stewardship Information."

This is a proposed category unique to Federal Government

accounting and auditing standards. It refers to certain

information for which FASAB expects OMB and GAO in collaboration

to agree upon appropriate auditing procedures. It will be

regarded as essential for "fair presentation."

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STATEMENT OF FEDERAL FINANCIAL

ACCOUNTING STANDARDS NUMBER 7

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

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

ACCOUNTING STANDARDS FOR REVENUE AND OTHER FINANCING SOURCES .. 1

SCOPE .................................................... 1

CLASSIFICATION, RECOGNITION, AND MEASUREMENT ............. 1

DISCLOSURES, SUPPLEMENTARY INFORMATION, AND OTHER

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

CONCEPTS FOR RECONCILING BUDGETARY AND FINANCIAL ACCOUNTING ... 4

PART I: ACCOUNTING

FOR REVENUE AND

OTHER FINANCING SOURCES

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

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

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

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

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

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

EXCHANGE REVENUE .............................................. 11

RECOGNITION AND MEASUREMENT OF EXCHANGE REVENUE .......... 12

DISCLOSURES AND OTHER ACCOMPANYING INFORMATION ........... 16

NONEXCHANGE REVENUE ........................................... 17

RECOGNITION AND MEASUREMENT

OF NONEXCHANGE REVENUE ................................... 17

The General Standard ................................ 17

Taxes and Duties .................................... 17

Fines and Penalties ................................. 23

Donations ........................................... 24

Other Nonexchange Revenue ........................... 24

DISCLOSURES, SUPPLEMENTARY INFORMATION, AND OTHER

ACCOMPANYING INFORMATION ............................ 24

Disclosures ......................................... 24
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Supplementary Information ........................... 26

Other Accompanying Information ..................... 27

OTHER FINANCING SOURCES ....................................... 28

RECOGNITION AND MEASUREMENT OF OTHER FINANCING SOURCES ... 29

Appropriations ...................................... 29

Financing Imputed for Cost Subsidies ................ 29

Transfers of Assets ................................. 30

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

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

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

PART II: CONCEPTS FOR RECONCILING BUDGETARY AND FINANCIAL

ACCOUNTING ........................ 36

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

AMENDMENTS TO SFFAC No. 2, ENTITY AND DISPLAY ................. 36

RECONCILIATION STATEMENT--BUDGETARY AND FINANCIAL

ACCOUNTING .......................................... 37

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

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

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

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

EXCHANGE REVENUE ......................................... 42

Special Nature of Government Exchange Transactions .. 42

Recognition: General Considerations ................. 43

Recognition: Special Cases .......................... 49

Measurement ......................................... 58

NONEXCHANGE REVENUE ...................................... 61

Inherent Limitations ............................... 61

Practical Limitations .............................. 62

Modified Cash Basis for Taxes and Duties ............ 63

Cash Basis Information Needed ...................... 63

Potential Changes .................................. 63

Entities Responsible for Measuring and Recognizing

Revenue ....................................... 64

Possible Over- and Under-funding of Trust Funds .... 64

Conceptual Criteria for Accrual and Limitations on

Their Application ............................. 65

Limitations on the Scope of Accounting ............. 67

Some Benefits of this Standard ..................... 67

Some Things this Standard Does Not Accomplish ...... 68

Accounting Systems Changes ......................... 69

Disclosures, Supplementary Information, and Other
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Accompanying Information ...................... 70

Tax Gap ............................................ 73

Tax Expenditures .................................... 75

Directed Flows of Resources ......................... 76

OTHER FINANCING SOURCES AND BUDGETARY RESOURCES ............... 78

General Principles .................................. 78

Reducing Differences ................................ 79

The Budgetary Process and Its Linkage to

Accounting ..................................... 80

Implications of the term "Net Results of

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

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

APPENDIX B: GUIDANCE FOR THE CLASSIFICATION OF TRANSACTIONS ... 90

INTRODUCTION ............................................. 90

TABLE OF TRANSACTIONS. . . . . . . . . . . . . . . . . . 93

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

Nonexchange Transactions With The Public ............ 97

Exchange Transactions With The Public: Revenue ...... 107

Exchange Transactions With The Public: Gains And

Losses .........................................115

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

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

Nonexchange Transactions--Intragovernmental:

Revenue ........................................119

Nonexchange Transactions--Intragovernmental: Gains

And Losses .....................................121

Exchange Transactions--Intragovernmental: Revenue ... 122

Exchange Transactions--Intragovernmental: Gains

And Losses .....................................127

Other Financing Sources--Intragovernmental .......... 128

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

TRANSACTIONS NOT RECOGNIZED AS REVENUES, GAINS, OR

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

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

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

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

This document contains two separate parts. The first, on revenue

and other financing sources, is composed of the introduction,

accounting standards, and appendices. After the standards

recommended by FASAB are approved by the Secretary of the

Treasury, the Director of the Office of Management and Budget,

and the Comptroller General and are published, the standards

provide authoritative guidance to those who prepare and audit

general purpose financial reports of U.S. Government entities.

The second part of this document amends Statement of Federal

Financial Accounting Concepts No. 2, Entity and Display, by

adding a new concept to satisfy users' needs for information that

reconciles budgetary and financial accounting. This concept is

presented in the section of this document that begins on page

Error! Bookmark not defined.. Statements of Federal Financial

Accounting Concepts articulate the framework within which the

Board considers and recommends accounting standards. Statements

of concepts do not provide authoritative guidance to preparers

and auditors.

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EXECUTIVE SUMMARY

ACCOUNTING STANDARDS FOR REVENUE AND OTHER

FINANCING SOURCES

SCOPE

1. This Statement presents standards to

account for inflows of resources from revenue

and other financing sources. It provides

standards for classifying, recognizing, and

measuring resource inflows. These financial

(proprietary) accounting standards differ

from those used for budgetary accounting only

to the extent essential to meet the

Objectives of Federal Financial Reporting.

CLASSIFICATION, RECOGNITION, AND

MEASUREMENT

2. Revenue is an inflow of resources that the

Government demands, earns, or receives by

donation. Revenue comes from two sources:

exchange transactions and nonexchange

transactions. Exchange revenues arise when a

Government entity provides goods and services

to the public or to another Government entity

for a price. Another term for "exchange

revenue" is "earned revenue." Nonexchange

revenues arise primarily from exercise of the

Government's power to demand payments from

the public (e.g., taxes, duties, fines, and

penalties) but also include donations. The

term "revenue" does not encompass all

financing sources of Government reporting

entities, such as most of the appropriations

they receive. These other sources of

financing do, however, provide resource

inflows to Government reporting entities, so

this Statement includes accounting standards

for them.

3. These accounting standards recognize

exchange revenue at the time that a

Government entity provides goods or services

to the public or to another Government

entity. The revenue is measured at the price
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likely to be received. Thus, with some

differences that are explained in the

standard, the accounting for earned revenue

is comparable to the private sector's accrual

accounting for earned revenue. Exchange

revenue includes most user charges other than

taxes. Such user charges include regulatory

user charges, in which the exchange is not

wholly voluntary but the revenue is

generally, but not always, related to the

cost of providing service to identifiable

groups. One example is the revenue derived

from the Securities and Exchange Commission's

registration fees. Exchange transactions also

include those intragovernmental transactions

where the price serves as a full or partial

reimbursement for the costs incurred.

4. Distinguishing exchange revenue from nonexchange revenue and other financing sources

enables the entity to report the net cost of

operations of its programs (and the cost of

the entity to the taxpayer) and provides the

accounting foundation to report unit cost of

output measures for performance evaluations.

Requiring that exchange revenue be matched

with the cost of outputs of goods and

services sold to the public enables the

entity to report the cost to the taxpayer of

not charging the full cost of those goods and

services.

5. Nonexchange revenues include income taxes,

excise taxes, duties, fines, penalties, and

other inflows of resources arising from the

Government's power to demand payments, as

well as voluntary donations. Nonexchange

revenue is recognized when a reporting entity

establishes a specifically identifiable,

legally enforceable claim to cash or other

assets. It is recognized to the extent that

the collection is probable (i.e., more likely

than not) and the amount is measurable (i.e.,

reasonably estimable).1

6. In the case of taxes and duties, inherent and practical limitations

on the assessment process serve to delay the time when the power
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to demand payment becomes a legally enforceable claim to cash or

other assets. For this reason, the method of accounting for taxes

and duties can best be characterized as a modified cash basis of

accounting, rather than an accrual basis. This basis of accounting

amends the standard for the recognition of accounts receivable for

taxes and duties. Cash basis tax revenue will continue to be

accounted for as well, because of the fiscal importance of the

information. The accrual accounting required will provide more

accurate and complete information about receivables and refunds

legally receivable and payable and about the components of the

Government's revenue stream. The Board may review the standard

for accrual of taxes and duties after several years. The Board has

provided that in the interim the IRS and Customs may on their own

initiative modify this standard so that it reflects a fuller application

of the accrual concept.

7. Budgetary resources are recognized from two perspectives: the

proprietary accounting perspective and the budgetary perspective.

From the proprietary perspective, appropriations are accounted for

as a financing source when used. Appropriations are used when an

entity has acquired goods and services or has provided benefits and

grants that are authorized to be paid by an appropriation. The

remaining amount of appropriations enacted into law, but not yet

recognized as "appropriations used," is treated as capital, i.e.,

"unexpended appropriations." This treatment parallels the

recognition of expended appropriations during budgetary

execution.

8. To the extent that other standards require that costs not on the

entity's books be imputed to the entity, the standards for other

financing sources require recognition of the corresponding imputed

financing.

9. Financial statements have not previously presented budget

execution information needed by users of those reports.

Furthermore, concerns have been expressed about whether the

budget is being properly executed in all cases. The standards

presented in this document require the presentation and,

consequently, the audit of information about budgetary resources,

the status of those resources, and outlays. The standards also

require a reconciliation of proprietary and budgetary information in
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a way that helps users relate the two.

DISCLOSURES, SUPPLEMENTARY

INFORMATION, AND OTHER INFORMATION

10. The different types of revenue, and the complexity of

accounting for revenue and other financing sources, increase the

importance of certain disclosures and other information.

11. Extensive disclosures and other information about taxes and

duties compensate to some extent for the limited accruals under the

modified cash basis of accounting. Such disclosures and other

information also provide a better basis for estimating future cash

flows, overseeing the custodial responsibilities given to the tax

collecting entities, and understanding how the tax burden is shared.

12. Certain disclosures are required about exchange transactions

where the full cost of goods and services sold is not recovered.

13. Limited disclosure concerning accountability for dedicated

collections is required for reporting entities responsible for

administering such funds. Supplementary information is required

from those entities and the entities that make the collections in

cases where trust funds may be over- or under-funded in terms of

applicable law.

14. Disclosures are required about the use of borrowing authority

and the status of budgetary resources that may affect future

spending by the entity.

CONCEPTS FOR RECONCILING BUDGETARY AND

FINANCIAL ACCOUNTING

15. This statement amends Statement of Federal Financial

Accounting Concepts No. 2, Entity and Display, by adding a

category of financial information to further satisfy users' needs and

the objectives of financial reporting. More specifically, the

amendment is designed to meet users' need to understand "how
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information on the use of budgetary resources relates to

information on the cost of program operations . . ." (sub-objective

1C). The objective of this new category of information is to

provide an explanation of the differences between budgetary and

financial (proprietary) accounting. This is accomplished by means

of a reconciliation of budgetary obligations and nonbudgetary

resources available to the reporting entity with its net cost of

operations.
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6 PART I: ACCOUNTING

FOR REVENUE AND

OTHER FINANCING SOURCES

INTRODUCTION
REVENUE AND OTHER FINANCING SOURCES 7

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BACKGROUND

16. The essential differences among exchange

revenues, nonexchange revenues, and other

financing sources affect the way they are

recognized and measured under the accrual method

of accounting. Properly classifying these inflows

according to their nature, therefore, provides the

basis for applying different accrual accounting

principles. In addition, proper classification is

essential to constructing financial statements

that meet the federal financial reporting

objectives,2

 as they have been described in Statement of Federal

Financial Accounting Concepts No. 2, Entity and Display.

17. To help meet those objectives, classifications were developed to

determine what specific kinds of revenue should be deducted from the cost

of providing goods and services by the reporting entities. Only revenue

classified as exchange revenue should be matched with costs.

Nonexchange revenue and other financing sources are not matched with

costs because they are not earned in the operations process. Because they

are inflows that finance operations, nonexchange revenues and other

financing sources should be classified in accordance with other rules and

should be recognized only in determining the overall financial results of

operations for the period. This differs from the focus used in the private

sector, where the focus is on net income for business organizations, and on

changes in net assets for not-for-profit organizations. It is also a different

focus from that used previously in reporting on U.S. Government

operations. Under the old federal accounting standards, the focus was on

matching all of an entity's financing with incurred expenses to report "net

results of operations" which generally was not useful in evaluating

performance. The new focus is on costs --both gross and net--which are

useful in evaluating performance on many levels.
8 INTRODUCTION

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18. The concept of matching costs and revenue has little relevance in

government except where there is an exchange transaction. An exchange

transaction occurs when one party sacrifices value and receives a valuable

good or service in return. The operations of an entity engaged in exchange

transactions produce the revenue earned as well as the associated cost

incurred. Therefore, financial accounting should relate the revenue to the

cost for these transactions. The net effect--the gross cost minus the

revenue, or the net cost--generally determines the extent to which

taxpayers bear the cost of the operations.33

19. Information about the net cost of exchange

transactions serves other purposes as well. Net

cost gives one indication of the extent to which

people are willing to make voluntary payments to

acquire goods or services of the kinds that are

sold. It thus can give an indication of the extent

to which people judge the products to have value.

Net cost also can be used in evaluating an

entity's pricing policy.

20. Most importantly of all, both net cost and

gross cost can be compared with outputs and

outcomes in assessing the effectiveness and

efficiency with which resources are used to

achieve results. Such comparisons can be used by

agency management, the President, and the Congress

in making decisions about allocating resources.

These standards, together with those in SFFAS No.

4, Managerial Cost Accounting Concepts and

Standards, provide information essential to

effective implementation of the Government

Management Reform Act, which requires agencies to

report performance measures such as unit cost.

These standards, when applied in the context of

applicable entity and display concepts, will make

federal financial reporting more meaningful to

those concerned with performance measurement.

 

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

services. The extent to which taxpayers bear the costs of these goods and

services depends on whether the goods and services are sold to entities that in

turn sell goods and services to the public, or to entities that are financed by

taxes. The net cost of operations may also be financed by other nonexchange

revenue such as fines, forfeitures, and donations.
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21. Nonexchange revenue transactions do not

require a Government entity to give value directly

in exchange for the inflow of resources. The

Government does not "earn" the nonexchange

revenue. The cost that nonexchange revenue

finances falls on those who pay the taxes and make

the other nonexchange payments to the Government.

The different character of nonexchange revenues

requires that they be distinguished from exchange

revenues. They should, therefore, be shown in a

way that does not obscure the entity's net cost of

operations.

22. Although Board Members have differing views on

whether social insurance programs result in

exchange or nonexchange transactions, they agree

that social insurance tax revenues should be shown

in the same way as other tax revenues for the

purposes of financial reporting.34 Social insurance

taxes, like other taxes, are determined by the

Government's power to compel payment. Individuals

and businesses that pay social insurance taxes are

subject to them as a byproduct of their decision

to enter covered employment or engage in a covered

business. Especially for the major, broad-based

social insurance programs-- Social Security,

Medicare (hospital insurance), and unemployment

compensation--the individuals and businesses have

virtually no option except to pay.

23. The main sources of financing for the

Government as a whole are exchange and nonexchange

revenues and borrowing from the public. For

component reporting entities, however, the sources

of financing are provided through the budget and

are largely financing sources other than revenue.

Appropriations and other budget authority provide

an agency with the authority to incur obligations

to acquire goods and services or to provide

benefits and grants. These other financing sources

are not earned by an entity's operations.

Therefore, as with nonexchange revenue, they

should be accounted for in a way that does not

obscure the entity's net cost.

 

 34See discussion of social insurance programs in FASAB's Exposure Draft,

Supplementary Stewardship Reporting.
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24. Budgetary resources have a different character

than both exchange revenue and nonexchange

revenue. Budgetary inflows should be shown in a

way that reflects two different perspectives: the

proprietary effect and the budgetary effect.

Proprietary accounting treats these resources much

as capital and lines of credit are treated in

private sector accounting, and provides

information about their availability in the

Balance Sheet or in notes. Appropriations are

recognized as capital when enacted into law, while

borrowing authority is disclosed in notes. Because

Government entities are expected to expend capital

from appropriations rather than maintain it, the

accounting for the use of appropriations differs

in this respect from the private sector's

accounting for capital. The accounting for

"appropriations used" has been simplified and

parallels their budgetary effect.

25. The budget provides the principal basis for

planning and controlling obligations and

expenditures by Government entities. Budget

execution tracks the flow of budgetary resources

from the congressional authorizing and

appropriating process, to the apportionment,

allotment, and obligation of the budgetary

resources, to the outlay of cash to satisfy those

obligations. For the most part, obligations and

cash, rather than accrual accounting, are the

bases for budgeting and reporting on budget

execution.
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26. Those who prepare financial statements have

recognized that accrual accounting and the budget

are complementary. Accrual-basis accounting often

provides better information than cash-basis

accounting for evaluating performance. It can

provide more information for planning and control

of operations. Accrual accounting provides an

understanding of a reporting entity's net position

and cost of operations. U.S. Government financial

statements have not been used for planning and

control as well as they might have been. In part,

this is because accounting standards have not been

fully attuned to the Government's needs and

circumstances. Another important reason is the

continuing primacy of the budget as a financial

planning and control tool. General purpose

financial reports have not presented budget

execution information with the financial

statements in a way that helped users relate these

two important, but different, types of financial

information. The standards presented in this

document provide the basis for reports that can

deal with this problem.

MATERIALITY

27. Except as otherwise noted, the provisions of the accounting standards

in this statement need not be applied to items that are qualitatively and

quantitatively immaterial.

28. The determination of whether an item is material depends on the

degree to which omitting or misstating information about the item makes it

probable that the judgment of a reasonable person relying on the

information would have been changed or influenced by the omission or the

misstatement.

EFFECTIVE DATE

29. The provisions of this statement are effective for reporting periods that

begin after September 30, 1997. Earlier application is encouraged.
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ACCOUNTING STANDARDS

SCOPE

30. These standards determine how a Government reporting entity should

account for inflows of resources from revenue and other financing sources

in its general purpose financial reports. Revenue is an inflow of resources

that the Government demands, earns, or receives by donation. Revenue

comes from two sources: exchange transactions and nonexchange

transactions. Exchange revenues arise when a Government entity provides

goods and services to the public or to another Government entity for a

price. Another term for "exchange revenue" is "earned revenue."

Nonexchange revenues arise primarily from exercise of the Government's

power to demand payments from the public, such as taxes, duties, fines,

and penalties. Nonexchange revenue also includes donations.

31. The term "revenue" does not encompass all financing sources of

Government reporting entities, such as most of the appropriations they

receive. These other sources of financing do, however, provide resource

inflows to Government reporting entities, although not to the Government

as a whole. Accordingly, standards for accounting for these inflows are

also provided.

32. Appendix B, "Guidance for the Classification of Transactions,"

provides authoritative guidance on which transactions should be classified

as exchange transactions and which should be classified as nonexchange

transactions or other financing sources.

EXCHANGE REVENUE

33. Exchange revenue and gains are inflows of resources to a Government

entity that the entity has earned. They arise from exchange transactions,

which occur when each party to the transaction sacrifices value and

receives value in return. That is, exchange revenue arises when a

Government entity provides something of value to the public or another

Government entity at a price.
EXCHANGE REVENUE 13

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RECOGNITION AND MEASUREMENT OF

EXCHANGE REVENUE

34. Revenue from exchange transactions should be recognized when goods

or services are provided to the public or another Government entity at a

price.

35. When a transaction with the public or another Government entity at a

price is unusual or nonrecurring, a gain or loss should be recognized rather

than revenue or expense so as to differentiate such transactions.

36. Revenue from specific types of exchange transactions should be

recognized as follows:

(a) When services are provided to the public or another Government

entity (except for specific services produced to order under a

contract), revenue should be recognized when the services are

performed.

(b) When specific goods are made to order under a contract (either

short- or long-term), or specific services are produced to order

under a contract (either short- or long-term), revenue should be

recognized in proportion to estimated total cost when goods and

services are acquired to fulfill the contract. If a loss is probable

(more likely than not), revenue should continue to be recognized in

proportion to the estimated total cost and costs should continue to

be recognized when goods and services are acquired to fulfill the

contract. Thus, the loss should be recognized in proportion to total

cost over the life of the contract.3

(c) When goods are kept in inventory so that they

are available to customers when ordered,

revenue should be recognized when the goods

are delivered to the customer.
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(d) When services are rendered continuously over

time or the right to use an asset extends

continuously over time, such as the use of

borrowed money or the rental of space in a

building, the revenue should be recognized in

proportion to the passage of time or the use

of the asset. The interest received on money

borrowed in an intragovernmental transaction

is an exchange revenue when the source of the

borrowed funds is predominantly exchange

revenue and is a nonexchange revenue when the

source of the borrowed funds is predominantly

nonexchange revenue or other financing

sources.

(e) When an asset other than inventory is sold,

any gain (or loss) should be recognized when

the asset is delivered to the purchaser.
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37. When advance fees or payments are received,

such as for large-scale, long-term projects,

revenue should not be recognized until costs are

incurred from providing the goods and services

(regardless of whether the fee or payment is

refundable). An increase in cash and an increase

in liabilities, such as "unearned revenue," should

be recorded when the cash is received. "Unearned

revenue" should also be recorded if an agency

requests advances or progress payments prior to

the receipt of cash and records the amount.35

38. The measurement basis for revenue from

exchange transactions should be the actual price

that is received or receivable under the

established pricing arrangements.

39. When cash has not yet been received at the

time revenue is recognized, a receivable should be

recorded. An appropriate allowance for estimated

bad debts should be established.

40. To the extent that realization of the full

amount of revenue is not probable due to credit

losses (caused by the failure of the debtor to pay

the established or negotiated price), an expense

should be recognized and the allowance for bad

debts increased if the bad debts can be reasonably

estimated.36 The amount of the bad debt expense

should be separately shown.

 

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

claim to cash is established based on legal provisions, such as a payment due

date.

 36SFFAS No. 1, Accounting for Selected Assets and Liabilities, paragraphs 40-

52, is the standard for estimating bad debts. The standard is further explained

in SFFAS No.1's Basis for Conclusions, paragraphs 116-133.
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41. To the extent that realization of the full

amount of revenue is not probable due to returns,

allowances, price redeterminations, or other

reasons apart from credit losses, the revenue that

is recognized should be reduced by separate

provisions if the amounts can be reasonably

estimated. The amounts of such provisions should

be reflected as revenue adjustments, rather than

costs of operations, and should be separately

shown.

42. The recognition and measurement of revenue and

credit losses due to direct loans and loan

guarantees is determined by SFFAS No. 2,

Accounting for Direct Loans and Loan Guarantees.

Appropriate allowances should be established as

determined by those standards.

43. Exchange revenue should be recognized in

determining the net cost of operations of the

reporting entity during the period. The exchange

revenue should be recognized regardless of whether

the entity retains the revenue for its own use or

transfers it to other entities. Gross and net cost

should be calculated as appropriate to determine

the costs of outputs and the total net cost of

operations of the reporting entity. The components

of the net cost calculation should separately

include the gross cost of providing goods or

services that earned exchange revenue, less the

exchange revenue earned, and the resulting

difference. The components of net cost should also

include separately the gross cost of providing

goods, services, benefit payments, or grants that

did not earn exchange revenue.
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44. The net amount of gains (or losses) should be

subtracted from (or added to) gross cost to

determine net cost in the same manner as exchange

revenue is subtracted. Exchange revenue that is

immaterial or cannot be associated with particular

outputs should be deducted separately in

calculating the net cost of the program,

suborganization, or reporting entity as a whole as

appropriate. Nonexchange revenues and other

financing sources should not be deducted from the

gross cost in determining the net cost of

operations for the reporting entity.

45. Under exceptional circumstances, such as rents

and royalties on the Outer Continental Shelf, an

entity recognizes virtually no costs (either

during the current period or during past periods)

in connection with earning revenue that it

collects.

45.1. The collecting entity should not offset

its gross costs by such exchange revenue in

determining its net cost of operations. If such

exchange revenue is retained by the entity, it

should be recognized as a financing source in

determining the entity’s operating results. If,

instead, such revenue is collected on behalf of

other entities (including the U.S. Government as a

whole), the entity that collects the revenue

should account for that revenue as a custodial

activity, i.e., an amount collected for others.

45.2. If the collecting entity transfers the

exchange revenue to other entities, similar

recognition by other entities is appropriate.

a. If the other entities to which the

revenue is transferred also recognize

virtually no costs in connection with

the Government earning the revenue, the

amounts transferred to them should not

offset their gross cost in determining

their net cost of operations but rather

should be recognized as a financing

source in determining their operating

results.
18 ACCOUNTING STANDARDS

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b. If the other entities to which the

revenue is transferred do recognize

costs in connection with the Government

earning the revenue, the amounts

transferred to them should offset their

gross cost in determining their net cost

of operations.

45.3. Because the revenue is exchange revenue

regardless of whether related costs are

recognized, it should be recognized and measured

under the exchange revenue standards.

DISCLOSURES AND OTHER ACCOMPANYING

INFORMATION

46. Each reporting entity that provides goods or services to the public or

another Government entity should disclose the following:

(a) differences in pricing policy from the full cost or market pricing

guidance for exchange transactions with the public as set forth in

OMB Circular No. A-25, User Charges (July 8, 1993), or in

subsequent amendments in circulars that set forth pricing guidance;

(b) exchange transactions with the public in which prices are set by

law or executive order and are not based on full cost or on market

price;4

(c) the nature of intragovernmental exchange

transactions in which the entity provides

goods or services at a price less than the

full cost or does not charge a price at all,

with explanations of the amount and reason

for disparities between the billing (if any)

and the full cost; and

(d) the full amount of the expected loss when

specific goods are made to order under a

contract, or specific services are produced

to order under a contract, and a loss on the

contract is probable (more likely than not)

and measurable (reasonably estimable).
EXCHANGE REVENUE 19

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47. When making the disclosures called for by (a)

and (b) in paragraph 0, cautionary language should

be added to the effect that higher prices based on

full cost or market price might reduce the

quantity of goods or services demanded and,

therefore, the difference between revenue received

and such higher prices does not necessarily

provide an indication of revenue forgone. If a

reasonable estimate is practicable to make, the

entity should provide as other accompanying

information the amount of revenue forgone and

should explain whether, and to what extent, the

quantity demanded was assumed to change as a

result of a change in price.

NONEXCHANGE REVENUE

RECOGNITION AND MEASUREMENT

OF NONEXCHANGE REVENUE

The General Standard

48. Nonexchange revenues are inflows of resources

that the Government demands or receives by

donation. Such revenue should be recognized when a

specifically identifiable, legally enforceable

claim to resources arises, to the extent that

collection is probable (more likely than not) and

the amount is reasonably estimable. Nonexchange

revenue should be measured by the collecting

entities, but should be recognized by the entities

legally entitled to the revenue (the recipient

entities). Paragraphs 0 through 0 describe the

application of this general standard.

Taxes and Duties

49. Revenue measured by the collecting entities.

Taxes and duties also should be measured on the

cash basis, and the cash basis amount(s) should be

shown in conjunction with the accrual amounts

recognized. The source and disposition of revenue
20 ACCOUNTING STANDARDS

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from taxes, duties (which are a type of tax), and

related fines, penalties and interest should be

measured by the collecting entities in a manner

that enables reporting of (1) cash collections,

refunds, and the "accrual adjustment" necessary to

determine the total revenue and (2) cash or cash

equivalents transferred to each of the recipient

entities and the revenue amounts to be recognized

by each of them. The collecting entities function

in a custodial capacity with respect to revenue

transferred or transferable to the recipient

entities. The collecting entities should not

recognize such revenue, but should account for and

report upon the above mentioned custodial

activities. The entities that collect taxes and

duties may change the general standard (para. 0)

to accrue amounts now required to be presented as

supplementary information (paragraphs 0 and 0) and

make other changes that would result in a fuller

and more complete application of accrual

accounting.

50. Cash collections should be based on amounts

actually received during the fiscal period,

including withholdings, estimated payments, final

payments, and collections of receivables. Cash

collections include any amounts paid in advance of

due dates unless they are deposits.

51. Cash refunds should be based on repayments of

taxes and duties during the period. Refunds

include refund offsets and drawbacks. Refund

offsets are amounts withheld from refunds on

behalf of other agencies and paid to such

agencies. Drawbacks are refunds of duties paid on

imported goods that are subsequently exported or

destroyed.
NONEXCHANGE REVENUE 21

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52. The "accrual adjustment," which modifies the

net of cash collections and refunds to determine

the amount of revenue recognized, should be the

net increase or decrease during the reporting

period in net revenue-related assets and

liabilities. The net revenue-related assets and

liabilities include accounts receivable, the

allowance for uncollectible accounts, and amounts

payable for refunds. Recognition standards for

these accounts of the collecting entities are

described in paragraphs 0 to 0.
22 ACCOUNTING STANDARDS

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53. Accounts receivable should be recognized when

a collecting entity establishes a specifically

identifiable, legally enforceable claim to cash or

other assets through its established assessment

processes to the extent the amount is measurable.

This definition of accounts receivable from

nonexchange transactions requires the standard for

recognition of accounts receivable to be amended

so that such receivables are not recognized on the

basis of payment due dates but rather on the basis

of the completion of the assessment processes.5

Under such processes, assessments are enforceable claims for which

specific amounts due have been determined and the person(s) or entities

from whom the tax or duty is due have been identified. Assessments

include both self-assessments made by persons filing tax returns or entry

documents and assessments made by the collecting entities.

54. Assessments recognized as accounts receivable include tax returns

filed by the taxpayer (or customs documents filed by the importer) without

sufficient payments, taxpayer agreements to assessments at the conclusion

of an audit or to a substitute for a return (or importer agreements to

supplemental assessments), court actions determining an assessment, and

taxpayer (or importer) agreements to pay through an installment agreement

or through accepted offers in compromise. Receivables determined to be

currently not collectable are included, but assessments where there is no

future collection potential such as where the taxpayer (or importer) has

been either insolvent or deceased for specified periods are not included.

Accounts receivable, therefore, include only unpaid assessments made

through the end of the period plus related fines, penalties, and interest.

Accounts receivable do not include amounts received or due with tax

returns received after the close of the reporting period or amounts that are

compliance assessments37 or pre-assessment work in

process.

55. Compliance assessments and pre-assessment work

in process. Compliance assessments and preassessment work in process may or may not be

legally assessed depending on the resolution of

subsequent events.

 37Customs refers to "compliance assessments" as protested assessment

amounts.
NONEXCHANGE REVENUE 23

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55.1. Compliance assessments are proposed

assessments by the collecting entity in definitive

amounts, but the taxpayer (or importer) still has

the right to disagree or object, such as in the

case of assessments made at the conclusion of an

audit (or at the conclusion of a review by an

import specialist or when a violation of

applicable law is discovered), or the issuance by

IRS of a substitute for a return, or where

assessment is in appeals or in the tax court.

These compliance assessments may become accounts

receivable if the taxpayer files an amended return

(or Customs' protest/retention period lapses), or

an appeal or court action finally determines the

assessment, or the taxpayer (importer) agrees to

pay currently or through an installment agreement,

or an offer in compromise is accepted.

55.2. Pre-assessment work in process is

assessments not yet officially asserted by the

collecting entity which are subject to a

taxpayer's right to conference in response to

initial information notices, e.g., revenue agent

reports (or are unasserted assessments on

merchandise released into commerce for which the

importer did not submit an entry summary document

or for projected revenues due as a result of

Customs' compliance measurement programs). The

amount or range of amounts that will ultimately be

assessed or the duration of the notice period may

be reasonably estimable, but there are no amounts

for pre-assessment work in process presently

included in the dollar based accounting systems.

Estimates of the amount or range of amounts of

pre-assessment work in process that may ultimately

be collectable are not presently sufficiently

reliable to be recognized.

56. Allowance for uncollectible amounts should be

recognized based on an analysis of both individual

accounts receivable and groups of accounts

receivable, as prescribed by other standards.38 A

 38SFFAS No. 1, Accounting for Selected Assets and Liabilities, para. 44 to 51,

provides the basis for determining this allowance.
24 ACCOUNTING STANDARDS

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______________________________________________________

provision to increase or decrease the allowance

will result in an adjustment of nonexchange

revenue, rather than a bad debt expense.

57. Amounts payable for refunds (including refund

offsets and drawbacks) should be recognized when

measurable and legally payable under established

processes of the collecting entities. The amounts

include those refunds, where returns (or claims

for refund) have been filed by the taxpayer and

the Government has determined the specific amounts

refundable and has identified the payee. Refunds

with respect to returns or claims filed as of the

end of the reporting period that do not require

specific approval before payment are included in

accounts payable for refunds.

58. Other claims for refunds. Claims filed for

which specific administrative actions are required

before payments can be made and unasserted claims

for refund by taxpayers or importers that may or

may not become payable depending upon the

resolution of subsequent events.

58.1. Claims filed for refunds where required

administrative actions are not yet complete as of

the close of the reporting period are not

recognized. The refunds, however, may be

reasonably estimable.

58.2. Unasserted claims for refund such as

unfiled claims for refunds or drawbacks for which

no claim has been filed, are not recognized.39

These amounts may be reasonably estimable, but are

not presently included in dollar-based accounting

systems.

 39Future income taxes from corporations may be reduced by more than $100

billion dollars as a result of net operating loss carryforwards and tax credit

carryforwards. Information in returns filed by corporations and in their

financial statements appears to provide the basis for a reasonable estimate of

the amount of potential reduced future income tax revenue attributable to these

provisions of tax law. Information about net operating loss carryforwards is

not an unasserted claim, as defined here.
NONEXCHANGE REVENUE 25

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59. Deposits. Amounts voluntarily paid to the

reporting entities as deposits, such as those made

to stop the accrual of interest or those made

pending settlements and judgments, are separately

recognized as deposit liabilities.

60. Revenue recognized by the recipient entities

should equal the sum of (a) cash or cash

equivalents transferred to them by collecting

entities and (b) the net change in any related

inter-entity balances between the collecting and

receiving entities (i.e., the amount to be

transferred to the recipient entities from the

collecting entity or vice versa). Equivalents are

normally special Treasury securities issued by the

Treasury Department acting in conjunction with the

collecting entities. Inter-entity balances of

amounts to be transferred normally should be

recognized when (1) a legally enforceable claim

exists between a collecting entity and a recipient

entity for the transfer or repayment of taxes or

duties, and (2) payment of such claim is probable

and measurable. Inter-entity balances typically

represent estimated settlements of transfers made

during the period and revenue received by the

collecting entity at year end but not yet

transferred. Revenue should be recognized as a

financing source in calculating the results of

operations and not as a deduction in determining

net cost of operations. Principles for the

application of this standard to major groups of

recipient entities are described in paragraphs 0

through 0.

60.1. Trust funds legally entitled to excise

taxes collected. Certain trust funds are legally

entitled to receive only excise taxes that are

actually collected by the collecting entity.

However, transfers to such trust funds currently

are based on assessed excise taxes, because data

on the components of cash collections by type of

tax are not currently obtained from taxpayers.

This standard affirms that revenues may be

recognized on the basis of assessed excise taxes

in lieu of excise taxes actually collected.
26 ACCOUNTING STANDARDS

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60.2. Trust funds legally entitled to receive

Social Security taxes accrued. By law, the trust

funds are to receive Social Security taxes on the

basis of the earnings of participants and the

applicable tax rates. Social Security taxes

accrued are presently determined by the assessment

processes of the Internal Revenue Service (IRS).

Non-compliance by taxpayers may result in such

amounts being less than taxes based on actual

earnings of participants. Amounts for individual

participants are separately reported to the Social

Security Administration (SSA), but because of

employer reporting deficiencies these amounts are

currently even less than amounts determined by the

IRS. SSA is legally entitled to retain the higher

amounts actually transferred by the IRS. This

standard affirms that revenue should be recognized

on the basis of the best available information,

i.e., on the basis of the higher of the amount

determined by the IRS assessment process or the

individual participant amounts based on reports to

SSA of participants' earnings, subject to any

later adjustments necessary to bring the amounts

transferred to the trust funds up to the amount of

taxes due based on the actual earnings history of

the participants.

60.3. Collecting entities entitled to retain

revenue. When legally retained by the collecting

entity as a reimbursement of the cost of

collection, revenue should be recognized as an

exchange revenue and deducted in determining the

collecting entity's net cost of operations.

60.4. General Fund. The General Fund recognizes

all nonexchange revenue not recognized by trust

funds and other recipient entities. Interest on

delinquent taxes should be recognized as exchange

revenue. The General Fund should recognize in

succeeding periods revenue adjustments for any

recognized revenue that is determined after the

books are closed for the period to have been

properly transferable (or improperly transferred)

to other recipient entities.
NONEXCHANGE REVENUE 27

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Fines and Penalties

61. Fines and penalties are monetary requirements

imposed on those who violate laws or

administrative rules. They may be imposed by the

entities collecting taxes and duties, or by other

government entities. The time when a claim to

resources arises will depend on the nature of the

fine and the associated legal and administrative

processes. Some examples of conditions that,

depending on the circumstances, could establish a

legally enforceable and measurable claim include

(1) the date by which an individual may contest a

court summons expires, (2) the offender pays the

fine before a court date, or (3) the court imposes

the fine. An allowance for uncollectible accounts

should, as in the case of taxes and duties, be

recognized as a revenue adjustment and determined

in accordance with other standards.6

 The allowance

should reduce the gross amount of the receivable and revenue to its net

realizable value, based on the criterion that losses should be recognized to

the extent it is probable (more likely than not) that some or all of the

receivables will not be totally collected.

Donations

62. Donations are contributions to the government,

i.e., voluntary gifts of resources to a government

entity by a nonfederal entity. Donations may be

financial resources, such as cash or securities,

or nonfinancial resources such as land or

buildings. Revenue arising from donations should

be recognized for those inflows of resources which

meet recognition criteria for assets7

 and should be

measured at the estimated fair value of the contribution.

Other Nonexchange Revenue
28 ACCOUNTING STANDARDS

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63. The various types of nonexchange revenue are

described in Appendix B: Guidance for the

Classification of Transactions. Some of these are

not specifically mentioned in this standard. They

should be recognized and measured in accordance

with the general rule (see para. 0) except where

other Board standards apply.

DISCLOSURES, SUPPLEMENTARY

INFORMATION, AND OTHER ACCOMPANYING

INFORMATION

Disclosures

64. Basis of Accounting. Collecting entities

should disclose the basis of accounting when the

application of the general rule of paragraph 0

results in a modified cash basis of accounting.

The disclosure should point out the specific

potential accruals which are not made as a result

of this practice and the practical and inherent

limitations affecting the accrual of taxes and

duties. The disclosure should refer to the related

other required disclosures and to the

supplementary information and should mention that

other accompanying information also provides

related information. If a collecting entity adopts

accounting standards that embody a fuller

application of accrual accounting concepts, as

permitted in paragraph 0, then the disclosure

should describe that change in accounting and

point out how it differs from that prescribed by

this standard.

65. Entities that collect taxes and duties should

disclose the following relating to future cash

flows, revenue-related transactions, and custodial

responsibilities:

65.1. Accounts receivable. Factors affecting

collectability and timing of categories of

accounts receivable and the amounts involved.
NONEXCHANGE REVENUE 29

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65.2. Material revenue-related transactions.

Revenue-related transactions affecting the

beginning and end-of-period balances of accounts

receivable, accounts payable for refunds, and the

allowance for uncollectible amounts should be

disclosed. All material types of revenue

transactions which relate to the custodial

responsibilities of the collecting entities should

be disclosed. The disclosure should be

comprehensive enough to include as a minimum: 

self-assessments by taxpayers (or importers);

assessments by the entity; penalties; interest;

cash collections applied to taxpayer accounts and

unapplied collections; refunds, refund offsets,

and drawbacks; abatements; accounts receivable

written off during the reporting period as

uncollectible; and provisions made to the

allowance for uncollectible amounts.

65.3. Cumulative cash collections and refunds

by tax year and type of tax. Cash collections and

refunds by tax year and type of tax should include

cash collections and cash refunds for the

reporting period and for sufficient prior periods

to illustrate (1) the historical timing of tax

collections and refunds, and (2) any material

trends in collection and refund patterns. 

Sufficient prior periods for each type of tax are

the periods which end when the statutory period

for collection ends. Collecting entities may

shorten these periods if evidence for prior tax

years indicates that a shorter period would

reflect at least 99 percent of the collectible

taxes.

66. If trust fund revenues are not recorded in

accordance with applicable law, both the

collecting and recipient entities should disclose

the reasons.

 

Supplementary Information

67. Entities that collect taxes and duties should

provide the following supplementary information

relating to their potential revenue and custodial
30 ACCOUNTING STANDARDS

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______________________________________________________

responsibilities:

67.1. The estimated realizable value, as of the

end of the reporting period, of compliance

assessments and, if reasonably estimable, preassessment work in process. The amounts furnished

should represent management's best estimate of

additional revenues likely to be collected from

compliance assessments and from pre-assessment

work in process, appropriately qualified as to

their reliability. A range of amounts may be

provided for pre-assessment work in process if

estimable. The change in the total(s) of 

compliance assessments and of pre-assessment work

in process during the reporting period also should

be provided.

67.2. If reasonably estimable, other claims for

refunds that are not yet accrued but are likely to

be paid when administrative actions are completed.

If estimated, unasserted claims for refunds should

be provided separately from claims filed and may

be expressed as a range of amounts. The amounts

furnished should represent management's best

estimates, appropriately qualified as to their

reliability. The change in the total of these

amounts during the reporting period also should be

provided.

67.3. The amount of assessments that the entity

still has statutory authority to collect at the

end of the period, but that have been written off

and thus excluded from accounts receivable.

67.4. If reasonably estimable, the amounts by

which trust funds may be over- or under-funded in

comparison with the requirements of law.

68. Recipient entities that are trust funds should

provide the same information as required for

collecting entities in para. 0.
NONEXCHANGE REVENUE 31

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Other Accompanying Information

69. The following guidance for other accompanying

 information is intended to provide flexibility to

enable preparers to present the most relevant

information with respect to these topics,

considering the needs and interests of users and

the availability of data.

69.1. A perspective on the income tax burden.

The IRS should provide a perspective on the income

tax burden. This could take the form of a summary

of the latest available information on the income

tax and on related income, deductions, exemptions,

and credits for individuals by income level and

for corporations by size of assets. The objective

is to show the tax burden borne by different

classes of individuals and corporations and how

that burden is affected by the tax rates,

deductions, credits, etc., provided by the tax

laws.

69.2. Available information on the size of the

tax gap. Collecting entities should provide any

relevant estimates of the annual tax gap that

become available as a result of federal government

surveys or studies. The tax gap is defined as

taxes or duties due from non-compliant taxpayers

or importers. Amounts reported should be

specifically defined, e.g., whether the tax gap

includes or excludes estimates of taxes due on

illegally earned revenue. Appropriate explanations

of the limited reliability of the estimates also

should be provided. Cross references should be

made to portions of the tax gap due from

identified non-compliant taxpayers which are shown

as supplementary information, i.e., compliance

assessments and pre-assessment work in process

(para. 0). 

69.3. Tax expenditures related to entity

programs. Information on tax expenditures that a

reporting entity considers relevant to the

performance of its programs may be presented, but

should be qualified and explained appropriately to
32 ACCOUNTING STANDARDS

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help the reader assess the possible impact of 

specific tax expenditures on the success of the

related programs.

69.4. Directed flows of resources related to

entity programs. Information on directed flows of

resources related to an entity's programs may be

presented, but if this information is presented

the estimated amounts should be accompanied by a

description of the basis for the estimates and

appropriate cautionary language about their

reliability. Information should also be

appropriately qualified and explained to help the

reader assess the possible impact on the success

of the programs.

OTHER FINANCING SOURCES
OTHER FINANCING SOURCES 33

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____

70. Financing sources, other than exchange and

nonexchange revenues, that provide inflows of

resources that increase results of operations

during the reporting period include appropriations

used, transfers of assets from other Government

entities, and financing imputed with respect to

any cost subsidies.8

 Financing outflows may result from transfers

of the reporting entity's assets to other Government entities or from

exchange revenues earned by the entity but required to be transferred to

the General Fund or another Government entity. Unexpended

appropriations are recognized separately in determining net position but

are not financing sources until used.

RECOGNITION AND MEASUREMENT OF OTHER

FINANCING SOURCES

Appropriations

71. Unexpended Appropriations. Appropriations,

until used, are not a financing source. They

should be recognized in capital as "unexpended

appropriations" (and among assets as "funds with

Treasury") when made available for apportionment,

even if a Treasury Warrant has not yet been

received, or the amount has not been fully

apportioned. Unexpended appropriations should be

reduced for appropriations used and adjusted for

other changes in budgetary resources, such as

rescissions and transfers. The net increase or

decrease in unexpended appropriations for the

period should be recognized as a change in net

position of the entity.
34 ACCOUNTING STANDARDS

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____

72. Appropriations Used. When used, appropriations

should be recognized as a financing source in

determining net results of operations.9

 Appropriations

are used in operations when goods and services are received or benefits

and grants are provided. Goods and services (including amounts

capitalized) are considered received when a liability is established.

Benefits are considered to be provided when the related liability is

established. Grants are considered to be provided when grantees meet the

requirements that allow them to use the grants.40

Financing Imputed for Cost Subsidies

73. Government entities often receive goods and

services from other Government entities without

reimbursing the providing entity for all the

related costs. In addition, Government entities

often incur costs, such as for pensions, that are

paid in total or in part by other entities. These

constitute subsidized costs to be recognized by

the receiving entity to the extent required by

other accounting standards. An imputed financing

source should be recognized equal to the imputed

cost. This offsets any effect of imputed cost on

net results of operations for the period.

Transfers of Assets

74. An intragovernmental transfer of cash or of

another capitalized asset without reimbursement

changes the resources available to both the

receiving entity and the transferring entity. The

receiving entity should recognize a transfer-in as

an additional financing source in its result of

operations for the period. Similarly, the

transferring entity should recognize the transferout as a decrease in its result of operations. The

value recorded should be the transferring entity's

book value of the asset. If the receiving entity

does not know the book value, the asset should be

recorded at its estimated fair value as of the

date of transfer.

 40FASAB plans to undertake a project on accounting for grants.
OTHER FINANCING SOURCES 35

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____

75. To the extent that a Government entity's

exchange revenue that is included in calculating

net cost of operations is required to be

transferred to the Treasury or another Government

entity, the amount should be recognized as a

transfer-out in determining the net result of

operations.10

PRIOR PERIOD ADJUSTMENTS

76. Prior period adjustments should be limited to corrections of errors and

accounting changes with retroactive effect, including those occasioned by

the adoption of new federal financial accounting standards, and should be

recognized and measured under applicable standards. Adjustments should

be recognized as a change in cumulative results of operations (rather than

as an element of net results of operations for the period). Prior period

financial statements should not be restated for prior period adjustments

recognized in the current period.

BUDGETARY INFORMATION

77. The budget is the primary financial planning and control tool of the

government. For this reason, and because of the importance of this

information to users of federal financial information, the following

material budgetary information should be presented by reporting entities

whose financing comes wholly or partially from the budget:

(a) total budgetary resources available to the reporting entity during

the period;

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

(c) outlays.

78. Recognition and measurement of budgetary resources should be based

on budget concepts and definitions contained in OMB Circulars A-11 and 

A-34. In addition, the reporting entity should provide this information for

each of its major budget accounts as supplementary information. Small

budget accounts may be aggregated.
36 ACCOUNTING STANDARDS

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79. The following information about the status of budgetary resources

should be disclosed.

(a) the amount of budgetary resources obligated for undelivered orders

at the end of the period;

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

(c) repayment requirements, financing sources for repayment, and

other terms of borrowing authority used;

(d) material adjustments during the reporting period to budgetary

resources available at the beginning of the year and an explanation

thereof;

(e) existence, purpose, and availability of permanent indefinite

appropriations;

(f) information about legal arrangements affecting the use of

unobligated balances of budget authority such as time limits,

purpose, and obligation limitations;

(g) explanations of any material differences between the information

required by paragraph 0 and the amounts described as "actual" in

the Budget of the United States Government;

(h) the amount, and an explanation that includes identification of

balance sheet components, when recognized unfunded liabilities do

not equal the total financing sources yet to be provided; and

(i) the amount of any capital infusion received during the reporting

period.
BUDGETARY RESOURCES 37

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80. Budgetary and financial accounting information are complementary,

but both the types of information and the timing of their recognition are

different, causing differences in the basis of accounting. To better

understand these differences, a reconciliation should explain the

relationship between budgetary resources obligated by the entity during the

period and the net cost of operations. It should reference the reported

"obligations incurred" and related adjustments as defined by OMB

Circular A-34. It also should include other financing sources not included

in "obligations incurred" such as imputed financing, transfers of assets,

and donations of assets not included in budget receipts. Further, it should

include decreases (increases) in receivables from the public related to

exchange revenue when only the cash amount is included in budgetary

resources. The total of these items comprises obligations and

nonbudgetary resources.

81. This total should then be adjusted by:

(a) Resources that do not fund net cost of operations (e.g., changes in

undelivered orders, appropriations received to pay for prior period

costs, capitalized assets),

(b) Costs included in net cost of operations that do not require

resources (e.g., depreciation and amortization expenses of assets

previously capitalized), and

(c) Financing sources yet to be provided (those becoming available in

future periods which will be used to finance costs recognized in

determining net cost for the present reporting period).

82. The adjustments should be presented and explained in appropriate

detail and in a manner that best clarifies the relationship between the

obligations basis used in the budget and the accrual basis used in financial

(proprietary) accounting.

ACCOUNTABILITY FOR DEDICATED COLLECTIONS
38 ACCOUNTING STANDARDS

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83. A reporting entity may be responsible for funds financed with

dedicated collections that are held for later use to accomplish the fund's

purpose. Some of these are held in a fiduciary capacity. Special

accountability is required for the sake of the taxpayers or other

contributors who make payments to the fund with the expectation that the

collections will be used for the purposes for which they were dedicated,

and for the sake of those who expect to benefit from the fund's future

expenditures. Such funds include all funds within the budget classified as

trust funds, those funds within the budget that are classified as "special

funds" but that are similar in nature to trust funds, and those funds within

the Federal universe (inside or outside the budget) that are fiduciary in

nature. Management should, therefore, identify those special funds that are

similar in nature to trust funds and those funds inside and outside the

budget that are fiduciary in nature. Identification of funds that are similar

in nature to trust funds is a judgmental matter; management is best

qualified to make this judgment.

84. Separate financial information about these dedicated collections should

be provided if they are material either to the reporting entity or to the

beneficiary or contributors. The separate information may be reported on

the face of the entity's general purpose financial statements, or the

information may be disclosed in the notes to the financial statements.

When not material to the reporting entity, this information may be

provided separately in special reports to the contributors and beneficiaries

(or their representatives) rather than separately in the reporting entity's

general purpose financial statements or notes thereto.

85. The following information, at a minimum, should be reported for

individual funds that account for dedicated collections.

(a) A description of each fund's purpose, how the administrative entity

accounts for and reports the fund, and its authority to use those collections.

(b) The sources of revenue or other financing for the period and an

explanation of the extent to which they are inflows of resources to the Government or the

result of intragovernmental flows.

(c) Condensed information about assets and liabilities showing
DEDICATED COLLECTIONS 39

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______________________________________________________

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

other liabilities, and fund balance.

(d) Condensed information on net cost and changes to fund balance

showing revenues by type (exchange/nonexchange), program expenses, other expenses, other

financing sources, and other changes in fund balance.

(e) Any revenues, other financing sources, or costs attributable to the

fund under accounting standards, but not legally allowable as credits or charges to the fund.

When the above information is provided separately in special reports, as

described in paragraph 0, the financial information required in (c) and (d)

above should be combined for all such funds and the information

described as "amounts for immaterial funds not presented separately in this

general purpose report."
40 ACCOUNTING STANDARDS

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86. The law may require the accounting for a fund to be done in a

particular way. The disclosures called for by item (e) are required if the

fund's recognition requirements, as determined by law, are contrary to

applicable accounting standards with respect to certain revenue, other

financing sources, or costs. For example, a trust fund may be required to

recognize revenue based on cash collected by the Government during the

reporting period rather than the accruals due the Government. In the case

of some funds, payments from the fund are also subject to legal

limitations. Although the accounting used within the fund itself should be

in accordance with the applicable legal requirements, the larger reporting

entity of which the fund is a component, the administrative entity, or the

next higher level of the Government (e.g., a department or the

governmentwide entity), should recognize the revenues, other financing

sources, or costs associated with but not legally allowable to the fund.11

87. Most dedicated collections are included in the

financial statements of the entity carrying out

the program and responsible for administration of

the fund. However, this may not be the case where

collections are outside the budget or are not

otherwise included in the reporting entity under

the concepts of Entity and Display. In either

case, the information is required to be disclosed.

If more than one reporting entity is responsible

for carrying out the program financed with the

dedicated collections, then the entity with the

largest share of the activity should be

responsible for reporting all revenues, other

financing sources, assets, liabilities, and costs

of the fund.
______________________________________________________

41

PART II: CONCEPTS FOR RECONCILING

 BUDGETARY AND FINANCIAL

ACCOUNTING

INTRODUCTION
42 ENTITY AND DISPLAY

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______________________________________________________

88. The Statement of Federal Financial Accounting

Concepts (SFFAC) No. 2, Entity and Display, was

issued to provide conceptual guidance as to what

would be encompassed by a federal entity's

financial report. It identifies the types of

financial information to be communicated to users

and suggests the types of information to be

included in an entity's report to help meet the

objectives of federal financial reporting. Among

other things, SFFAC No. 2 supports reporting both

budget information and operating performance

(i.e., proprietary) information to meet the needs

of users and the objectives of reporting. The

budget information focuses on the obligation and

outlay of financial resources to acquire or

provide goods and services as defined by budget

concepts. Operating performance information

focuses on the cost of resources used as defined

by accrual accounting standards.

89. Budgetary and financial accounting information

are complementary, but both the types of

information and the timing of their recognition is

necessarily different because of the difference in

focus. To better understand the differences and

make better use of the complementary information

provided, information needs to be provided to

reconcile the use of budgetary resources to

acquire or provide goods and services with the net

cost of using those goods and services. An

approach to doing this was explored in the

exposure draft, Accounting for Revenue and Other

Financing Sources, and received substantial

support from respondents. Therefore, Entity and

Display is being amended to include in its

concepts the need to communicate information about

the differences between the use of resources as

reported in the budget and in the net cost of

operations.

AMENDMENTS TO SFFAC No. 2, ENTITY AND DISPLAY

90. The following heading and two paragraphs

(numbered 0 and 0 in this document) are added to

the section of SFFAC No. 2 titled "Displaying

Financial Information."
CONCEPTS 43

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______________________________________________________

RECONCILIATION STATEMENT--BUDGETARY

AND FINANCIAL ACCOUNTING

91. Subobjective 1C of the budgetary integrity objective

states that information is needed to help the reader to

determine "how information on the use of budgetary resources

relates to information on the costs of program operations

and whether information on the status of budgetary resources

is consistent with other accounting information on assets

and liabilities." This objective arises because accrualbased expense measures used in financial statements differ

from the obligation-based measures used in the budgetary

reports.

92. To satisfy this objective, information is needed about

the differences between budgetary and financial (i.e.,

proprietary) accounting that arise as a result of the

different measures. This could be accomplished through a

Statement of Financing that reconciles the budgetary

resources obligated for a federal entity's programs and

operations to the net cost of operating that entity. The

data presented could be for the reporting entity as a whole,

for the major suborganization units, for major budget

accounts, or for aggregations of budget accounts, rather

than for each individual budget account of the entity.

93. The Statement of Financing is added to SFFAC

No. 2's suggested list of items included in the

section titled "Financial Reporting for an

Organizational Entity." In addition, a footnote

(referenced to the Statement of Financing) shall

be added stating:

OMB will provide guidance regarding details of the display

for the Statement of Financing, including whether it shall

be presented as a basic financial statement or as a schedule

in the notes to the basic financial statements.

94. The following heading and paragraphs (numbered

0 through 0 in this document) are added to the

section of SFFAC No. 2 titled "Recommended

Contents for the Recommended Displays." 

STATEMENT OF FINANCING

95. The purpose of the Statement of Financing is to explain

how budgetary resources obligated during the period relate

to the net cost of operations for that reporting entity.

This information should be presented in a way that clarifies

the relationship between the obligation basis of budgetary
44 ENTITY AND DISPLAY

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______________________________________________________

accounting and the accrual basis of financial (i.e.,

proprietary) accounting. By explaining this relationship

through a reconciliation, the statement provides information

necessary to understand how the budgetary (and some

nonbudgetary) resources finance the cost of operations and

affect the assets and liabilities of the reporting entity.

The appropriate elements for the Statement of Financing

would be as indicated in the following paragraphs. They

provide logical groupings of reconciling items that help the

reader move from obligations to net cost of operations.

96. Obligations incurred are amounts of new orders placed,

contracts awarded, services received, and other similar

transactions during the period that will require payments

during the same or a future period. A deduction is needed

for spending authority from offsetting collections and

recoveries of prior period obligations.

97. Nonbudgetary resources represent the net amount of

resources received by the entity that are not included in

budgetary resources. These items could include donations of

assets, transfers of assets from (to) other federal

entities, and financing imputed for cost subsidies. This

amount would also include decreases (increases) in

receivables related to revenue accrued from the public

because, while the cash collected for exchange revenue is a

budgetary resource, the accrual amount is not.

98. Resources that do not fund net cost of operations are

primarily (a) the change in amount of goods, services, and

benefits ordered but not yet received or provided, (b)

amounts provided in the current reporting period that fund

costs incurred in prior years, and (c) amounts incurred for

goods or services that have been capitalized on the balance

sheet.

99. Costs that do not require resources are most commonly

the result of allocating assets to expenses over more than

one reporting period (e.g., depreciation) and the write-down

of assets (due to revaluations).

100. Financing sources yet to be provided are the financing

amounts needed in a future period to cover cost incurred in

the current period.

101. The bottom line of this reconciliation would be the net

cost of operations.

102. The following example financial statement

format will be added to the appendices of SFFAC

No. 2:
CONCEPTS 45

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______________________________________________________

Entity and Display, Appendix 1-G

EXAMPLE FINANCIAL STATEMENT FORMATS

STATEMENT OF FINANCING

For the year ended September 30, 19X4

Obligations and Nonbudgetary Resources 

Obligations incurred $XXX 

Spending authority for offsetting collections

 and oth

Donations not in the budget X

Financing imputed for cost subsidies X

Transfers-in (out) X

Exchange revenue not in the budget (X)

Other X

 Obligations, as adjusted,

 and Non

Resources That Do Not Fund Net Cost of Operations

Change in amount of goods, services, and benefits

ordered but not yet received or provided (X)

Cost capitalized on the balance sheet (X)

Financing sources that fund costs of prior periods (X)

Other (X)

Costs That Do Not Require Resources

Depreciation and amortization X

Revaluation of assets and liabilities X

Other X

Financing Sources Yet to be Provided X

Net Cost of Operations $XXX
______________________________________________________

46

APPENDICES

APPENDIX A: BASIS FOR CONCLUSIONS

103. This appendix does not constitute

authoritative guidance for those who prepare and

audit general purpose federal financial reports.

It summarizes important considerations that FASAB

members considered as they deliberated on this

Statement. It includes reasons for accepting

certain approaches and rejecting others.

Individual Board members gave greater weight to

some factors than to others.

104. FASAB published the exposure draft Accounting

for Revenue and Other Financing Sources in July

1995. The exposure draft included 18 specific

questions for respondents and invited comments on

other topics. The Board received 42 letters of

comment from the following sources:

 SOURCE

USERS, ACADEMICS & OTH

AUDITORS

PREPARERS

TOTALS
BASIS FOR CONCLUSIONS 47

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__________________________________________________

____

105. FASAB also held a public hearing on the

exposure draft on September 20, 1995. One

individual (a professor of accounting),

representatives of four federal organizations that

prepare financial statements, and representatives

of one federal audit organization presented

comments and discussed the exposure draft with the

Board. Most of those who commented orally or in

writing supported most of the provisions of the

exposure draft. Most responses did suggest

widening the proposed disclosures for trust funds

to include other funds with similar special

accountability for dedicated collections. Also,

most respondents suggested retaining the customary

business practice of recognizing bad debt expense

for credit losses from exchange transactions. The

Board made these changes. (See paragraph 0 for

details on the change regarding credit losses. See

paragraphs 0 and following for details on the

change regarding disclosures for trust funds and

similar funds). Concurrently with the widening of

disclosures about funds, the Board required

disclosures and supplementary information about

any over- and under-funding of the trust funds

(see para. 0, 0 and 0). The Board also made other

less material changes in the exposure draft as a

result of considering the comments it received.

106. As a result of further information received

from IRS following the exposure draft, the Board

made terminology changes with respect to "preassessments," now referred to as "compliance

assessments," and "proposed assessments, now

called "pre-assessment work in process." More

importantly, the Board provided for the

possibility that amounts for pre-assessment work

in process might not be reasonably estimable (see

para. 0). As a result of further information from

Customs following the exposure draft, the Board

added a supplementary information requirement for

unasserted claims for refund (see para. 0. (These

include potential drawbacks that may approximate

20% of Customs reported revenue.)

107. After some deliberation, the Board also
48 APPENDIX A

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____

concluded that it would permit a fuller

application of accrual accounting for taxes and

duties than is required by the general rule (see

para. 0). This would apply in the interim period

between the issuance date of the Statement and any

reconsideration of the standard by the Board.

Coincident with extending the effective date of

the standard for one year beyond that proposed in

the exposure draft, and because of the importance

of accurate information, the Board decided to

require that material revenue-related transactions

should be accounted for under a double entry

accounting system (rather than estimated) and

changed the designation of this information from

supplementary to disclosure information (see para.

0 and 0).

108. Finally, the Board recognized that, under

certain circumstances, reporting entities may

appropriately report information about tax

expenditures and directed flows of resources that

are related to their programs. However, the

standard only permits this information to be

presented as other accompanying information if it

is properly qualified and explained (see para. 0

and 0).
BASIS FOR CONCLUSIONS 49

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____

EXCHANGE REVENUE

Special Nature of Government

Exchange Transactions

109. Revenue from exchange transactions plays a

different role in Government than in private

business. Most Government output is provided

to the public directly as the result of political

decisions rather than in exchange for revenue.

This is regardless of whether the output is the

provision of services, transfer payments

to individuals, or grants to state and local

governments. Likewise, most of the Government's

receipts are collected as a result of exercising

its power to compel tax payments rather than

earned by providing goods and services to the

public at a price.

110. Where Government goods and services are

provided in exchange for revenue, prices may be

set to cover cost. Sometimes they may be set in

the market as they would be set by a business

(such as auctioning the right to drill for oil on

Government land). However, law or policy sets many

prices below the amount that might be obtained in

an auction or other market transaction (such as

fees for grazing rights). In some of these cases,

prices may be set with little or no regard to the

related cost (such as fees to visit national

parks).

111. Exchange transactions also occur between

entities within the Government, sometimes

as stipulated by law and in other cases by mutual

agreement. These exchange transactions, also, are

often not conducted at fair market prices.

Services are often provided to a program free,

such as the litigation the Department of Justice

does for the Internal Revenue Service. Another

common example is a central computer used without

charge by several programs within an agency. Where

charges are imposed, the internal sales price or

reimbursement is not necessarily based on the full
50 APPENDIX A

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____

cost of providing the goods or services or on

competitive market equivalents.

112. Some exchange transactions within the

Government are carried out by intragovernmental

revolving funds. In many instances, these funds

have been established with the goal of recovering

their full cost by selling their output. This

would allow them to be self-sustaining from their

sales, including the maintenance of their capital,

without the need for additional appropriations.

Goods and services must be priced at full cost to

achieve this goal, but full cost is not always

charged. As a result, revolving funds have often

failed to be self-sustaining and have required

extra appropriations.13

Recognition: General Considerations

113. Matching revenue with cost. It is often said

that private sector accounting matches expense

with revenue to measure the net income of the

business. This provides a measure of effort

compared with accomplishment that cannot be used

for most government activities. Most government

activity either provides collective goods and

service (such as national defense and justice) or

redistributes income and wealth (as in benefit

payments and grants). Therefore, the Government's

output--its goods, services, transfers, and

grants--is usually not provided in exchange for

voluntary payments. In such cases, directly

measuring the value that the Government's activity

adds to society's welfare is difficult.

114. The Objectives of Federal Financial Reporting

focuses on cost in relationship to accomplishment

as the main objective in reporting an entity's

operating performance. This is because of the

fundamental importance of cost information. It is

important to program managers in operating their

activities efficiently and effectively. It is

equally important to Executive and Congressional

decision makers in making resource allocations.

Subobjectives 2A and 2B declare that:
BASIS FOR CONCLUSIONS 51

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__________________________________________________

____

Federal financial reporting should provide

information that helps the reader to determine 

...the costs of providing specific programs and

activities and the components of, and changes in,

these costs...[and] the efforts and

accomplishments associated with federal programs

and the changes over time and in relation to

costs.14

115. The Boardís explanation of the operating performance objective

defines more exactly what this means:
52 APPENDIX A

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____

...expenses can be matched against the provision

of services year by year. The resulting cost can

then be analyzed in relationship to a variety of

measures of the achievement of results.41

116. SFFAS 4, Managerial Cost Accounting Concepts and Standards,

discusses the need for Government accounting to emphasize cost as a way

to improve decision making and program management. It says that good

cost information can be used for: (1) budgeting and cost control, (2)

performance measurement, (3) determining reimbursements and setting

fees, (4) program evaluations, and (5) economic choice decisions (such as

whether to contract-out a project).42

117. To meet these goals, cost must be matched

with the provision of goods and services to the

public or other Government entities. To determine

the net cost of an exchange activity--i.e., the

part of the cost that is not offset by revenue

earned from the goods and services provided--the

related revenue must be matched with the cost.

 41Ibid., page 38, para. 124. For more extended discussion, see ibid., chapter

8. As explained there, difficulties arise in practice for many reasons, e.g.,

the specific measures that are appropriate and feasible will vary from program

to program, outcomes are influenced by external factors as well as actions of

government, focusing attention on selected measures can have unintended--and

sometimes undesired--consequences, etc.

 42SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for the

Federal Government, pp. 11-14.
BASIS FOR CONCLUSIONS 53

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____

118. Matching revenue with cost in a uniform

manner is essential in evaluating agency

performance and setting price. Cost and revenue

must pertain to the same output in order to

estimate the extent to which the revenue covers

the cost. Therefore, costs should be matched

against the provision of goods and services with

revenue matched against those costs and thus with

revenue also matched against the same provision of

goods and services. When this is done, the gross

and net cost of an entity can be compared with the

related outputs and outcomes to evaluate its

operating performance, pricing policy, and

economic decisions. Similarly, when this is done,

the net cost to the taxpayer can be estimated for

the entity’s related outputs provided to the

public.

119. The standards in this Statement therefore use

the accrual basis for recognizing exchange revenue

and provide for matching exchange revenue against

related cost as closely as practicable. The

standards specify how the matching is to be

achieved for different types of transactions.

120. Assigning revenue to the costs of earning it.

Determining the net cost of producing outputs,

providing programs, or carrying out missions will

often be more important than determining the net

cost for the reporting entity as a whole. A

reporting entity may have several missions carried

out by different suborganizations, all of them

having component programs and outputs. For each of

these, both gross and net cost are important in

evaluating performance and managing cost.

Furthermore, either an entity as a whole or its

suborganizations and programs may have material

costs that are not incurred to earn revenue, as

well as material costs that are incurred for that

purpose. Therefore, the revenue-earning and

nonrevenue-earning components need to be

separately evaluated in order to assess the net

cost of particular activities. Additionally,

various components may earn revenue but cover

costs to different degrees.
54 APPENDIX A

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____

121. In all these cases, the net cost of the

reporting entity as a whole does not show the

extent to which earned revenue covers the cost of

providing a particular output. This can only be

calculated for the entity’s components.

Determining the net cost for components is

therefore essential to achieve the goals of the

standards in this Statement: to match exchange

revenue with the gross cost of outputs and to

offset exchange revenue against that related gross

cost.

122. To be most useful, therefore, the gross costs

and net cost of operations should be calculated by

suborganization, program, or output.

Suborganizations are generally equivalent to

responsibility segments as defined by the

standards on managerial cost accounting.43 Each

responsibility segment must be able to assign full

costs to the measurable outputs of its programs.44

As a result, users of general purpose federal

financial reports will be able to relate the net

costs of a program to program outputs and

outcomes.

123. Preparers should decide the exact

classification of suborganizations and programs

based on the nature of the entity, the missions

and outputs for its GPRA strategic and annual

performance plans, the concepts in Entity and

Display, Federal accounting standards, and OMB's

bulletin prescribing the form and content of

agency financial statements. Exchange revenue

should be assigned to the costs of outputs unless

it is not reasonably possible to do so. If that

cannot be done, exchange revenue should be

assigned to the costs of programs, or, if that

also is not reasonably possible, to the costs of

suborganizations. Assigning exchange revenue to

the components of an entity in this way is more

 43

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

para. 75 and footnote 14.

 44

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

Federal Government, pp. 36-42 and 51-59.
BASIS FOR CONCLUSIONS 55

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____

effective for performance evaluation, price

setting, and other purposes than assigning it to

the reporting entity as a whole.

124. The gross cost, the exchange revenue, and the

difference or net cost should be determined for

each such component. The net cost and gross cost

for each component could be used for such purposes

as comparison with the outputs and outcomes of

that component in order to assess the efficiency

and effectiveness with which resources were used

to achieve results.45

125. Good information on gross cost and net cost,

determined and analyzed in this manner, is

essential to the success of the Government

Performance and Results Act of 1993 (GPRA)46 in

relating costs to accomplishments. GPRA requires

agencies to set performance goals for program

activity and establish performance indicators to

measure outputs and outcomes of the program

activity. Performance measurement under GPRA is to

begin in FY 1999, and pilot projects started in FY

1994. Under the OMB plan to carry out GPRA,

performance reports will show the results of what

was actually accomplished (outputs and outcomes)

with the resources used. The net cost of

operations (as well as gross cost) should be a

fundamental measure of these resources.

 45As noted previously, the specific measures of program economy, efficiency,

and effectiveness that are feasible and appropriate will vary among programs.

 46Public Law 103-62.
56 APPENDIX A

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126. Uncollectible amounts. When realization of

the full amount of recognized revenue is not

probable, the standards require that a separate

provision be made if the uncollectible amount can

be reasonably estimated. The Board defines

"probable" as "more likely than not." This

definition, and measurability, are the criteria

for recognizing losses due to uncollectible

amounts of accounts receivable under Federal

accounting standards.47

127. Government entities have an extraordinary

responsibility to be accountable--to the

President, the Congress, and the public. Because

of this, it is appropriate to show separately (1)

the full revenue due under their established

pricing arrangements, and (2) the amount of this

revenue that they estimate will not be realized.

128. The Exposure Draft proposed that the entire

provision for estimated uncollectible amounts be

recognized as a revenue adjustment. It reasoned

that, if some of the potential revenue is not

likely to be received, this should be viewed as

the failure to realize revenue or the absence of

an inflow of resources. Some of the respondents

also viewed the entire uncollectible amount as a

shortfall in revenue, but a majority believed that

credit losses were a cost of doing business.

Businesses extend credit in order to finance their

customers, and any losses in this line of activity

are another kind of expense. Such treatment is

required for direct loans and loan guarantees that

follow the credit reform accounting standards of

SFFAS No. 2. A particularly telling argument, made

by some, was that credit losses should be a

component of full cost when establishing prices

for the sale of goods and services. This would be

facilitated by recognizing credit losses as a bad

debt expense rather than a revenue adjustment. For

these reasons, the Board concluded that credit

losses should be recognized as an expense.

 47

SFFAS No. 1, Accounting for Selected Assets and Liabilities, pp. 12 and 33-

34, paragraphs 44-45 and 124-30.
BASIS FOR CONCLUSIONS 57

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____

129. Uncollectible amounts due to other reasons--

such as returns, allowances, and price

redeterminations--would, however, be recognized as

revenue adjustments. This treatment is parallel

with the treatment in this Statement of taxes and

other nonexchange revenue, where refunds,

adjustments, and abatements are deducted from

gross revenue rather than recognized as an

expense. Under current practice and private sector

standards, these uncollectible amounts are

commonly treated as revenue adjustments but are

not always separately disclosed.

130. The bad debt expense and the revenue

adjustment each needs to be separately shown in

order for the entity to be accountable for the

different reasons why revenue is not collectible.

131. The allowance for bad debts should be based

on an analysis of both individual accounts and

groups of accounts, as appropriate under the

circumstances. This principle is explained in the

standard for accounts receivable.48 For

intragovernmental transactions, allowances for bad

debts may not always be needed, because full

payment can often be assumed.

Recognition: Special Cases

132. The general principles underlying exchange

revenue recognition are supplemented for special

cases.

133. Gains and losses. Gains and losses are

recognized rather than revenues and expenses in

order to differentiate unusual or nonrecurring

transactions for evaluating an entity’s

performance or setting its prices. Material gains

and losses are expected to be infrequent. They

would normally be of a type that management would

want to be considered in appraisals of its

operations.

 48Ibid., pp. 12-13 and 34-35.
58 APPENDIX A

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____

134. Direct loans and loan guarantees. Standards

for direct loans and loan guarantees were

established in SFFAS No. 2, Accounting for Direct

Loans and Loan Guarantees. The basic principle is

to recognize the subsidy cost of the direct loan

or loan guarantee as an expense when the loan is

made. Subsidy cost is inherently a net concept:

the present value of estimated cash outflows less

the present value of estimated cash inflows over

the life of the loan. This requires that the

present value of estimated fees be recognized as a

deduction in calculating subsidy cost, and that

the present value of estimated defaults be

included in calculating the subsidy cost. The

standards for direct loans and loan guarantees

that follow credit reform accounting thus differ

from the standards in the present Statement in

three respects: revenue is deducted in calculating

the subsidy cost, bad debts are included in

calculating the subsidy cost, and both revenue and

bad debts are measured as present values.

135. Determining the subsidy cost in this way is a

method of matching revenue with cost, and it is

also a method of matching the subsidy cost with

the provision of the subsidy to the public. SFFAS

No. 2 is therefore consistent with the objectives

of this Statement for exchange revenue, and the

standards in this Statement do not apply to the

recognition and measurement of revenue and credit

losses for direct loans and loan guarantees that

follow credit reform accounting. This exception

includes pre-1992 direct loans and loan guarantees

that have been restated on a present value basis.

The guidance for classifying transactions in

Appendix B reflects the provisions of SFFAS No. 2.
BASIS FOR CONCLUSIONS 59

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136. Exchange revenue collected for others. Many

entities that collect exchange revenue keep that

revenue for their own use. Revolving funds keep

the revenue they earn. By their nature, they are

expected to finance at least a material part of

their cost by selling goods and services in a

continuing cycle of business-type activity. Other

collecting entities may also keep the revenue they

earn. Sometimes, however, the exchange revenue is

transferred to the General Fund or to other

entities in whole or in part. For example, the

Southeastern and Southwestern Power

Administrations transfer the revenue they collect

from the public to the General Fund of the

Treasury; similarly the Western Area Power

Administration, while retaining some of the

revenue that it collects, transfers the rest to

the General Fund and various special funds

designated by law.

137. As a general rule, exchange revenue

transferred to others must be offset against the

collecting entity's gross cost to determine its

net cost of operations. Exchange revenue reduces

the net cost of operations incurred by the entity

in producing outputs, regardless of whether the

entity keeps the exchange revenue for its own use

or transfers it to another operating entity or the

General Fund. Likewise, exchange revenue reduces

the net cost of the entity’s operations to the

taxpayer regardless of its disposition. Therefore,

all exchange revenue related to the cost of

operations must be deducted from gross cost to

determine the net cost of operations for the

entity.

138. Any exchange revenue that is transferred to

others, however, does not affect the collecting

entity's net position. Therefore, as required by

the standards for other financing sources, such

exchange revenue is recognized as a transfer-out

in calculating the entity's operating results.

139. The only exception to the general rule occurs

when the entity recognizes virtually no cost in
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earning the exchange revenue, as explained in the

following section.

140. Exchange revenue unrelated to recognized

cost. In exceptional cases, an entity may

recognize virtually no costs in connection with

earning exchange revenue that it collects. A major

example for many years has been the Minerals

Management Service (MMS) of the Department of the

Interior. It manages energy and other mineral

resources on the Outer Continental Shelf (OCS) and

collects rents, royalties, and bonuses due the

Government and Indian tribes from minerals

produced on the OCS and other Federal and Indian

lands. The rents, royalties, and bonuses are

exchange revenues, earned by sales in the market.

If the value of natural resources were recognized

as an asset by MMS, then depletion could be

recognized as a cost according to the units of

production method as minerals were extracted.15 The

revenue from rents, royalties, and bonuses could then be matched against

MMSís gross cost, including depletion and minor other costs, to determine

its net cost of operations.

141. MMS does not recognize a depletion cost for various reasons,

including the fact that under present accounting standards the value of

natural resources is not recognized as an asset. As a result, this exchange

revenue cannot be matched against the economic cost of operations and

bears little relationship to the recognized cost of MMS. Therefore, it

should not be subtracted from MMS's gross cost in determining its net cost

of operations. If it were subtracted, the relationship between MMSís net

cost of operations and its measures of performance would be distorted.

The net cost of operations of the Department of the Interior would likewise

be distorted.

142. MMS collects this revenue acting as an agent for the recipients

designated by law: the Treasury, certain entities within the Government to

which amounts are earmarked, the states, and Indian tribes and allottees.

Therefore, MMS should account for the exchange revenue as a custodial

activity, which is an amount collected for others, in the same way as the

Internal Revenue Service accounts for the nonexchange revenue that it

collects. Because the revenue collected by MMS is exchange revenue, it
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should be recognized and measured under the exchange revenue standards

when the rents, royalties, and bonuses are due pursuant to the contractual

agreements.

143. The rents, royalties, and bonuses transferred to Treasury for the

General Fund or to other Government reporting entities should be

recognized similarly by these recipient entities. The revenue is exchange

revenue and should be recognized and measured under the exchange

revenue standards. However, neither the Government as a whole nor the

other recipient entities recognize the natural resources as an asset and

depletion as a cost. Therefore, the revenue should not offset the cost of

operations for the U.S. Government as a whole or for these entities. As in

the case of MMS, offsetting cost by this revenue would distort the

relationship between the net cost of operations and the measures of the

performance of these entities. The exchange revenue should instead be a

financing source in determining the operating results and change in net

position.

144. The Board is addressing the accounting for natural resources in a

separate project. If it concludes that the value of mineral rights should be

recognized as an asset and depletion as a cost, it would be appropriate to

recognize the exchange revenue from rents, royalties, and bonuses in

determining the net cost of operations.

145. Although MMS is the most prominent case of an entity collecting

exchange revenue for which it recognizes virtually no cost, there can be

other instances. The Federal Communications Commission collects

exchange revenue from the auction of the radio spectrum. Such revenue

should be accounted for in the same way as the revenue collected by

MMS.

146. One respondent to the Exposure Draft asked about the meaning of the

term ìvirtually no costs.î If an entity sells scrap metal or fully depreciated

equipment, the exchange revenue or gain is not related to any cost that is

recognized at the time of sale. These assets are recorded on the balance

sheet as having no value at the time of sale, so the gross proceeds from the

sale are not offset by any remaining book value in calculating the entityís

gain. However, unlike the auctions of petroleum rights or the radio

spectrum, costs were recognized in past periods for the purchase of the
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materials or the use of the equipment. Therefore, offsetting the entityís

cost by its gains from sale provides a more accurate measure of its net cost

of operations over time for comparison with measures of its performance

over time. The standard has been clarified to say that the term ìvirtually no

costsî means that virtually no costs are recognized during past periods as

well as during the current period.

147. It is also possible that an entityís cost accounting may not assign any

costs to byproducts of its major goods or services. However, cost is

recognized for the activities that produced both the major products and the

byproducts. All revenue earned in connection with these activities needs to

be offset against the cost of these activities in determining the entityís net

cost for the purpose of making comparisons with its measures of

performance.

148. Specific goods (or services) made to order compared with goods

made for inventory. When an entity produces goods for sale, revenue can

be matched with cost in either of two ways: (1) revenue and expense can

be recognized as costs are incurred, or (2) the expenditures can be

recorded in inventory, with the revenue and expense recognized

subsequently when the goods are delivered to the customer.

149. For specific goods made to order under a contract (or specific

services produced to order), the standard requires that revenue be

recognized as goods and services are acquired to fulfill the contract. More

precisely, the standard requires that revenue, as determined by the contract

price, be recognized in proportion to the estimated total cost as goods and

services are acquired to fulfill the contract. This means that the

percentage-of-completion method must be used and the amounts of

revenue must be calculated based on the costs of the goods and services

acquired to date to fulfill the contract in relationship to the estimated total

cost under the contract. If the time period and estimated total cost are

uncertain, revenue recognition should be deferred until a firm basis can be

established to assign cost. Goods and services made (or produced) to order

include such projects as building construction and ship repair, where costs

are incurred over a period of time to provide a particular good or service to

a specific customer according to characteristics determined by contract.

They do not include the sale of standard services, such as electricity, under

a contract.
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150. Recognizing revenue and cost in this way provides an up-to-date

measure of the entityís operations in providing goods and services. The

revenue and cost are generated by the entityís activities during the current

reporting period, unlike alternative recognition standards. In particular,

this is unlike the completed contract method, under which the revenue and

cost recognized in a period may have been generated substantially during

previous periods. Because the revenue and cost recognized in the reporting

period are up-to-date, they can more readily be compared with each other

and with current outputs in evaluating the entityís performance and pricing

policy in that period.

151. In some instances, however, there may be no material difference

between the percentage-of-completion method and the completed contract

method. This is especially likely for small or short-term contracts. In such

instances, the completed contract method could be followed.

152. The standard also requires that when a loss on a contract is probable

(more likely than not) and measurable (reasonably estimable), it should be

recognized over the life of the contract in proportion to the estimated total

cost instead of immediately. This will come about by continuing to

recognize revenue in proportion to estimated total cost and by continuing

to recognize costs as goods and services are acquired to fulfill the contract.

This requirement is an exception to SFFAS No. 5, Accounting for

Liabilities of the Federal Government, under which a loss on a contract is

recognized at the time when expected costs exceed expected revenue. The

Board believes this exception is appropriate, because it provides a more

accurate measure of the entity's net cost of operations during each

reporting period than if the entire estimated loss were recognized in the

single period when it was concluded that the loss was probable and

measurable. The entire estimated loss, however, would be disclosed.

153. The standard is different when an entity produces goods to be kept

"on the shelf" until ordered. It requires that manufacturing costs be

charged to inventory and that revenue not be recognized until the goods

are delivered to the customer. Costs and revenue are recognized later than

when goods and services are made to order, because there is less assurance

of revenue at the time when the costs are incurred. The term "delivery to

the customerî includes instances in which the sale has taken place and the
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goods have been segregated or set aside for delivery.

154. Classification of interest on intragovernmental balances. Large

amounts of interest are paid and received on intragovernmental balances.

Most trust funds and some special funds and revolving funds have

invested in special Treasury securities on which they earn interest due

from the Treasury. Treasury and the Federal Financing Bank have made

loans to a number of funds, on which those funds incur interest expense

and on which interest is due to the Treasury or the Bank. The recorded

interest revenue should be classified as exchange or nonexchange

depending on the predominant source of funds upon which the interest

payment is based. Other intragovernmental balances bear no interest. The

Board is considering a project that might result in imputing interest where

the balances bear no interest or the interest does not reflect the cost of

borrowing by the Treasury.

155. The interest on these intragovernmental liabilities has the form of an

exchange transaction, but often it does not also have the substance of an

exchange. The standards in this Statement and the guidance in Appendix

B, ìGuidance on the Classification of Transactions,î differentiate among

inflows of resources according to whether or not they should be deducted

from an entityís gross cost in determining its net cost of operations. This

differentiation depends fundamentally on whether the inflow of resources

is related to costs that the entity incurs and recognizes in order to produce

outputs and the inflow of resources.
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156. When applied to the receipt of interest by a Government account from

the Treasury, this criterion implies that interest should be classified in the

same way as the predominant source of revenue to the fund: as exchange

revenue, if the predominant source is exchange revenue; and as

nonexchange revenue, if the predominant source is nonexchange revenue.

If the invested funds come from exchange revenue, the interest on these

funds derives from exchange revenue and the costs incurred to earn that

revenue; if the invested funds come from nonexchange revenue, the

interest on these funds is based ultimately on the governmentís power to

compel payment rather than on a market transaction. With certain

exceptions, this means that interest received by trust funds and special

funds should be classified as nonexchange revenue, whereas interest

received by revolving funds and trust revolving funds should be classified

as exchange revenue. This is explained below, together with the

exceptions and certain analogous transactions.

157. Invested balances of trust funds (and special funds) predominantly

derive from earmarked taxes, which are nonexchange transactions with the

public (e.g., employment taxes and gasoline taxes). To a lesser extent they

derive from other financing sources (e.g., the General Fund payment

appropriated to the Supplementary Medical Insurance fund). The balances

are not earned in exchange transactions by the entity's operations. Most

fundamentally, they are not produced by operations in which the entity

incurs any costs. Therefore, the interest on Treasury securities should not

be deducted from the gross costs of the trust fund (or special fund) in

determining its net cost of operations. As a result, that interest should not

be classified as an exchange revenue. It should instead have the same

classification as the predominant source of the invested balances, which

for most trust funds (and special funds) is nonexchange revenue.

158. The invested balances of revolving funds, on the other hand,

predominantly derive from the funds' business-type operations. Revolving

funds need capital in their operations and may invest some of that capital

in Treasury securities. Since the holding of invested balances and the sale

of goods and services are both integral to the fundsí operations, the

interest on their securities is related to the fundsí costs of operations just as

is the revenue earned from selling goods and services. Furthermore, the

source of the invested balances is predominantly revenue previously

earned from the sales of goods and services, for which the funds incurred
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costs of operations when that revenue was earned. The interest they

receive should therefore be classified in the same way as their revenue

earned from selling goods and services and should likewise be deducted

from gross cost in determining the net cost of operations. For this reason,

interest earned by revolving funds should be classified as exchange

revenue.

159. A few revolving funds are classified by law as trust funds. Trust

revolving funds need capital in their operations, just like other revolving

funds, the source of which is predominantly the revenue they have earned.

When some of their capital is invested in Treasury securities, the interest is

related to their cost of operations in the same way as the revenue earned

from selling services; and the source is predominantly revenue previously

earned from the sales of services, for which they incurred costs of

operations. Their interest should therefore be classified in the same way as

for other revolving funds, which is exchange revenue.

160. The three previous paragraphs explain the rationale for the normal

classification of interest received by trust funds, special funds, revolving

funds, and trust revolving funds. However, in some cases, the source of

balances for trust funds and special funds may not be predominantly

nonexchange revenue, and the source of balances for revolving funds and

trust revolving funds may not be predominantly exchange revenue. For

example, the main source of balances for two major trust funds, the Civil

Service Retirement and Disability Fund and the Military Retirement Fund,

consists of exchange revenue and other financing sources. In such

exceptional cases, interest should be classified in the same way as the

predominant source of balances rather than according to the normal rule.

161. Agencies may receive authority to borrow from Treasury (or the

Federal Financing Bank), and they pay interest on their borrowings. The

interest is a cost to the agency and an inflow of resources to the Treasury.

The Treasury may be deemed to have borrowed from the public to finance

the outlays for which the agency borrowed, and thus to have incurred a

corresponding interest cost of its own. The interest received by Treasury

from the agency is therefore related to Treasuryís cost of borrowing from

the public and should be classified as an exchange revenue.

162. When debt securities are retired before maturity, there may be a
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difference between the reacquisition price and the net carrying value of the

extinguished debt. This difference is a gain or loss that should be classified

in the same category as the interest on the extinguished debt.

Measurement

163. Exchange transactions with the public

ordinarily take place at prices set by the agency

or the Congress, such as electricity rates, book

prices, and interest on delinquent taxes.

Sometimes the market sets the price, as with the

rents and royalties from companies that bid to

explore and produce oil and gas on the Outer

Continental Shelf. In either case the actual

prices represent the inflow of resources to the

entity and, therefore, are the appropriate basis

for measuring revenue.

164. Except for prices set by law, OMB Circular

No. A-25 and other regulations generally provide

that user charges for transactions with the public

should be set at full cost or market price.16

However, compliance with these regulations is partial, and potential

revenue is not realized in many cases. To help report users understand how

the entity's operations are financed, disclosures are needed about (1)

differences in pricing policy from the guidance in OMB's circular on user

charges and (2) transactions where prices are set by law or executive order

and are not based on full cost or market pricing. Other accompanying

information is needed about the revenue forgone in these transactions but

only if a reasonable estimate is practicable. The other accompanying

information should explain whether, and to what extent, the quantity

demanded was assumed to change as a result of the change in price.

165. Circular A-25 defines "full cost" as ìall direct and indirect costs to

any part of the Federal Government of providing a good, resource, or

service.î49 This generic definition and the

accompanying examples in the circular are

generally consistent with the definition of “full

cost” in the managerial cost accounting standards50

 49Circular A-25, section 6(d)(1). 50

SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for the
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and the recognition and measurement of many

particular expenses in other Federal accounting

standards.51 However, unlike those standards,

Circular A-25 also includes as part of the

definition of full cost an annual rate of return

on land, structures, equipment, and other capital

resources (unless they are rented);52 and it

includes depreciation not only on structures and

equipment that are classified as general PP&E

(property, plant, and equipment), which is

required by Federal accounting standards, but also

on structures and equipment classified as

stewardship PP&E, which in a few cases may be used

in connection with the production of goods or

services for sale.53 Aside from these differences,

the cost accounting and other accounting standards

should enable the Circular A-25 definition of full

cost to be measured more accurately than has been

possible heretofore.54

 Federal Government, pp. 38-44. 51For example, the standards for expenses related to credit are stated in

SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees; and numerous

standards for expense are stated in SFFAS No. 5, Accounting for Liabilities of

the Federal Government. 52The Board currently has a project to consider whether the rate of return on

capital should be recognized as a cost in financial accounting statements.

 53The extent of differences between Circular A-25 and Federal accounting

standards can be found by comparing Circular A-25, section 6(d)(1)(b), with

SFFAS No. 6, Accounting for Property, Plant, and Equipment. 54Circular A-25 says that “full cost shall be determined or estimated from the

best available records of the agency, and new cost accounting systems need not

be established solely for this purpose.” See section 6(d)(1)(e). The cost

accounting and other standards should improve agency records and specify the

nature of costs more precisely and comprehensively.
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166. The appropriate basis for measuring revenue

from intragovernmental exchange transactions is

likewise the actual price (or reimbursement) that

the seller receives from the buyer. Accounting

systems should be able to provide the information

needed to set the reimbursement at full cost, but

often the full cost is not charged. In these

cases, the amount of the reimbursement is an

incomplete measure of the economic value of the

transaction. When one entity receives goods or

services from another without paying all related

costs, the net operating cost of the receiving

entity is understated if it does not recognize (by

imputation) the additional cost paid by the

providing entity.

167. Other Federal financial accounting standards

require such inter-entity cost subsidies to be

recognized by the receiving entity in certain

cases.55 This Statement, in the section on "Other

Financing Sources," provides standards to

recognize other financing sources that are imputed

to offset whatever subsidy costs those other

standards require to be recognized and imputed.

Accounting for the imputed cost of goods and

services provided by one Government entity to

another requires the exercise of judgment, based

on the specific circumstances of each case.

Therefore, whether costs are imputed or not, the

providing entity should disclose an explanation of

the amount and reason for material disparities

between the billing (if any) and the full cost.

 55The general principles for recognizing imputed cost are stated in SFFAS No.

4, Managerial Cost Accounting Concepts and Standards for the Federal

Government, pp. 43-50. The accounting is similar to the accounting for employee

pensions and retirement health benefits, where the entity administering the

plan does not provide goods or services to the reporting entity but does pay

some or all of the cost. See SFFAS No. 5, Accounting for Liabilities of the

Federal Government, pp. 20-36 and 56-63.
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NONEXCHANGE REVENUE

Inherent Limitations

168. Inherent limitations on the ability to

perform accrual accounting for nonexchange

revenue. Accrual accounting recognizes the

financial effects of transactions and events when

they occur, whether or not cash changes hands at

that time. As it does with respect to exchange

revenue, full accrual accounting for nonexchange

revenue would enhance financial planning, control,

and accountability. Full accrual accounting could

 provide important data with respect to future

cash flows and tax policy and could improve the

ability to evaluate the performance of the

collecting entities and the exercise of their

custodial responsibilities.

169. Unfortunately, the degree of accrual

accounting that is practicable to perform for

taxes and duties is limited by difficulties in

ascertaining the amount of revenue arising from

the underlying events and by the assessment

processes used to manage the collecting functions.

Taxpayers may not ascertain taxable income until

after the underlying events. They may not file

returns on their due dates, and due dates are

generally set by the administrative processes

after the occurrence of the underlying event.

Also, the extent of non-compliance is a function

of the laws establishing these entities and the

expectations by the Congress and the

Administration about how diligently the collecting

entities should perform their collection

functions. These inherent limitations on the

ability to perform accrual accounting were

considered by the Board.

Practical Limitations

170. Practical limitations were also considered by

the Board. The Board's standards for accrual

accounting require that accruals mirror the
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established assessment processes of the collecting

entities. As such, they do not require, for

example, the accrual of taxes or duties which are

likely to be assessed under established processes,

but only those that are actually assessed under

the defined processes of the collecting entities.

Having accounting mirror the established process

by which collecting entities interact with

taxpayers has value, though arguably accounting

for revenue should not be so limited.

171. At the time the Board began deliberations on

this standard, accounting systems necessary to

determine even the limited revenue accruals that

are now required for taxes did not exist. The

changes in systems required by this standard are

limited to those necessary to mirror the

established assessment processes. The Board

understands that the Internal Revenue Service is

attempting to improve its collection function and

the related management information systems.

Because such systems must also provide accounting

information, the Board decided not to impose

accounting standards at this time that might

conflict with systems changes needed to improve

the efficiency and effectiveness of the collection

process or go beyond the minimum changes

considered necessary to enable the collecting

entities to properly discharge their

responsibilities.

Modified Cash Basis for Taxes and Duties

172. As a result of both the inherent limitations

and the practical limitations accepted by the

Board, the accrual standard, as it applies to

taxes and duties, might be best characterized as a

"modified cash" basis of accounting. These

limitations on full accrual accounting required

the amendment of the accounting standard on

recognition of receivables as provided in

paragraph 41 of SFFAS No. 1, which said, in

effect, that taxes should be recognized as

receivables when they are due from taxpayers.
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173. In the future, the general standard for

accrual as it applies to taxes and duties could be

tightened to produce a fuller application of the

accrual concept. For fines, penalties and

donations, no accountable event precedes the

recognition point established by this standard.

Therefore, the general standard for recognition as

it applies to these sources of revenue results in

full accrual accounting for them.

Cash Basis Information Needed 

174. Cash basis information on taxes and duties

continues to be very important because it is

widely used for planning purposes at present and

is a component of the budget. It is also available

soon after the close of the reporting period and

is needed to comply with laws that require cashbasis accounting in particular instances.

Unfortunately, accurate cash-basis information to

meet certain legal requirements and other

information needs is not presently available. This

standard accepts the importance of both types of

information and requires entities that collect

taxes and duties to provide both types of

information.
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Potential Changes

175. Requirements for disclosures, supplementary

information, and other accompanying information

compensate to some extent for the modified cash

basis of accounting for taxes and duties being

approved at this time. In the future, the Board

plans to evaluate users' satisfaction with reports

prepared on the basis of the standard and to give

consideration to improvements being made in IRS

processes and related management information

systems. Based on this evaluation and

consideration, it may propose to extend the degree

of application of accrual accounting in several

years time. In the interim, the Board will permit

changes in accounting made at the initiative of a

collecting entity if the changes represent a

fuller application of accrual accounting than that

prescribed by the standard. For example,

compliance assessments for taxes or unasserted

claims for drawbacks may be recognized rather than

shown as supplementary information if the amounts

are both probable and reasonably estimable.

Entities Responsible for Measuring and

Recognizing Revenue

176. Collecting entities, e.g., the Internal

Revenue Service and the Customs Service, collect

cash and administer the assessment processes that

provide the basis for adjusting those collections

to an accrual basis. They, therefore, have

measurement and reporting responsibilities for

these inflows of resources. They also, at the

direction of the Treasury Department, account for

the disposition of these inflows to recipient

entities. The Treasury determines the amounts

payable to the recipient entities and, in

conjunction with the collecting entities, makes

the actual cash payments, or issues special

Treasury securities, as necessary, to fund the

amounts transferred. Because the recipient

entities are designated by law to receive the

inflows and make ultimate disposition of the

funds, they, rather than the collecting entities,
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must recognize the inflows as revenues in order to

provide financial statements which are meaningful

to users.

Possible Over- and Under-funding of Trust

Funds

177. The standard provides that trust funds should

recognize the amounts transferred (and the change

during the period of the amounts to be

transferred) from the collecting entity as revenue

despite the fact that those transfers may not be

made on the basis of applicable law. In the case

of excise taxes, transferring more than the

amounts actually collected may cause these trust

funds to be over-funded. The Board is advised by

its legal counsel that this is a violation of law

by the IRS. Such violations cannot be remedied

unless, and until, the IRS adopts methods to

collect the needed data from taxpayers. In the

case of Social Security, weaknesses in the data

collection methods may cause these trust funds to

be under-funded. The Board is advised by its legal

counsel that so long as IRS and SSA act on the

basis of the best available information there is

no violation of law. In considering these two

situations, the Board concluded that it should not

set an accounting standard with which the

recipient entities could not comply and,

therefore, accepted the present basis of making

transfers to them as the basis of recognition of

revenue by them. However, the Board believes that

both the collecting entity and the recipient

entity have the responsibility to disclose any

violation of law and to provide, as supplementary

information, if estimable, amounts by which the

trust funds may be over- or under-funded.
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Conceptual Criteria for Accrual and

Limitations on Their Application

178. As mentioned earlier, this standard

recognizes both inherent and certain practical

limitations on the application of the accrual

concept to taxes and duties. The conceptual

criteria for full accrual accounting for taxes and

duties are the underlying taxable events, a

precondition for the government to assert a demand

for payment, and a demand date itself. A demand

date conceivably could be as early as a date

contemporaneous with the underlying events.

179. The underlying taxable events. Conceptually,

certain Government taxes and duties could be

accrued based on particular events, and certain

others on events that take place over a period.

Excise taxes and customs duties are examples of

taxes based on particular events (sales or

importing goods). Individual and corporation

income taxes are examples of taxes based on events

that take place over a period (e.g., income earned

over the course of a year). Indeed, some taxpayers

who prepare accrual-basis financial statements for

themselves normally accrue taxes due to the

government based on the underlying events.

180. Data about underlying events is supplied to

collecting entities through returns required to be

filed by taxpayers. Unfortunately, non-compliance

with return requirements is estimated to account

for more than $100 billion annually in uncollected

taxes. Only a relatively small portion of this

amount is ultimately collected through the

enforcement processes of the collecting entities.

Estimates of this tax gap made from time-to-time

have provided some information to guide

enforcement efforts with respect to particular

groups of tax payers, but do not provide

sufficient information to establish claims against

individual non-compliant taxpayers or defined

groups of non-compliant taxpayers. Therefore, the

underlying-event criterion for recognition can

only be applied to the extent that taxpayers file
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tax returns17 or the collecting entities determine through their

enforcement processes that specific non-compliant taxpayers owe or might

owe taxes.

181. The demand date. To obtain taxes and duties, the government must

demand the payment. The criterion for revenue recognition under this

concept could be that the demand date for taxes and duties is the same as

the date the underlying taxable event occurs or over the period that the

underlying taxable event occurs, e.g., as taxable income is earned by the

taxpayer. However, demand dates presently defined by established

assessment processes are the dates payments are required to be received by

the collecting entities. They include dates for withholding and estimated

tax payment as well as the final due dates for tax returns. These dates

provide administrative convenience for taxpayers and generally lag the

underlying events. Because of the emphasis on cash, those payments made

in advance of due dates for payment are not deferred for accounting

purposes. Past-due taxes as a result of taxpayer failure to comply with

established payment dates are not accrued until the collecting entities

receive late tax returns from such taxpayers, or until the collecting entities

determine through their enforcement processes that the Government has a

legally enforceable claim. Only then are accounting accruals triggered

under this standard. Those dates lag the underlying events by more than

necessary to determine an accrual. The aforementioned limitations on the

application of the demand criterion, which are arguably practical ones,

further constrain the conceptual basis for accrual.

Limitations on the Scope of Accounting

182. Although relevant to the cost of the

Government from an economic perspective, to

Government fiscal policies, and to performance

evaluation of Government reporting entities, the

Board concluded not to require information on "tax

expenditures" or expenditures that federal laws

require others to make, i.e., "directed flows of

resources." There were a variety of opinions among

Board members on the need for this information and

different reasons given for not requiring some

form of disclosure, but all Board members agreed

that relevant amounts are not normally measured

under present accounting concepts. However,
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information may be provided under certain

circumstances, but outside the financial

statements themselves.

Some Benefits of this Standard

183. Some of the benefits of the accrual

requirements of this standard:

! Reporting the "accrual adjustment" as a

separately identified adjustment of taxes and

duties collected. This preserves needed cashbasis information.

! Improving the data for both accrual- and

cash-basis information. The standard

accomplishes this because all transactions

for which accounting could be performed under

the standard will need to be processed. Some

of these have not been accounted for in past

financial reports because of delays in

processing transactions at the end of the

year.

! Accrual of assessments. Accounts receivable

would be accrued based on returns filed or

enforcement actions taken through the end of

the period where such returns or actions have

not yet resulted in cash receipts. A

statistical estimate of the effect of this

standard, as of September 30, 1993, disclosed

approximately $29 billion of net accounts

receivable after deducting an allowance for

uncollectible amounts of $42 billion.

Heretofore, net accounts receivable were

thought to be in excess of $100 billion. The

accounting requirements for accrual should

further improve the accuracy of the amount of

accounts receivable.

! Recognition of refunds payable will provide

some indication of the lag in making refunds

to taxpayers.
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Some Things this Standard Does Not Accomplish

184. Some of the things this standard does not

accomplish:

! Recognizing events after the close of the

reporting period, such as cash received on

later due dates, even if the receipt results

from the underlying taxable events of the

period. For example, unemployment taxes for

the September 30 quarter are due in October

and will be recognized in October if received

on the October due date.

! Deferring recognition of revenue for tax

payments that may be received before the

demand or underlying event. For example,

voluntary over-withholding by taxpayers will

be treated as revenue.

! Recognizing compliance assessments and preassessment work in process or refunds before

completion of the assessment processes. As a

result, variations in the speed and

effectiveness of the assessment processes

will affect the amount accrued at the end of

a fiscal period. Another result is that

accounting information relative to

measurement of the performance of the

compliance functions by the collecting

entities will not be available.

! Recognizing the tax gap, i.e., taxes (which

include duties) due from unidentified noncompliant taxpayers and importers. As a

result, this large potential source of

revenue will not receive as much attention as

it would if it could be made a formal part of

the collecting entity's accountability.
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! Accounting for "tax expenditures," which may

contribute to the programs of reporting

entities, or "directed flows of resources,"

which may substitute for program costs which

might otherwise need to be incurred by

reporting entities. These amounts are very

large in relation to the "on budget" program

amounts which are measured by accounting. As

a result, these materially important

performance and cost related data may not be

fully considered.

Accounting Systems Changes

185. The IRS accounting system at present does not

account for revenue transactions on an accrual

basis and, therefore, does not establish accounts

receivable, refunds payable, and the allowance for

uncollectible accounts on the basis of the flow of

all the various events and transactions affecting

these balances. Instead of being an accrual

accounting system, all assessments are recorded in

an operating file not designed to do accounting

and not operated under a double entry concept

where the revenue effects of assessments are

determined. That operating file, for example,

includes multiple assessments made for the same

tax claim so that the IRS can pursue all potential

sources for the payment of that claim. As a result

of the present limitations of this operating file,

to determine the accounts receivable at any point

in time, the IRS must make a statistical

projection of a representative sample of valid tax

claims. The potential error in the estimates made

to date have been material, i.e., in excess of $5

billion.

186. This standard contemplates that systems and

accounting records will be put in place to permit

the accurate determination and disclosure of all

revenue and cash transactions which are reflected

in the formal assessment process. By treating

information relating to compliance assessments,

pre-assessment work in process, and refunds before

the completion of the assessment process as
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supplementary information, this standard

contemplates that statistical estimates, rather

than transaction-driven accounting systems and

auditable subsidiary accounting records for

individual taxpayers, may be used to provide the

dollar values for these important revenue-related

items.

Disclosures, Supplementary Information, and

Other Accompanying Information

187. This additional information will help users

of federal financial reports in understanding the

following:

187.1. Components of the revenue stream. By disclosing the dollar amounts of the

material types of transactions reflected in

the required "modified cash basis" revenue

stream (from initial recognition by the

established assessment process through cash

collections and refunds), important

accountability information for oversight and

performance evaluation will be provided about

the tax collection function. Providing as

much accurate and detailed information as

possible about the annual flow of taxpayer

funds (now over $1 trillion) is important

because the administration of the collection

function is to some degree discretionary.18

187.2. Cash flows. By disclosing cash flows by type of tax and tax

year, accurate historical information will be provided about the

source and timing of the annual flow. Material trends in collection

and refund patterns may be apparent from the comparative financial

statements presented and by reference to financial statements of

prior periods. Both the ability to accurately forecast future flows and

to understand the speed and effectiveness of the collection function

should be enhanced by this information. Also, an indication of the

degree of potentially correctable "error" from the use of a modified

cash basis of accounting should be provided by this cumulative cash

flow data.
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187.3. Other future-oriented information. Disclosures

about categories of accounts receivable provide additional

information about collection problems and timing of future

cash flows. At IRS, different categories of receivables vary

considerably in terms of ultimate collectability and timing of

collection. 

187.4. Other potentially reportable revenue. Supplementary

information on compliance assessments and pre-assessment work in

process and on refunds before the completion of the assessment

processes provides indications of the amounts of potentially

accruable revenue. If such amounts were ultimately accrued, the

"accrual adjustment" on a modified cash basis would be converted

to an "accrual adjustment" that came closer to an estimate of the

effect of full accrual accounting. Some or all of these potential

accounts receivable and payable may become measurable by the

collecting entities, and the Board may require their accrual when the

collecting entities' management systems are improved.

187.5. Sharing of the income tax burden. Other

accompanying information about the tax gap and IRS

historical information showing income, deductions, and

credits by income level (assets for corporations) responds to

those concerned with the extent of non-compliance with the

laws and how the income tax burden is shared among

compliant taxpayers.

187.6. Administration of the tax laws by the collecting

agencies. Disclosures, supplementary information, and other

accompanying information provide a more complete picture of

how the collecting agencies are functioning. This information

may be relevant to allocation of resources to collecting

agencies, to their performance appraisal, and to their

oversight.

o Supplementary information on compliance assessments and

pre-assessment work in process and on refunds before the

completion of the assessment process shows the backlog in

processing assessments and refunds.
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o The disclosure and supplementary information with respect

to over- and under-funding of the trust funds identifies

administrative problems to be overcome.

o Disclosure of abatement of assessed taxes with respect to

non-compliant taxpayers ($37 billion by the IRS in 1993)

provides some information about the administrative

discretion exercised by collecting entities. However, no

information is required about reductions of possibly material

amounts in compliance assessments and pre-assessment

work in process as a result of the resolution of examinations,

investigations, protests, and litigation. Therefore, accounting

reports will not include data about these processes, which

involve an even higher degree of administrative discretion

than the formal assessment process. Nor will they provide

data, e.g., compliance assessments made during the

reporting period, that might be related to the cost of

compliance, e.g., salaries of revenue agents and related

administrative costs, that might be relevant to evaluating the

performance of the collecting entities' compliance function.
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Tax Gap

188. The exposure draft proposed that available

information about the nonexchange revenue gap,

including the tax gap, be provided as "other

accompanying information." This information would

not have been subject to audit, and the auditor's

responsibility would have been limited to

reporting if it was materially misleading in light

of the information gathered during the audit.

Substantially all of the revenue gap is the tax

gap because duties are technically a type of tax,

so the Board decided to deal only with the tax

gap. The sources of non-compliance that cause the

tax gap include unreported income, overstated

exemptions, and overstated deductions. The largest

component of the tax gap relates to income taxes.

IRS originally estimated the gross income tax gap

at $94 billion for tax year 1987. The net income

tax gap for 1987, which is the gross income tax

gap less the estimated amount that has been or

will be collected through IRS's enforcement

efforts, is now estimated at $72 billion. Thus,

with respect to 1987, later collections from noncompliant taxpayers are about $22 billion.

Estimates of the income tax gap cover only taxes

on legally earned income of individuals and

corporations--not taxes owed from illegal sources

of income such as drugs and prostitution.19

189. Estimates of the tax gap by IRS have been made from time to time.

Congress recently concluded not to authorize a current study56 and

there is no present plan to conduct another one.

On the other hand, Customs makes estimates of

amounts due from unknown non-compliant importers.

The Board concluded, therefore, that the standard

should require only that any estimates by the

Government of the tax gap be presented when they

were relevant, i.e., provided reasonably current

information is available.

 56The Tax Compliance Measurement Program (TCMP) planned for 1996.
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190. Some respondents to the exposure draft

believed that tax gap information is important,

but others believed it is too imprecise to be a

required disclosure. The Board considered

establishing a new category of information

"Required Supplementary Stewardship Information"

(RSSI) for the "unidentified persons or entities"

portion of the tax gap. This concept is also being

considered for application to certain "Stewardship

Information." The Board concluded that for the

time being this standard should say that available

information about the tax gap should be provided

as other accompanying information. In addition to

the tax gap information requirements (see para.

0), other accompanying information is required or

permitted under certain circumstances with respect

to (a) the income tax burden (see para. 0), (b)

tax expenditures (see para. 0), (c) directed flows

of resources (see para. 0), and (d) revenue

forgone for exchange transactions (see para. 0).

191. The Board intends to review the requirements

in this standard to provide other accompanying

information when it considers standards for the

Management Discussion and Analysis (MD&A). The

Board may decide to modify the information

requirements when it considers the degree to which

this information should be subject to some sort of

audit scrutiny. Auditing standards for the MD&A

have not been established by any auditing standard

setters, including the Comptroller General, who

establishes standards for auditors who audit

federal organizations, programs, and activities.

It is expected that audit standards for an MD&A

will be considered by the Comptroller General's

Advisory Council and standards may be set later by

the Comptroller General. Particular audit

requirements for MD&A may be set by agreement

between OMB and GAO if consistent with any such

standards then existing. When the Board's project

on MD&A is considered, OMB and GAO plan to give

consideration to the auditing requirements for

MD&A and to the concept of RSSI.

Tax Expenditures
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192. Tax expenditures are estimates of the revenue

forgone because of preferential provisions of the

tax structure. They are due to special exclusions,

exemptions, deductions, credits, deferrals, and

tax rates that depart from a "baseline." These

exceptions are generally intended to achieve

public policy objectives by providing benefits to

qualifying individuals or entities or by

encouraging particular activities. They also may

be intended to improve tax equity or offset

imperfections in other parts of the tax structure.

Tax expenditures are not revenue. They are not

inflows of resources to the reporting entity.

193. The following are some examples of tax

expenditures (with estimates from the Treasury

Department of the revenue forgone in FY 1995):

o the exclusion from gross income of the

housing and meals provided military personnel

($2.0 billion);

o tax credits for expenditures to preserve and

restore historic structures ($0.1 billion)

and to produce "alternative" fuels ($1.0

billion); 

o exclusion from gross income of employee

compensation in the form of health insurance

premiums and other medical care

($59.4 billion); and

o deductions for mortgage interest

($48.1 billion) and state and local property

taxes ($15.3 billion) on owner-occupied

homes.

194. The Board considered a proposal to require

each reporting entity to provide supplementary

information on tax expenditures related to its

missions. The amounts reported would have been the

Treasury Department's estimates that are published

in the President's budget.
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195. Those who supported that proposal believe

that this information is relevant to evaluating

the performance of Government programs that have

related tax expenditures. Some of these tax

expenditures are very closely tied to program

operations. Others are less closely tied to an

agency's operating activities but still relate to

its mission. For example, the preferential

treatment of owner-occupied homes can be related

to HUD's mission to promote good housing for the

nation.

196. Furthermore, policy makers may compare

changes in tax expenditures with changes in direct

budgetary outlays. They did so, for example, in

1983 and 1993 when they increased the taxation of

Social Security benefits but alternatively could

have reduced the cost-of-living adjustment. In

ways such as these, the reporting on the costs and

accomplishments of an entity is incomplete unless

it includes the tax expenditures related to its

missions.

197. The Board decided not to require

supplementary information on tax expenditures in

component entity financial statements for several

reasons. The definition of the baseline for

comparison is in part a matter of values and

judgment. In some cases the association with

particular programs is not sufficiently clear.

Furthermore, the information is available

elsewhere now. However, the Board agreed to permit

reporting entities to present, as other

accompanying information, information on tax

expenditures that the reporting entity considers

relevant to its programs, if suitable explanations

and qualifications are provided.

Directed Flows of Resources

198. The Board considered a proposal to require

each entity to provide supplementary estimates of

the material annual expense to nonfederal entities

of existing federal laws and regulations

associated with its programs. The requirement
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would have been limited to regulations that

establish standards for the characteristics of

products or for the methods of production, or that

mandate expenditures by state and local

governments. These estimates would not necessarily

have included nonpecuniary costs, although

nonpecuniary costs might have been included to the

extent identifiable. Each entity also would have

provided any appropriate explanations about

availability of data and limitations on the

reliability of the estimates.

199. Advocates of the proposal believe that the

Government pursues some of its goals by requiring

states, local governments, and private entities to

spend funds for specified public purposes. For

example, the Government may require states to

extend the coverage of Medicaid, communities to

have water treatment plants that meet Government

safety standards, firms to minimize their workers'

exposure to asbestos, and automobile manufacturers

to install air bags. When the regulations apply to

state and local governments, they are generally

called "unfunded mandates." 

200. The costs and financing of federal

regulations do not flow through the Government,

but their effects are similar to the effects of

direct federal expenditures and revenue.

Fundamentally, both regulation and federal

expenditure allocate resources to the purposes

specified by the Government. The cost of

regulation includes regulations imposed in the

past as well as newly issued regulations.

Furthermore, expenditure required by regulation

may be an alternative means of achieving the same

public policy goals as direct federal expenditure

or other methods. For example, Medicaid coverage

may be extended with or without more federal

grants.

201. Advocates of this requirement believe that

financial reports that omit important financial

effects of Governmental action do not fairly

present the results of the Government's
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operations. Such reports fail to achieve the

objectives of federal financial reporting. They

believe that the efforts and accomplishments with

which an agency pursues its goals can be properly

assessed only if the financial reports include all

material information. This means that the reports

should bring together information about the net

cost of operations, the tax expenditures, and the

directed flows of resources that are intended to

achieve the same or similar missions.

202. The Board decided not to require

supplementary information on directed flows for

several reasons. Much of this information is not

available now and will not be available to

preparers of financial reports without added

expense. In some cases the estimates would be very

imprecise. Finally, most Board members believe

that the scope of Government financial reporting

should not extend to flows of financial resources

 that are not inflows to, or outflows from,

federal Government reporting entities. However,

the Board agreed to permit reporting entities to

present, as other accompanying information,

information on directed flows of resources that

the reporting entity considers relevant to its

programs, if suitable explanations and

qualifications are provided.
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OTHER FINANCING SOURCES AND

BUDGETARY RESOURCES

General Principles

203. The standards for other financing sources and

budgetary resources should satisfy several of the

objectives of financial reporting such as: (1)

explaining the relationship of budgetary resources

obligated to the net cost of operations, (2)

showing how budgetary resources were used and the

status of budgetary resources at the end of the

period, and (3) indicating the effect on the net

results of operations of the entity of all the

financing sources used to finance the net cost of

operations. However, financing from a financial

accounting (proprietary) perspective is different

than the budgetary accounting perspective.

204. The budget is the primary financial planning

and control tool of the Government. Its

objectives, such as planning resource allocation,

authorizing and controlling obligations, planning

cash disbursements, and raising revenue, differ

from those of financial reporting where the focus

is on net cost of the entity's programs and

activities and stewardship of its assets and

liabilities. Differing objectives are responsible

for some but not all of the many differences in

these two financial management tools. Differences

in standards for measuring and reporting budgetary

and financial information, coupled with unreliable

data, have caused financial statements to be

under-utilized by Government managers, the budget

community, and others who might benefit from

financial information.
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Reducing Differences

205. The problem of unreliable data is being

addressed through financial statement audits that

will include both proprietary and budgetary

information and improvements in financial

management systems. These federal accounting

standards reduce unnecessary differences between

the information reported in these two tools of

financial management and require reconciliations

and data to explain necessary differences. This

should increase the utility of the financial

planning and control information provided by the

flow statements in general purpose financial

reports and enhance the usefulness of the other

accountability information provided, e.g., the

Balance Sheet. This should occur because those who

focus on the budget will better understand the

financial statements and find them to be reliable

and useful reports.

206. The new recognition and measurement standards

for financial accounting adopt budgetary flow

concepts for appropriations and provide consistent

flow standards for nonbudgetary resources. As

explained earlier, standards for recognition of

nonexchange revenue reported by Government

entities reflect legal requirements. These changes

make the reporting on financing for entity net

costs more consistent among entities and more

comparable to the budget.

207. However, differences inherent in the

different objectives of the budget and the

financial statements must remain. The obligation

basis for the budget differs from the costsincurred basis for the financial statements.

This difference must continue in order for both

types of information to serve their purposes.

Some budgetary resources are used to invest in

assets and therefore are not reflected in

operating costs. Also, an entity may incur costs

that were covered by previously provided budgetary

resources (e.g., depreciation), costs not yet

covered by budgetary resources (e.g., accrued
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annual leave), or costs covered by budgetary

resources of other entities (e.g., some pension

costs). Continuing these differences in the

accounting reports is essential if financial

statements are to report cost information that can

be related to entities' outputs and if the

statements are to report other information on the

resources over which the entities are accountable.

These remaining differences need to be explained

in the financial statements to increase the

utility of the financial statements.

The Budgetary Process and Its

Linkage to Accounting

208. The budget controls obligations and thus

ultimately controls expenditures by Government

entities. In this sense, it is about their

outflows of resources. Conversely, the budget

makes inflows of resources available to component

entities to finance expenditures. The inflows are

reported in the financial statements as revenues

and other financing sources (e.g.,

appropriations).

209. The budgetary process provides a component

entity with budgetary resources through

appropriations acts. Budget authority may be

provided in the form of appropriations, borrowing

authority, contract authority, or spending

authority from offsetting collections. An

appropriation may make funds available from the

General Fund, special funds, or trust funds--

including amounts received from earmarked taxes--

or may authorize the spending of offsetting

collections credited to expenditure accounts.

Budgetary resources also include unobligated

balances remaining from prior reporting periods

and a number of adjustments (e.g., recoveries of

prior year obligations). Execution of the budget

includes the obligation of budgetary resources and

the outlays to liquidate the obligations.
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210. Borrowing authority is sometimes used instead

of appropriations to incur obligations and make

payments to liquidate them out of borrowed money.

However, borrowing money under this authority does

not change the net position of the entity. The

liability created by the borrowing is recorded

along with the related asset (the cash borrowed).

Repayment of the liability later will normally

require the use of an offsetting collection or an

appropriation. Assets acquired as a result of

borrowing may be later amortized or written off

and become part of an entity's costs. When this

occurs, or in the unusual event that the borrowing

finances expenses rather than assets, the entity's

net position will be reduced.

211. Contract authority is not a reportable

financing source because it only allows agencies

to incur obligations in advance of receiving funds

to pay for any resulting liabilities. The funds to

liquidate any resulting liabilities will come from

an appropriation or offsetting collections. For

financial statement purposes, a financing source

is recognized in accordance with the appropriate

accounting standards for the type of financing

received to liquidate the liability. Under past

practice the financing was recognized at the time

liabilities were incurred, but under the new

standard the financing will not be recognized

until liquidating appropriations are made

available, which may be in the same reporting

period as the liability is incurred or a later

period.
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212. Appropriations, including permanent

indefinite appropriations, are the most widely

used form of budget authority. When obligated by

orders for, or receipt or provision of, goods,

services, or benefits, they are reflected as

obligations incurred.20 When used, appropriations are accounted

for as an inflow of resources (i.e., an other financing source) in calculating

net results of operations for the reporting period.

213. From the budgetary perspective, appropriations include dedicated tax

receipts, such as Social Security taxes and Highway Trust Fund excise

taxes. From a proprietary perspective, on the other hand, unexpended

appropriations do not include dedicated tax receipts, because these receipts

are accounted for as nonexchange revenue. Therefore, appropriations used

do not include dedicated tax receipts, thus avoiding double counting of

these amounts as financing sources.

214. The accounting treatment for recognizing "appropriations used" as a

financing source parallels the budgetary accounting for expended

appropriations. Expended appropriations are recognized when goods and

services ordered have been delivered, when benefits are payable to

recipients, or when funds available under a grant agreement are payable,

and there is an available appropriation to pay these amounts. Under this

standard, this is also the time when "appropriations used" is recognized as

a financing source in the proprietary accounts.

215. Thus, at the time a liability is established which will be paid by an

available appropriation, appropriations are considered used. Liabilities

should be established in accordance with SFFAS No. 5. Under that

standard, a liability can be established in several ways, and the type of

transaction that has occurred governs when a liability has occurred. For

example, grants can be provided under different transactions. Some can be

provided without any required exchange of service with the federal

government, while others may require specific activities to occur before

the funds are available.
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216. Providing funds from an appropriation does not necessarily cause the

recognition of a financing source if that payment is an advance. For

example, an entity may advance funds to a grantee under the grant

agreement. This should not cause recognition of a financing source. The

recognition of appropriations used would not occur until the grantee meets

the requirements that allow it to use the funds in accordance with the grant

agreement.

217. The focus on net cost rather than on matching financing with

expenses as incurred provided an opportunity to simplify the accounting

for appropriations and to eliminate one of the differences between

financial and budgetary accounting. Reporting entities will no longer have

to defer recognition of appropriations used nor accrue appropriations

before they become available.

o Recognition was previously deferred for appropriations used to

finance capitalized transactions, such as the purchase of a fixed asset

or the making of a loan under pre-credit reform programs which

have not converted their accounts to a present value basis. The use

of financing was previously recognized at the same time and rate

that depreciation of the asset's cost was recognized as an expense or

that bad debts expense was recognized on pre-credit reform

receivables which had not been converted to present values.

o Accrual of appropriations as amounts receivable was sometimes

allowed for costs incurred but not funded until after the period the

costs were incurred, such as subsidy reestimates under the Credit

Reform Act. Reestimates of subsidy cost for credit programs are

made at or after the end of a period for which the reestimate applies

and for which an expense is recognized, but the permanent

indefinite authority is not available until the following period. When

a financing accrual was not used for unfunded expenses, the

unfunded expenses were removed from cumulative results of

operations and reported separately in net position as future funding

requirements.
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218. These changes eliminate reporting invested capital and future

financing sources in equity. These two equity accounts did not provide

accurate information because invested capital was never expected to be

returned and future financing requirements did not cover all future

financing needed but only that amount which had been recognized as

expenses.

219. An appropriation may provide an agency with the authority to

obligate and expend earmarked receipts to which it is legally entitled and

its offsetting collections. Most of these inflows of resources are classified

and accounted for as either exchange or nonexchange revenue in accord

with the accounting standards previously discussed. However, the

relationship is not exact between these revenues and related new budget

authority. For example, some offsetting collections are neither a revenue

nor a financing source. They only change the form of a resource already

reported on the Balance Sheet (e.g., funds received from the sale of an

asset at book value). Some offsetting collections are credited to receipt

accounts instead of expenditure accounts and cannot be obligated without

specific appropriation. Some of these revenues are precluded from

obligation in a fiscal year by a provision of law, such as a benefit formula

that determines obligations, or by a limit on the amount of obligations that

can be incurred. Amounts precluded from obligation are not counted as

budget authority in that year.

220. By recognizing nonbudgetary resources, e.g., imputed financing and

transfers, the financial statements of the entity will show how its recorded

costs were financed by the budgetary resources of other entities as well as

its own.

(a) "Imputed financing" sources are reported to offset budgeted costs of

another entity that applicable accounting standards impute to the

reporting entity.57 The imputing process recognizes

these costs in the net cost of operations of

the responsible entity. By reflecting

"imputed financing" in the changes in net

position, the net position of the responsible

entity is not affected and there is no double

 57Imputed financing sources may be reported to recognize imputed costs that

have not yet been budgeted for other entities, such as for pensions and

retirement health care.
96 APPENDIX A

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counting.

(b) "Transfers-in" and "Transfers-out" are

necessary to show transfers of assets or

revenue from one Government entity to

another. In the case of assets, the

transferor's budget reflected the original

expenditure for the asset, but the budget

normally does not reflect the subsequent

transfer of the asset. The transfer changes

the entity's financial position at the time

of transfer but not its net cost of

operations. Therefore, it is recognized in

determining the net results of operations for

the reporting period but not net cost.

221. In the case of earned revenue, the budget may

require the earned revenue inflow related to the

entity's costs to be paid to the General Fund or

another entity. Reporting the transfer-out of such

revenue as a reduction in net results of

operations lets the responsible entity properly

report its earnings in net cost of operations

without increasing its net position.

222. Donations are not included as receipts in the

budget, except for cash and near-cash items.

However, some other kinds of donations are also

recognized as revenue. Such revenues are permanent

differences between the budget and the financial

statements. Donation revenue will increase net

results of operations under these standards. Under

the standard, accounting for donations is

consistent with current practice in the private

sector where contributions are recognized as

revenue.

223. Costs that are not yet covered by budgetary

resources are "permanent" differences until

Congress acts to finance them in the budget or

until permanent budget authority becomes

available. Under the new standards, financing yet

to be provided for recorded costs will not be

accrued. Accordingly, it will not increase

cumulative results of operations.
BASIS FOR CONCLUSIONS 97

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Implications of the term "Net Results of

Operations"

224. Some of those who commented on the exposure

draft expressed concern that some readers might

infer that the amount of "net results of

operations" reported on the new Statement of

Changes in Net Position was a relevant performance

measure. Some financial statement users might draw

such an inference because, in the private sector,

the term "net results of operations" is synonymous

with net income and net income is the "bottom

line" performance measure. Similarly, the

statement of operations used by federal reporting

entities prior to implementation of SFFAS No. 7

focused on a similar bottom line, net results of

operations. This was the result of showing the

flow of all operating activities on a single

statement. For most governmental entities,

however, no single bottom line can accurately

measure performance, and "net results of

operations" normally provides little information

on either the costs or the benefits of an entity's

operations.

225. The new reporting model, illustrated in

Entity and Display, focuses on measuring costs and

reporting on performance. Both gross and net cost

are key financial performance measures that can be

related to outputs and outcomes of the entity's

programs and activities.

DEDICATED COLLECTIONS

226. The exposure draft proposed disclosure

requirements for trust funds that were included

within the reporting entity's financial statements

in total and for material individual fund. The

information was proposed to provide users a basis

for understanding these funds and for holding the

Government accountable for the use and disposition

of earmarked collections. Based on comments

received, this standard changes what was proposed
98 APPENDIX A

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as follows.

226.1. The proposed standard did not cover

funds administered by a federal entity in a

fiduciary relationship with beneficiaries that

were not included in the entity's financial

statement. In addition, it did not cover other

funds which are of the same nature as many trust

funds. The standard now requires disclosures for

these funds also.

226.2. The requirement for a total for all

funds was modified. If the fund is not material to

the reporting entity, disclosure may be made in a

special report to the contributors and

beneficiaries (or their representatives) and only

disclosure of the total of these funds is

required.

227. User needs. Funds that account for dedicated

collections are of great interest to users of

federal financial statements. First and foremost

are the contributors and beneficiaries to which

the Government needs to be accountable for the

receipt and disposition of earmarked collections

and for the balances that remain available to pay

beneficiaries in the future or serve other

purposes determined by law. Other users are

interested in the financing of other government

operations with these fund balances.

228. External users of federal financial reports

sometimes misunderstand the relationship of these

funds, especially trust funds, to the Government.

Very few Government trust funds are held "in

trust" in a fiduciary relationship as is

customarily the meaning of this term outside the

Government. Also, some of the trust funds

currently spend less than the receipts they

collect each year. Most of the cash surplus that

arises when receipts are greater than outlays is

invested in Treasury securities until the amounts

are needed for the trust fund to use in accordance

with benefit formulas or other provisions of the

law.
BASIS FOR CONCLUSIONS 99

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229. The Treasury uses these additional receipts

to meet the cash needs of general operations, thus

reducing the need to borrow from the public, raise

taxes, or reduce spending. In the consolidated

financial statements of the Government, the

investments in Treasury securities held by trust

funds and other fund entities and the

corresponding debt owed by the Treasury to these

funds cancel out. They are eliminated from the

amounts reported in the consolidated Balance Sheet

but footnote disclosure of these amounts normally

has been included.

230. Funds covered by the standard. As pointed out

by respondents, trust funds are not the only type

of fund that collects dedicated moneys. However,

the exposure draft did not specifically delineate

which funds might be included in the wider scope.

The Board decided to limit these disclosures to

funds where there was a need to show 

accountability to contributors and expected

beneficiaries. Therefore, the funds that are

covered by this standard are all trust funds, all

special funds that are similar to trust funds, and

all fiduciary funds whether or not in the budget.

231. The federal government does not use a

consistent fund designation for these types of

collections. Funds classified by law as trust

funds are established by specific legislation to

carry out activities stipulated by law and

frequently are financed by taxes. While the

Government's use of the term "trust funds"

ordinarily differs from use of the term in the

private sector, a few trust funds within the

federal universe have the stringent fiduciary

characteristics similar to those of trust funds in

the private sector. Furthermore, some funds within

the budget are classified as special funds and are

similar in nature to non-fiduciary trust funds

within the budget. Providing precise criteria for

which non-trust funds are covered by this

requirement is difficult. The Board realized that

it will not always be easy for management to
100 APPENDIX A

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identify accountability expectations of

contributors and beneficiaries.

232. On the other hand, no special accountability

of a fund is needed for the sake of those who make

voluntary payments in contemporaneous exchange for

goods or services. Once goods and services have

been rendered for the payment made, the purchaser

generally does not expect the fund to provide

additional accountability. For this reason the

special reporting requirements do not apply to

revolving funds or other funds financed similarly.

However, special accountability may exist for a

revolving fund that collects receipts for goods

and services that are expected to be provided at a

later period, such as long-term insurance

contracts, and preparers are encouraged to provide

the needed information in such cases.

233. Funds not part of the reporting entity's

financial statements. In most cases, the

requirement will apply to a fund that is included

in the financial statements of the reporting

entity. In the case of most fiduciaries, however,

the fund is administered by a reporting entity but

is not part of the reporting entity itself or

included in its own general purpose financial

statements. The disclosure requirement applies to

such funds as well.

234. Special reports. Since the primary purpose of

this requirement is accountability to the

contributors and expected beneficiaries, all funds

that meet the stated criteria are deemed material

in this respect. Therefore, information needs to

be provided regardless of whether it is material

to the reporting entity. However, to minimize the

amount of additional information required in

financial statements, where the disclosures for

dedicated collections are made to the contributors

and beneficiaries in special reports and the

information required is not material to the

reporting entity, minimal disclosures are included

in the reporting entity's general purpose

financial statements or notes thereto. Special
BASIS FOR CONCLUSIONS 101

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reports provided to representatives of

contributors or beneficiaries may satisfy this

requirement (for example, a report to an Indian

tribal government).
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102

APPENDIX B: GUIDANCE FOR THE CLASSIFICATION

OF TRANSACTIONS

INTRODUCTION

235. The Government of the United States has a

great many types of transactions that finance

its cost of operations, and they must be

classified in various ways for revenue

accounting in order to achieve the objectives

of the standards in this Statement. The type of

transaction may be an exchange transaction, a

nonexchange transaction, or an other financing

source; the transaction may be made between a

Government reporting entity and the public or

between two reporting entities within the

Government (i.e., an intragovernmental

transaction). If it is an exchange transaction,

it will normally produce revenue but may

produce gains and losses. This appendix

provides guidance for the classification of

specific transactions based on the standards

for accounting for revenue and other financing

sources, and the reasoning behind these

standards as explained in the Introduction and

the Basis for Conclusions.

236. To serve that purpose, this appendix

provides guidance for classifying all major

transactions that finance the Government's cost

of operations and a significant number of

lesser transactions. It is intended that these

classifications--together with the explanation

of these classifications, interpreted in the

light of the Standards, the Basis for

Conclusions, and the Introduction--will provide

guidance for classifying all the financing

transactions of the Government, including those

that are not specifically listed. It should be

understood that while some classifications are

unequivocal, others are the result of balancing
CLASSIFICATION OF TRANSACTIONS 103

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different considerations.

237. The transactions in this appendix are

divided into several groups. Transactions 

recognized in the financial statements have a

two-fold division: first, whether they are with

the public or intragovernmental; and second,

whether they are nonexchange transactions,

exchange transactions that produce revenue,

exchange transactions that produce gains or

losses, or other financing sources. A separate

group consists of gains and losses due to

revaluation.

238. Exchange transactions are classified as

producing gains or losses if they are likely to

be unusual or nonrecurring. If the transactions

classified in this appendix as gains or losses

are usual and recurring for a particular

reporting entity, that entity should classify

them as producing exchange revenue or expense

instead of gains or losses.

239. The final group of transactions in this

appendix consists of transactions that produce

amounts not recognized as revenues, gains, or

other financing sources. Although in some

instances there is overlap with other groups,

they are presented together as a convenient

reference to amounts not classified in any of

the other categories. They include:

o A number of transactions in which there is

no net inflow of resources (or the net

inflow is less than the full amount of the

transaction) because one asset is exchanged

for another or there is an increase in both

assets and liabilities.

o Certain transfers and donations that do not

affect net cost or net position.

o A number of transactions involving direct

loans and loan guarantees, which are

recognized as expenses or reductions in
104 APPENDIX B

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expenses according to the standards in

SFFAS No. 2, Accounting for Direct Loans

and Loan Guarantees.

o Deposit fund transactions.

240. As a guide to this appendix, the following

table lists in order the transactions that are

illustrated, group by group, and cites the

page. Unless otherwise stated:

 o Revenue from nonexchange transactions is

included in determining the net operating

results and hence the change in net

position.

 o Revenue from exchange transactions is

subtracted from gross cost in determining

the net cost of operations. (Gains and

losses from exchange transactions also

affect net cost.)

 o Other financing sources are included in

determining the net operating results and

hence the change in net position.

241. In addition, the collection and

disposition of most nonexchange revenue and a

small part of exchange revenue is accounted for

as a custodial activity of the collecting

entity.
CLASSIFICATION OF TRANSACTIONS 105

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TABLE OF TRANSACTIONS

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

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

Individual income taxes, corporation income taxes, social insurance taxes and

contributions, excise taxes, estate and gift taxes, and customs duties (97)

Social insurance taxes and contributions paid by Federal employees (99)

Deposits by states for unemployment trust fund (99)

User fees, Harbor Maintenance trust fund (100)

Customs Service fees (101)

Deposits of earnings, Federal Reserve System (102)

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

(103)

Fines and penalties (104)

Penalties due to delinquent taxes in connection with custodial activity (104)

Forfeitures (105)

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

Sales of goods and services (107)

Sales of goods and services in undercover operations (107)

Interest (unless classified elsewhere), dividends, and rents (except for 

mineral rights) on Government property (108)

Rents, royalties, and bonuses on Outer Continental Shelf (OCS) and other 

petroleum and mineral rights. (108)

Proceeds from the auction of the radio spectrum (109)

Interest on post-1991 direct loans (110)

Interest on delinquent taxes and other receivables that arise as the result

of custodial operations (111)

Regulatory user fees such as patent and copyright fees; immigration and 

consular fees; SEC registration and filing fees; and Nuclear

Regulatory Commission fees (111)

Diversion fees, Department of Justice (112)

Premiums for SMI (Supplementary Medical Insurance), bank deposit insurance, 

pension benefit guarantees, crop insurance, life insurance,

and other insurance (112)

Federal employee contributions to pension and other retirement benefit plans (112)

Federal employee contributions to health benefits plan for current coverage

(113)

Reimbursement for collecting revenue (114)

Reimbursement for cleanup costs (115)

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

Sales of Government assets: other than property, plant, and equipment and

forfeited and foreclosed property (115)

Sales of property, plant, and equipment (115)

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

Sales of foreclosed property: associated with pre-1992 direct loans and loan

guarantees (117)

Sales of receivables: except direct loans (117)

Sales of direct loans (117)
106 APPENDIX B

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Retirement of debt securities prior to maturity (118)

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

Seigniorage (118)

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

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

Interest on Treasury securities held by trust funds and special funds (except

trust revolving funds) (119)

Interest received by one fund from another (120)

Employer entity contributions to social insurance programs (120)

Nonexchange transactions--intragovernmental: gains and

losses ...................................................121

Retirement of debt securities prior to maturity: trust funds and special

funds (except trust revolving funds) (121)

Cancellation of debt (122)

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

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

Intragovernmental sales of goods and services by a fund other than a

revolving fund (122)

Employer entity contributions to pension and other retirement benefit plans 

for Federal employees (123)

Employer entity contributions to health benefit plans for current coverage of 

Federal employees (123)

Employer entity payments for unemployment benefits and workers compensation 

(124)

Interest on Treasury securities held by revolving funds (124)

Interest on Treasury securities held by trust revolving funds (125)

Interest on uninvested funds received by direct loan and guaranteed loan

financing accounts (126)

Interest received by Treasury (126)

Exchange transactions--intragovernmental: gains and losses127

Retirement of debt securities prior to maturity: revolving funds and trust

revolving funds (127)

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

Appropriations (128)

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

full cost (128)

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

retirement benefits), less the employee contributions, if any, and the

employer entity contributions (129)
CLASSIFICATION OF TRANSACTIONS 107

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Contribution by the General Fund to the SMI trust fund (130)

Transfer by CCC to Federal Crop Insurance Corporation (131)

Interchange between the Railroad Retirement Board and the Social Security and 

Hospital Insurance trust funds (131)

Transfer of cash and other capitalized assets without reimbursement (132)

Transfer of property, plant, and equipment without reimbursement: types that

are expensed (132)

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

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

Revaluation of inventory and related property (133)

TRANSACTIONS NOT RECOGNIZED AS REVENUES, GAINS, OR OTHER

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

Borrowing from the public (134)

Borrowing from Treasury, the Federal Financing Bank, or other Government 

accounts (134)

Disposition of revenue to other entities: custodial transfers (134)

Sales of different types of Government assets (135)

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

Transfer of property, plant, and equipment without reimbursement: types that

are expensed (136)

Donation of property, plant, and equipment: types that are expensed (137)

Negative subsidies on post-1991 direct loans and loan guarantees (137)

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

(137)

Fees on post-1991 direct loans and loan guarantees.-- (138)

Repayment of post-1991 direct loans (138)

Repayment of pre-1992 direct loans (139)

Repayment of receivables: except direct loans (139)

Sales of direct loans (139)

Sales of foreclosed property: associated with post-1991 direct loans and loan

guarantees (140)

Deposit fund transactions (140)
108 APPENDIX B

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TRANSACTIONS WITH THE PUBLIC

Nonexchange transactions with the public

242. Individual income taxes, corporation

income taxes, social insurance taxes and

contributions,1 excise taxes, estate and gift

taxes, and customs duties.--Taxes (including

customs duties) are levied through the exercise

of the power of the Government to compel

payment. In broad terms, taxes are "the price

we pay for civilization." More specifically

they finance spending of many types to promote

the general welfare, provide for the common

defense, and ensure domestic tranquillity:

national defense, a judicial system, aid to the

elderly, construction of infrastructure,

education and training, and so forth. The

relationship between the tax paid and the value

received is too indirect and disproportionate

to relate the revenue that is received from any

identifiable taxpayer to the cost that is

incurred for providing that identifiable

taxpayer with benefits. This is especially the

case where the benefits are of a collective or

public nature, such as national defense, in

which case consumption by one taxpayer does not

reduce the consumption available for another;

or where the benefits are designed to

redistribute income from one group of people to

another. Therefore, tax revenue is nonexchange

revenue.

243. All excise taxes, like other taxes, are

classified as resulting in nonexchange revenue.

Some excise taxes (considered to be benefit

taxes) are levied on bases that are related to

the use of publicly provided goods and services

or the public provision of other benefits, such

as the gasoline tax; certain other excise taxes

are levied on bases related to a cause of some

damage and are dedicated to pay down costs,

such as the tax on domestically mined coal,

which is dedicated to the black lung disability
CLASSIFICATION OF TRANSACTIONS 109

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trust fund. Even in these cases, however, the

relationship between the tax and the benefit

received by an identifiable recipient is

relatively indirect and disproportionate.

Moreover, these excise taxes, like other taxes,

are determined through the exercise of the

power of the Government to compel payment.

Therefore, like other taxes, they are

classified as producing nonexchange revenue.

244. Board members have differing views on

whether social insurance programs result in

exchange or nonexchange transactions.21.--Taxes

(including customs duties) are levied through the exercise of the power

of the Government to compel payment. In broad terms, taxes are "the

price we pay for civilization." More specifically they finance spending

of many types to promote the general welfare, provide for the common

defense, and ensure domestic tranquillity: national defense, a judicial

system, aid to the elderly, construction of infrastructure, education and

training, and so forth. The relationship between the tax paid and the

value received is too indirect and disproportionate to relate the revenue

that is received from any identifiable taxpayer to the cost that is

incurred for providing that identifiable taxpayer with benefits. This is

especially the case where the benefits are of a collective or public

nature, such as national defense, in which case consumption by one

taxpayer does not reduce the consumption available for another; or

where the benefits are designed to redistribute income from one group

of people to another. Therefore, tax revenue is nonexchange revenue.

243. All excise taxes, like other taxes, are classified as resulting in

nonexchange revenue. Some excise taxes (considered to be benefit

taxes) are levied on bases that are related to the use of publicly

provided goods and services or the public provision of other benefits,

such as the gasoline tax; certain other excise taxes are levied on bases

related to a cause of some damage and are dedicated to pay down

costs, such as the tax on domestically mined coal, which is dedicated

to the black lung disability trust fund. Even in these cases, however,

the relationship between the tax and the benefit received by an

identifiable recipient is relatively indirect and disproportionate.

Moreover, these excise taxes, like other taxes, are determined through

the exercise of the power of the Government to compel payment.
110 APPENDIX B

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Therefore, like other taxes, they are classified as producing

nonexchange revenue.

244. Board members have differing views on whether social insurance

programs result in exchange or nonexchange transactions.58

However, they agree that social insurance tax

revenue should be reported in the same way as

other tax revenue for the purposes of financial

reporting. This is because social insurance

taxes, like other taxes, are determined through

the exercise of the power of the Government to

compel payment. Furthermore, individuals and

businesses subject to social insurance taxes

are subject to them as a byproduct of their

decision to enter covered employment or engage

in a covered business, so especially for the

major, broad-based social insurance programs--

Social Security, Medicare (hospital insurance),

and unemployment compensation--they have

virtually no legal option except to pay.

245. Tax receipts are generally collected from

the public by the IRS (Internal Revenue

Service) and, to a lesser extent, by the

Customs Service and other entities acting as

agents for the recipient entities rather than

on their own behalf. The collecting entity

receives the cash and then transfers it to the

General Fund, trust fund, or special fund on

whose behalf it was collected. The amount so

collected should be accounted for as a

custodial activity by the collecting entity.

The tax is recognized as a nonexchange revenue

by the entity that is legally entitled to the

amount. This would be a trust fund or special

fund in the case of an earmarked (i.e.,

dedicated) tax. If collected on behalf of the

Government as a whole, it would be recognized

in the Government-wide consolidated financial

statements.

 58See discussion of social insurance programs in FASAB, Exposure Draft,

Supplementary Stewardship Reporting (August 1995).
CLASSIFICATION OF TRANSACTIONS 111

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246. Social insurance taxes and contributions

paid by Federal employees.

22--Federal employees

may be covered by social insurance programs

such as Social Security59 and Medicare under the

same terms and conditions as the remainder of

the covered population. The payments made by

Federal employees are in the nature of taxes,

compulsory payments demanded by the Government

through the exercise of its power to compel

payment. Insofar as the social insurance

program applies to employees of the United

States government, the terms and conditions are

generally the same as the program for private

employees. The employer and employee

contributions are generally calculated in the

same way; the employee contribution is not

earned by the social insurance program; and the

benefits are generally calculated in the same

way. The employee does not obtain particular

benefits under the plan from rendering service

in Federal employment, because he or she would

have been similarly covered by the program if

privately employed and would have obtained

similar benefits. For these reasons, the

employee contribution should have the same

classification as contributions by non-Federal

employees, which is nonexchange revenue.

247. Deposits by states for unemployment trust fund.--States deposit

the receipts from the state unemployment tax to the U.S. Treasury for

the unemployment trust fund in order to finance most of the benefits

under the unemployment compensation system. The state

unemployment tax differs from state to state in terms of the tax rate,

tax base, and certain other characteristics, and unemployment benefits

also differ from state to state. Nevertheless, the deposit has long been

construed as a Federal budget receipt (a governmental receipt), and the

unemployment trust fund has long been included as an account in the

Federal budget.

 59Most Federal civilian employees hired before 1984 are not covered by Social

Security.
112 APPENDIX B

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248. This is for a combination of reasons taken together: (a) the

unemployment compensation system--including the system of taxes,

the system of benefits, and the trust fund--was established by the

Social Security Act of 1935 and has been amended by Federal law

many times; (b) deposits are held in a trust fund operated by the U.S.

Government; (c) Federal law specifies extensive requirements for the

state unemployment tax and unemployment benefits; (d) the Federal

unemployment tax finances grants to states to cover their entire cost of

administering the unemployment system; and (e) Federal law

effectively coerces states to participate in the system, with participation

requiring them to levy the state unemployment tax and deposit the

collections in the U.S. Treasury. If a state does not participate (or is not

certified by the Department of Labor as meeting Federal requirements):

(i) the Federal unemployment tax is levied within the state at its

maximum rate, (ii) the system does not pay any unemployment

compensation benefits within the state, and (iii) the Federal

Government provides no grants to state governments to pay for the

costs of administration. The deposits of the state tax are therefore

nonexchange revenue of the unemployment trust fund. (The Federal

unemployment tax is levied and collected separately from the state

unemployment tax.)

249. User fees, Harbor Maintenance trust fund. --This is an example of

a tax that is termed a "user fee" by law while classified in the budget as

a governmental receipt together with other taxes and duties. It is an ad

valorem tax of 0.125 percent imposed on commercial cargo loaded and

unloaded at specified U.S. ports open to public navigation. The receipt

is earmarked to the Harbor Maintenance trust fund. It is similar in

nature to other excise taxes that result from the Governmentís power to

compel payment and that are dedicated to a trust fund or special fund

to be spent for a designated purpose (for example, the gasoline excise

tax, which is dedicated to the Highway Trust Fund). It therefore should

be recognized as nonexchange revenue by the Harbor Maintenance

trust fund.

250. Customs Service fees.--The Customs Service collects revenue

primarily from duties on imported merchandise but also from two

types of fees: the merchandise processing fee and a group of fees

called "user fees."
CLASSIFICATION OF TRANSACTIONS 113

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251. The merchandise processing fee is primarily an ad valorem charge

on formal merchandise entries into the United States (at 0.19 percent)

subject to a maximum and minimum charge. It also includes flat fees

on informally entered goods. The collections are earmarked by law to a

special fund from which receipts are made available to finance

Customs Service operations to the extent provided by current

appropriations.

252. The merchandise processing fee is associated with the cost of the

Customs Service's operations. The fee as originally enacted was

modified by the Customs and Trade Act of 1990 to make it consistent

with U.S. obligations under GATT (the General Agreement on Tariffs

and Trade) after a GATT panel had ruled that the original fee (a

straight ad valorem fee) exceeded the cost of services rendered and

was a tax on imports that discriminated against imports in favor of

domestic production. The maximum and minimum fees and the flat

fees were enacted to meet the U.S. obligation.

253. However, the associated cost is primarily some of the costs of

assessing and collecting duties on imported merchandise, such as the

salaries of import specialists (who classify merchandise) and the costs

of processing paperwork. The importer pays duties that are required by

law; it does not receive anything of value from the Government in the

nature of an exchange. Furthermore, these costs are not likely to

depend significantly on the value of the merchandise, and the fee is

levied through the power of the Government to compel payment. 

Therefore, for the purpose of a classification system for financial

reporting, the fee is akin to dedicated taxes that are also related in the

aggregate to associated costs and that are classified as nonexchange

revenue (e.g., the excise tax on gasoline). The merchandise processing

fee is therefore classified as a nonexchange revenue.

254. The user fees consist of a group of flat fees charged on passengers

and conveyances entering the country.23 The collections are

dedicated by law to a special fund whose

receipts are made available by permanent

indefinite appropriation to finance Customs

Service operations.
114 APPENDIX B

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255. These fees are intended to offset certain

inspection costs that relate to the processing

of passengers and conveyances entering the

country. They are levied through the power of

the Government to compel payment, and the

person or entity that pays these fees does not

receive anything of value from the Government

in exchange. The inspection activities are for

a variety of purposes: to ensure that dutiable

merchandise is declared, to seize contraband

(such as narcotics and illegal drugs), to

detect infringements of patent and copyright

laws, and so forth. Some of these purposes are

related to the Government's powers to raise

taxes, which are nonexchange revenue, and to

enforce laws. Only to a limited extent are they

like regulatory user fees, based on the

Government's power to regulate particular

businesses or activities. Therefore, like the

merchandise processing fee, the user fees are

classified as nonexchange revenue.

256. Deposits of earnings, Federal Reserve System.--The Federal

Reserve System consists of the Board of Governors of the Federal

Reserve System and twelve regional Federal Reserve Banks. Under

Federal accounting concepts, it is not considered to be part of the

Government-wide reporting entity. Therefore, payments made to or

collections received from the Federal Reserve System would be

reported in the financial statements of the Federal Government and its

component reporting entities.24 The Federal Reserve earns

large amounts of interest on its portfolio of

Treasury securities and deposits to the

Treasury all net income after deducting

dividends and the amount necessary to bring the

surplus of the Federal Reserve Banks to the

level of capital paid-in.
CLASSIFICATION OF TRANSACTIONS 115

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257. The Federal Reserve was established by Act

of Congress pursuant to the Government's

sovereign power over the nation's money, and

its investment in Treasury securities is

necessary for carrying out its monetary

function. It does not receive anything of value

from the Government in exchange for its deposit

of earnings, and on occasion it has been

required by law to make extra payments. The

revenue from the deposits is therefore

nonexchange.
116 APPENDIX B

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258. Donations: except types of property, plant, and equipment that

are expensed.-- Donations are contributions to the Government, i.e.,

voluntary gifts of resources to a Government entity by a non-Federal

entity.25 The Government does not give anything of

value to the donor, and the donor receives only

personal satisfaction. The donation of cash,

other financial resources, or nonfinancial

resources (except stewardship property, plant,

and equipment) is therefore a nonexchange 

revenue.

259. The exception, stewardship PP&E, consists

of Federal mission PP&E, heritage assets, and

stewardship land. Such PP&E is expensed if

purchased, but no amount is recognized if it is

received as a donation.60 Correspondingly, no

revenue is recognized for such donations.

260. Fines and penalties.--Fines and penalties are monetary

requirements imposed on those who violate laws or administrative

rules. The person or other entity that pays a fine or penalty does not

receive anything of value in exchange, nor does the Government

sacrifice anything of value. The Government collects these amounts

through the exercise of its power to compel payment. Fines and

penalties are therefore a nonexchange revenue.

261. Fines from judicial proceedings are collected by the entity acting

as an agent for the Government as a whole rather than on its own

behalf. They are therefore accounted for as a custodial activity of the

collecting entity and recognized as a nonexchange revenue in the

Government-wide consolidated financial statements.

262. Fines and penalties produced by an entity's operations--such as

inspections to ensure compliance with Federal law and with

regulations that are the responsibility of the entity (e.g., inspections by

the Office of Surface Mining) or compliance with regulations for the

conduct of a Federal program--are recognized as nonexchange revenue

by whichever entity is legally entitled by law to the revenue. In some

cases, but not all, this would be the collecting entity. If the collecting

 60SFFAS No.6, Accounting for Property, Plant, and Equipment, pp. 18 and 20.
CLASSIFICATION OF TRANSACTIONS 117

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entity transfers the nonexchange revenue to the General Fund or

another entity, the amount is accounted for as a custodial activity by

the collecting entity. If transferred to the General Fund, the penalties

are recognized as nonexchange revenue in the Government-wide

consolidated financial statements; if transferred to another entity, they

are recognized as nonexchange revenue by the entity that receives the

transfer.

263. Penalties due to delinquent taxes in connection with custodial

activity.--The person or other private entity that pays a penalty on

delinquent taxes does not receive anything in exchange, nor does the

Government sacrifice anything of value. The Government collects

these amounts through its power to compel payment. Penalties on

delinquent taxes are therefore a nonexchange revenue. The penalties

are accounted for as a custodial activity. If transferred to the General

Fund, the penalties are recognized as nonexchange revenue in the

Government-wide consolidated financial statements; if transferred to

another entity, they are recognized as nonexchange revenue by the

entity that receives the transfer.

264. Forfeitures.--Property may be seized as a consequence of various

laws and regulations and forfeited to the Government. Forfeited

property may be acquired through forfeiture proceedings, be acquired

to satisfy a tax liability, or consist of unclaimed and abandoned

merchandise. Forfeited property is principally managed by the Asset

Forfeiture Fund of the Justice Department and the Treasury Forfeiture

Fund of the Treasury Department. Revenue is recognized from

forfeited property unless the property is distributed to state or local law

enforcement agencies or foreign governments or is received in

satisfaction of a previously recognized revenue (e.g., accrued tax

receivables).26

265. The timing of revenue recognition depends

on how the property is forfeited and the nature

of the property. In the case of unclaimed and

abandoned merchandise, revenue is recognized in

the amount of the sales proceeds at the time

the property is sold. In the case of property

acquired through forfeiture proceedings, the

timing of recognition depends on the nature and
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disposition of the property. For monetary

instruments, the revenue is recognized at the

time of obtaining forfeiture judgment; for

property that is sold, at the time of sale; and

for property that is held for internal use or

transferred to another Federal agency, at the

time of obtaining approval to use the property

internally or transfer it.61

266. The method of measuring revenue depends on

the nature of the property. The amount of

revenue recognized for monetary instruments is

the market value when the forfeiture judgment

is obtained. For property that is sold, it is

the sales proceeds. For property that is held

for internal use or transferred to another

Federal agency, it is the fair value of the

property less a valuation allowance for any

liens or third party claims.

267. The revenue from forfeiture is nonexchange

revenue, because the Government seizes the

property through the exercise of its power. The

Government does not sacrifice anything of value

in exchange and the entity that forfeits the

property does not receive anything of value.

More than half of the forfeiture revenue of the

two funds mentioned above is from currency and

other monetary instruments. Although other

types of forfeited property must be sold in

order to recognize revenue, or constructively

sold (if transferred to another Federal agency

or placed into internal use), this is the last

step in a process that is inherently

nonexchange.

268. The disposition of the revenue from

forfeiture is determined by law. Revenue or the

 61SFFAS No. 3, 15-19. The standard also requires deferred revenue to be

recognized when a forfeiture judgment is obtained, but the deferred revenue is

reversed when revenue is recognized. The amount of revenue ordinarily differs

from the amount of deferred revenue. In some cases, an adjustment subsequent to

the original forfeiture judgment may be necessary when it is later determined

that a portion of the forfeiture is to be distributed to state or local law

enforcement agencies or foreign governments.
CLASSIFICATION OF TRANSACTIONS 119

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property itself may ultimately be distributed

to the seizing entity, state or local law

enforcement agencies, foreign governments, or

the general fund. Revenue is recognized as

nonexchange revenue by the entity that is

legally entitled to use the revenue or to use

the property itself. If the property is

distributed to a state or local law enforcement

agency or a foreign government, revenue is not

recognized by a Federal Government reporting

entity. If the revenue is transferred to the

General Fund, it is recognized as nonexchange

revenue in the Government-wide consolidated

financial statements.

269. Some entities may be involved in the

management and liquidation of forfeited

property but not themselves be entitled to the

revenue or to the use of the property. For

example, a central fund created to support the

seizure activities of multiple entities may

manage forfeited property and the collection

and disposition of the revenue from that

property. These entities should account for the

property as a custodial activity. Revenue is

shown when it is recognized, and it is shown as

transferred to others when the cash is

disbursed or the property is delivered. The

disposition of property to an entity outside

the Federal Government is also accounted for.

Exchange transactions with the public:

revenue

270. Sales of goods and services.--The cost of

production for goods and services such as

electricity, mail delivery, and maps is

defrayed in whole or in part by revenue from

selling the goods or services provided. The

sales may be made by a public enterprise

revolving fund (such as the Bonneville Power

Administration), an intragovernmental revolving

fund (such as the Government Printing Office),

or a fund that is not a revolving fund (such as

the Geological Survey). Each party receives and
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sacrifices something of value. The sale is

therefore an exchange transaction, and the

revenue is exchange revenue for the entity

making the sale.

271. Sales of goods and services in undercover

operations.--The cost of the Government’s

undercover operations is defrayed in whole or

in part from the proceeds of sales of goods

that have been purchased (as opposed to goods

that have been forfeited). Each party receives

and sacrifices something of value. These

characteristics of the transaction are not

affected by whether the sale is illegal. The

sale is therefore an exchange transactions, and

the revenue is exchange revenue of the entity

making the sale.

272. Interest (unless classified elsewhere),

dividends, and rents (except for mineral

rights) on Government property.--Each party

receives and sacrifices something of value, so

the inflow of resources is an exchange

transaction.
CLASSIFICATION OF TRANSACTIONS 121

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273. Interest is classified as exchange revenue

notwithstanding the fact that the entity may

not be charged a cost of capital for the assets

that yield these inflows; or, if the entity

borrowed from Treasury to acquire the assets,

it may have been charged a below-market

interest rate. The gross cost of the entity is

understated in such cases; and to recognize an

exchange revenue is to recognize a revenue

without some or all of the related costs, and

hence to understate the entity's net cost of

operations. Nevertheless, in some cases the

entity does pay the Treasury at least some

interest; and the Government's cost of

borrowing to acquire the assets is recognized

as a cost of the Government as a whole. Since

some cost is recognized, even if not always the

full cost of the entity,27 an exchange revenue is

recognized for the entity that receives the inflow of interest.

274. Rents, royalties, and bonuses on Outer Continental Shelf (OCS)

and other petroleum and mineral rights.--Rents, royalties, and bonuses

are exchange revenues, because each party receives and sacrifices

something of value. The amounts are earned by sales in the market and

therefore are exchange revenue. They are collected by the Minerals

Management Service (MMS) of the Department of the Interior, which

manages the energy and minerals resources on the OCS and collects

the amounts due the Government and Indian tribes from minerals

produced on the OCS and other Federal and Indian lands.

275. MMS does not recognize a depletion cost for various reasons,

including the fact that under present accounting standards natural

resources are not recognized as an asset and depletion is not

recognized as a cost. As a result, this exchange revenue bears little

relationship to the recognized cost of MMS and cannot be matched

against its gross cost of operations. Therefore, although the inflows are

exchange revenue, they should not be subtracted from MMSís gross

cost in determining its net cost of operations.
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276. MMS should instead account for the exchange revenue as a

custodial activity. MMS collects rents, royalties, and bonuses acting as

an agent on behalf of the recipients designated by law: the General

Fund, certain entities within the Government to which amounts are

earmarked, the states, and Indian tribes and allottees. The amounts of

revenue should be recognized and measured under the exchange

revenue standards when they are due pursuant to the contractual

agreement.

277. The rents, royalties, and bonuses transferred to Treasury for the

General Fund, or to other Government reporting entities, should be

recognized by them as exchange revenue. However, neither the

Government as a whole nor the other recipient entities recognize the

natural resources as an asset and depletion as a cost. Therefore, this

exchange revenue should not offset their gross cost in determining

their net cost of operations. It should instead be a financing source in

determining their operating results and change in net position.

278. Proceeds from the auction of the radio spectrum.--The proceeds

from auctioning the right to use the radio spectrum are exchange

revenues, because each party receives and sacrifices something of

value. The amount of revenue is earned by sales in the market at

auctions. It bears little relationship to the costs recognized by the

Federal Communications Commission (FCC), which collects the

revenue, or to the costs recognized by the U.S. Government as a

whole. Therefore, it should not be offset against the costs of the FCC

in determining its net cost of operations or against the costs of the

Government as a whole in Government-wide consolidated financial

statements.

279. The FCC should therefore account for this exchange revenue as a

custodial activity,

acting as an agent on behalf of the General Fund; and it should be

included as exchange revenue in the Government-wide consolidated

financial statements.
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280. Interest on post-19911 direct loans.28.

62--Interest on

direct loans is an exchange transaction,

because it is part of a broader exchange

transaction in which the entity makes a loan to

the borrower and the entity and borrower each

receives and sacrifices something of value.

Interest on direct loans that are budgeted

according to the provisions of the Federal

Credit Reform Act of 1990 consists of two

components: the nominal interest (the stated

interest rate times the nominal principal) and

the amortized interest (change in present value

of the loans receivable due to the passage of

time). The combined effect of these components

equals the effective interest, which is

directly defined as the present value of the

loans receivable times the Treasury interest

rate applicable to the particular loans (i.e.,

the interest rate used to calculate the present

value of the direct loans when the direct loans

were disbursed). The effective interest causes

an equal increase in the aggregate value of the

assets on the balance sheet, and therefore the

effective interest is the amount recognized as

exchange revenue.63

 62For interest on pre-1992 direct loans, see the preceding section on “interest (unless classified elsewhere) . . .” 63See SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 11-12,

paragraphs 30-31 and 37; for an illustrative case study, also see pp. 50-52 and

59-60.
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281. Interest on delinquent taxes and other receivables that arise as

the result of custodial operations.--Receivables that arise as the result

of custodial operations are custodial (or non-entity) assets, held by the

IRS or another entity as an agent for the Government as a whole rather

than on its own behalf (e.g., IRS tax receivables on which the

delinquent taxpayer must pay interest). The interest is an exchange

revenue, because each party receives and sacrifices something of value,

but it is not related to the costs incurred by the collecting entity. The

interest is accounted for as a custodial activity by the collecting entity.

If transferred to the General Fund, the interest is recognized as

exchange revenue in the Government-wide consolidated financial

statements because it is related to the government's cost of borrowing;

if transferred to another entity, it is recognized as nonexchange

revenue by the entity that receives the transfer.

282. Regulatory user fees such as patent and copyright fees;

immigration and consular fees; SEC registration and filing fees; and

Nuclear Regulatory Commission fees.--Regulatory user fees are

charges based on the Government's power to regulate particular

businesses or activities. The revenue is related to the cost in one of two

ways. Special benefits may be provided to identifiable recipients who

pay the fees, beyond the benefits, if any, that accrue to the general

public (e.g., passport fees); or the Government may incur costs in order

to regulate an identifiable entity for the benefit of the general public or

some other group, in which case the user charge compensates the

Government for its regulatory costs that were caused by the activity of

the party that pays the charge (e.g., SEC and Nuclear Regulatory

Commission fees). Because in general the revenue is closely related to

the cost of operations, these fees are classified as exchange

transactions and the revenue is an exchange revenue of the entity that

charges the fee.
CLASSIFICATION OF TRANSACTIONS 125

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283. Diversion fees, Department of Justice.--Registrants in the

Diversion Control Program (e.g., physicians) pay fees to the Drug

Enforcement Administration, in exchange for which the DEA provides

the registrants with the authority to prescribe controlled substances.

The diversion fees are intended to cover the costs of the Diversion

Control Program. Because the revenue is related to the cost and the

registrants both receive and sacrifice value, the payment of these fees

is an exchange revenue of the Diversion Control Program.

284. Premiums for SMI (Supplementary Medical Insurance), bank

deposit insurance, pension benefit guarantees, crop insurance, life

insurance, and other insurance.--In exchange for a premium and other

considerations, the Government promises to make payments to

program participants if specified events occur. The premium offsets

the cost of the program in whole or in part. The degree to which

participation is voluntary differs from program to program. Because

the revenue is related to the cost of the providing service, it is an

exchange revenue of the insurance program.

285. Federal employee contributions to pension and other retirement

benefit plans.29--Employees of the Federal Government

provide service to their employer in exchange

for compensation, of which some is received

currently (the salary) and some is deferred

(pensions, retirement health benefits, and

other retirement benefits). This is an exchange

transaction, because each party sacrifices

value and receives value in return. As part of

this exchange transaction, the Government

promises a pension to its employees after they

retire. The Government also promises other

retirement benefits, notably health benefits.

In return, the employee provides services and,

under some plans, makes a contribution to the

retirement fund out of his or her salary. The

financing of these benefits may include

contributions paid by the employee to the

retirement fund.

286. In broad terms, the employee contribution

is an inflow of resources to the retirement

fund as part of this exchange transaction. More
126 APPENDIX B

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narrowly, it is a payment by the employee as

part of an exchange of money and services for a

future pension or other retirement benefit.

Therefore, it is an exchange revenue of the

entity that administers the retirement plan and

thus is an offset to that entity's gross cost

in calculating its net cost of operations.64

287. Federal employee contributions to health benefits plan for

current coverage.--Employees of the Federal Government provide

services to their employer in exchange for compensation, of which

some is received currently in the form of money (the salary); some is

received currently in the form of payments to a third party (the

employer entity contribution to the medical insurance plan for current

coverage of its employees); and some is deferred (pensions and other

retirement benefits). This is an exchange transaction, because each

party sacrifices value and receives value in return. As part of this

exchange transaction, the Government and its employees both

contribute to a medical insurance plan that provides current coverage

of the employees.

288. In broad terms, the employee contribution out of his or her salary

is an inflow of resources to the health benefits plan as part of this

exchange transaction. More narrowly, it is a payment in exchange for

current coverage by a health benefits plan. Therefore, it is an exchange

revenue of the entity that administers the health benefits plan and thus

is an offset to that entity's gross cost in calculating its net cost of

operations.

 64For further discussion of the accounting standards for pensions and other

retirement benefits of Federal employees, see SFFAS No. 5, Accounting for

Liabilities of the Federal Government, pp. 20-36 and 56-63. The standards do

not cover accounting for the plan per se as distinct from the administering

entity. Nor do they cover defined contribution plans, or administrative

entities that are not Federal reporting entities.
CLASSIFICATION OF TRANSACTIONS 127

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289. Reimbursement for collecting revenue.--The Customs Service

collects duties on goods imported by Puerto Rico and the Virgin

Islands. The Customs Service retains an amount equal to the estimated

cost of collecting these duties, including all costs of operations in

Puerto Rico and the Virgin Islands and an allocation of overhead; it

transfers the remainder to the Treasury, which, in turn, transfers the

collections to Puerto Rico or the Virgin Islands.

290. The total amount of duties collected on these goods should be

accounted for as a custodial activity by the Customs Service.

Notwithstanding that duties are a nonexchange revenue, these

particular duties are a nonexchange revenue of an entity other than the

United States and therefore are not recognized as a nonexchange

revenue of the U.S. Government.

291. The method of disposing of these collections combines two

distinct transactions into one. The entire amount of the duties could be

transferred to Puerto Rico and the Virgin Islands, and these

governments could then pay the Customs Service to reimburse it for its

services of collecting duties. The payment to Customs would be

exchange revenue of the Customs Service. The actual procedure for

reimbursement, whereby Customs retains an amount equal to the

estimated cost, is simpler but equivalent in substance. Hence, the

custodial transfer to Treasury (for Puerto Rico and the Virgin Islands)

and the amount retained by Customs should be shown as separate

components of the disposition of the revenue from customs duties. The

amount retained by Customs to reimburse itself for its costs is

exchange revenue of the Customs Service and is offset against its gross

cost in calculating its net cost of operations.

292. Reimbursement for cleanup costs.--The Coast Guard or other

Federal entities may incur costs to clean up environmental hazards

caused by private parties and, in some cases, require these private

parties to reimburse it for the costs incurred. Notwithstanding that the

Government demands the revenue under its power to compel payment,

the revenue arises from the action of the private parties and is closely

related to the cost of operations incurred as a result of that action.

Therefore, the revenue is an exchange revenue of the entity that incurs

the cost.
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Exchange transactions with the public:

gains and losses

293. Note: As explained in the introduction to

this appendix, transactions that are classified

as producing gains or losses should instead be

classified as producing revenue or expense if

they are usual and recurring for a particular

reporting entity.

294. Sales of Government assets: other than

property, plant, and equipment and forfeited

and foreclosed property.--The sale of

Government assets (other than property, plant,

and equipment and forfeited and foreclosed

property) is an exchange transaction, because

each party receives and sacrifices something of

value. If the sales price equals book value,

there is no gain or loss, because a cash inflow

equal to book value is the exchange of one

asset for another of equal recorded value and

therefore not a net inflow of resources. If the

sales price is more or less than the book value

of the property, a gain or loss, respectively,

is recognized to the extent of the difference.

The amount of the difference between sales

price and book value is ordinarily a gain or

loss rather than a revenue or expense, because

sales of property are ordinarily an unusual or

nonrecurring inflow of resources.
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295. Sales of property, plant, and equipment.--

The transaction is an exchange transaction,

because each party receives and sacrifices

something of value. If the sales price30 equals book

value, there is no gain or loss, because a cash inflow equal to book

value is the exchange of one asset for another of equal recorded value

and therefore not a net inflow of resources. If the sales price is more or

less than book value, a gain or loss, respectively, is recognized to the

extent of the difference. The amount of the difference is ordinarily a

gain or loss rather than a revenue or an expense, because sales of

property, plant, and equipment are ordinarily an unusual or

nonrecurring inflow of resources.

296. The entire sales price is a gain if the book value of the asset is

zero. The book value is zero (a) if the asset is general property, plant,

and equipment (PP&E) that is fully depreciated or written-off or (b) if

the asset is stewardship PP&E, for which the entire cost is expensed

when the asset is purchased.65

297. Acquisition of property, plant, and equipment through

exchange.--The cost of property, plant, and equipment (PP&E)

acquired through an exchange of assets with the public is the fair value

of the PP&E surrendered at the time of exchange. If the fair value of

the PP&E acquired is more readily determinable than that of the PP&E

surrendered, the cost is the fair value of the PP&E acquired. If neither

fair value is determinable, the cost of the PP&E acquired is the cost

recorded for the PP&E surrendered net of any accumulated

depreciation or amortization. In the event that cash consideration is

included in the exchange, the cost of PP&E acquired is increased (or

decreased) by the amount of the cash surrendered (or received).

 65SFFAS No. 6, Accounting for Property, Plant, and Equipment, has divided

property, plant, and equipment (PP&E) into two basic categories: general PP&E

and stewardship PP&E (which consists of federal mission PP&E, heritage assets,

and stewardship land). General PP&E is capitalized and recognized on the

balance sheet; stewardship PP&E is expensed and thus has no book value.

(Stewardship PP&E is presented in a stewardship statement.)
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298. Any difference between the cost of the PP&E acquired and the

book value of the PP&E surrendered is recognized as a gain or loss.31

It is a gain or loss rather than a revenue or

expense, because ordinarily the amount would be

an unusual or nonrecurring inflow of resources.

299. If the fair value of the PP&E acquired is

less than the fair value of the PP&E

surrendered, the PP&E acquired is recognized at

its cost and subsequently reduced to its fair

value. The difference between the cost of the

PP&E acquired and its fair value is recognized

as a loss.66

300. Sales of foreclosed property: associated with pre-1992 direct

loans and loan guarantees.--Foreclosed property associated with pre1992 direct loans and loan guarantees is recognized as an asset at net

realizable value. The sale is an exchange transaction, and any

difference between the sales proceeds and book value is recognized as

a gain or loss.32

301. Sales of receivables: except direct loans.--The transaction is an

exchange transaction, because each party receives and sacrifices

something of value. Upon sale, any difference between the sales

proceeds and book value is recognized as a gain or loss. If the sales

price equals book value, there is no gain or loss, because the exchange

of one asset for another of equal value is not a net inflow of resources.

302. Sales of direct loans.--The sale of a direct loan is a modification

according to the Federal Credit Reform Act of 1990, regardless of

whether the loan being sold was obligated after FY 1991 or before FY

1992. The book value loss (or gain) on a sale of direct loans equals the

book value of the loans sold (prior to sale) minus the net proceeds of

the sale. It normally differs from the cost of modification, which is

recognized as an expense.33 Any difference between the

book value loss (or gain) and the cost of

modification is recognized as a gain or loss.67

 66Ibid., footnote 38. 67See SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 17 and

66-69.
CLASSIFICATION OF TRANSACTIONS 131

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303. Retirement of debt securities prior to maturity.--Debt securities

may be retired prior to maturity if they have a call feature or if they are

eligible for redemption by the holder on demand. Many Treasury

bonds issued before 1985 are callable; savings bonds, the Government

account series, the foreign series, and the state and local series of

Treasury securities are redeemable on demand, although sometimes

with a penalty or other adjustment or only after a specified period of

time.

304. Each party receives and sacrifices something of value in buying

and selling debt securities that may be retired prior to maturity. The

sales price reflects such features. Therefore, the transaction is an

exchange transaction. The difference, if any, between the reacquisition

price and the net carrying value of the extinguished debt is recognized

as a loss or gain.34

Other financing sources from the public

305. Seigniorage.--Seigniorage is the face

value of newly minted coins less the cost of

production (which includes the cost of the

metal, manufacturing, and transportation). It

results from the sovereign power of the

Government to directly create money and,

although not an inflow of resources from the

public, does increase the Government's net

position in the same manner as an inflow of

resources. Because it is not demanded, earned,

or donated, it is an other financing source

rather than revenue. It should be recognized as

an other financing source when coins are

delivered to the Federal Reserve Banks in

return for deposits.
132 APPENDIX B

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INTRAGOVERNMENTAL TRANSACTIONS

Nonexchange transactions--

intragovernmental: revenue

306. Interest on Treasury securities held by

trust funds and special funds (except trust

revolving funds).--Many trust funds and special

funds hold Treasury securities on which they

receive interest. In most cases the invested

balances of these funds derive predominantly

from the funds' earmarked taxes, which are

nonexchange transactions with the public (e.g.,

employment taxes and gasoline taxes), and to a

lesser extent from other financing sources

received from other government entities (e.g.,

the General Fund payment appropriated to the

Supplementary Medical Insurance fund). The

balances are not earned in exchange

transactions by the entity's operations. Most

fundamentally, they are not produced by

operations in which the entity incurs a cost.

307. Therefore, in such cases, the interest on

Treasury securities should not be deducted from

the gross costs of the trust fund (or special

fund), or the organization in which it is

administered, in determining its net cost of

operations. As a result, that interest should

not be classified as exchange revenue. It

should instead have the same classification as

the predominant source of the invested

balances, which for most trust funds (and

special funds) is nonexchange revenue. The

interest received from invested balances of

trust funds and special funds (except trust

revolving funds) is therefore normally a

nonexchange revenue.

308. The source of balances for some trust

funds and special funds may not be

predominantly nonexchange revenue. For example,

the main source of balances for two major trust

funds, the Civil Service Retirement and
CLASSIFICATION OF TRANSACTIONS 133

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Disability fund and the Military Retirement

fund, consists of exchange revenue and other

financing sources. In such exceptional cases,

as explained in the Basis for Conclusions, the

interest should be classified in the same way

as the predominant source of balances--in these

cases, as exchange revenue--rather than

according to the normal rule.

309. Interest received by one fund from

another.--One fund within the Government may

borrow from another. For example, in 1983 the

Old-Age and Survivors Insurance trust fund

borrowed from the Disability Insurance and

Hospital Insurance trust funds. When that

occurs, the lending fund sacrifices interest

from Treasury securities on its invested

balances and instead receives interest from the

borrowing fund on the amount of the loan. Since

the predominant source of balances to the

lending fund is the same regardless of whether

it invests in Treasury securities or lends to

another fund, the interest received from the

other fund should be classified in the same

way--as nonexchange or exchange revenue--as the

interest received on Treasury securities.
134 APPENDIX B

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310. Employer entity contributions to social

insurance programs.35--Federal employees may be covered by

social insurance programs such as Social Security68 and Medicare

under the same terms and conditions as the rest

of the covered population. Intragovernmental

contributions to social insurance programs such

as Social Security and Medicare are nonexchange

transactions, just as payments made by private

employers to these programs are nonexchange

transactions. Contributions by private

employers are in the nature of taxes; i.e.,

compulsory payments demanded by the Government

through the exercise of its power to compel

payment. Insofar as the social insurance

program applies to Federal employees, the terms

and conditions are generally the same as the

program for private employees. The employer and

employee contributions are generally calculated

in the same way; the employer entity

contribution is not earned by the social

insurance program; and the benefits are

generally calculated in the same way. The

employee does not obtain particular benefits

under the plan from rendering service in

Federal employment, because he or she would

have been similarly covered by the program if

privately employed and would have received

similar benefits. For these reasons, the

employer entity contribution should have the

same classification as private employer

contributions, which is nonexchange revenue.

Nonexchange transactions--

intragovernmental: gains and losses

 68Most Federal civilian employees hired before 1984 are not covered by Social

Security.
CLASSIFICATION OF TRANSACTIONS 135

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311. Retirement of debt securities prior to

maturity: trust funds and special funds (except

trust revolving funds).--Treasury securities

held by trust funds and special funds are

primarily issued in the Government account

series, which can generally be redeemed on

demand. Other Treasury securities held by these

funds may also be callable or redeemable on

demand. If these debt securities are retired

before maturity, the difference, if any,

between the reacquisition price and the net

carrying value of the extinguished debt should

be recognized as a gain or loss by the fund

that owned the securities. The gain or loss

should be accounted for as a nonexchange gain

or loss if the interest on the associated debt

securities is classified as nonexchange

revenue, and it should be accounted for as an

exchange gain or loss if the interest on the

associated debt securities is classified as

exchange revenue. For trust funds (except trust

revolving funds) and special funds, as

explained elsewhere, the interest is normally

but not always a nonexchange revenue.

312. The difference, if any, between the

reacquisition price and the net carrying value

of the extinguished debt should be recognized

as a loss or gain in accounting for interest on

Treasury debt. The amount should be equal in

absolute value but with the opposite sign to

the gain or loss recognized by the trust fund

or special fund. The amount should be

recognized as a gain or loss from exchange in

order to offset it against the gross interest

on Treasury debt in the Government-wide

consolidated financial statements.
136 APPENDIX B

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313. Cancellation of debt.--The debt that an

entity owes Treasury (or other agency) may be

canceled by Act of Congress. The amount of debt

that is canceled (including the amount of

capitalized interest that is canceled, if any)

is a gain to the entity whose debt is canceled

and a loss to Treasury (or other agency). The

purpose of borrowing authority is generally to

provide an entity with capital rather than to

finance its operations. Therefore, the

cancellation of debt is not earned by the

entity’s operations and is not directly related

to the entity’s costs of providing goods and

services. As a result, the cancellation is a

nonexchange gain to the entity that owed the

debt and a nonexchange loss to the lender.

Exchange transactions--intragovernmental:

revenue

314. Intragovernmental sales of goods and

services by a revolving fund.--The cost of

providing goods or services by a revolving fund

is defrayed in whole or in part by selling the

goods or services provided. Intragovernmental

sales may be made by an organization that

maintains either an intragovernmental revolving

fund (such as the Defense Business Operations

Fund) or a public enterprise revolving fund

(such as the Postal Service). Each party

receives and sacrifices something of value. The

proceeds are an exchange revenue.

315. Intragovernmental sales of goods and

services by a fund other than a revolving

fund.--The cost of providing goods or services

is defrayed in whole or in part by selling the

goods or services provided. Each party receives

and sacrifices something of value. The proceeds

are an exchange revenue.
CLASSIFICATION OF TRANSACTIONS 137

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316. Employer entity contributions to pension

and other retirement benefit plans for Federal

employees.--Employees of the Federal Government

provide service to their employer in exchange

for compensation, of which some is received

currently (the salary); and some is deferred

(pensions, retirement health benefits, and

other retirement benefits). This is an exchange

transaction, because each party sacrifices

value and receives value in return. As part of

this transaction, the Government promises a

pension and other retirement benefits

(especially health benefits) to the employees

after they retire. The financing of these

benefits may include contributions paid by the

employer entity to the retirement fund.

317. In broad terms, the employer entity

contribution is an inflow of resources to the

retirement fund as part of this exchange

transaction. More narrowly, it is a payment by

the employer entity in exchange for the future

provision of a pension or other retirement

benefit to its employees. Therefore, it is an

exchange revenue of the entity that administers

the retirement plan and thus is an offset to

that entity's gross cost in calculating its net

cost of operations.36

318. Employer entity contributions to health benefit plans for current

coverage of Federal employees.--Employees of the Federal

Government provide services to their employer in exchange for

compensation, of which some is received currently in the form of

money (the salary); some is received currently in the form of payments

to a third party (the employer entity contribution to the medical

insurance plan for current coverage of the employees); and some is

deferred (pensions and other retirement benefits). This is an exchange

transaction, because each party sacrifices value and receives value in

return. As part of this exchange transaction, the Government and its

employees both contribute to a medical insurance plan that provides

current coverage of its employees.

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

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resources to the health benefits plan as part of this exchange

transaction. More narrowly, it is a payment in exchange for current

coverage of the employer entity's employees by a health benefits plan.

Therefore, it is an exchange revenue of the entity that operates the

health benefits plan and thus is an offset to that entity's gross cost in

determining its net cost of operations.
CLASSIFICATION OF TRANSACTIONS 139

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320. Employer entity payments for unemployment benefits and

workers compensation.--The employer entity recognizes a liability and

an expense for Federal employees who are laid-off or injured on the

job and are entitled under law to unemployment benefits or workers

compensation, respectively.37 The payment to the former

or current employee is made by the unemployment

trust fund (Department of Labor) in the case of

unemployment benefits and by the special

benefits fund (Department of Labor) in the case

of workers compensation. Unemployment benefits

are reimbursed by the former employer entity;

and workers compensation costs are mostly

charged back to the employer entity.

321. Since the costs are recognized by the

employer entity and its payment to the

unemployment trust fund or the special benefits

fund reimburses these funds for the costs they

incur, the amounts these funds receive from the

employer entity are exchange revenues.

322. Interest on Treasury securities held by revolving funds.--A

revolving fund conducts a cycle of business-type operations in which

the expenses are incurred to produce goods and services that generate

revenue, and the revenue, in turn, finances expenses. Revolving funds

need capital in their operations and may invest some of that capital in

Treasury securities. Since their holding of invested balances and the

sale of goods and services are both integral to the fundsí operations,

the interest on the fundsí securities is related to the fundsí cost of

operations just as is the revenue earned from selling goods and

services. Furthermore, the source of the invested balances is

predominantly revenue earned from their sales of goods and services,

for which the funds incurred costs of operations when that revenue was

earned. The interest they receive should therefore be classified in the

same way as their revenue earned from selling goods and services and

should likewise be deducted from gross cost in determining the net

cost of operations. For this reason, interest earned by revolving funds

should normally be classified as exchange revenue.
140 APPENDIX B

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323. The source of balances for some revolving funds may not be

predominantly exchange revenue. For such exceptions, as explained in

the Basis for Conclusions, the interest should be classified in the same

way as the predominant source of balances rather than according to the

normal rule.

324. Interest on Treasury securities held by trust revolving funds.--A

trust revolving fund is a revolving fund that is also classified by law as

a trust fund. Like other revolving funds, it earns exchange revenue,

which is an offset to its gross cost. For example, the revenue that the

Employees Health Benefit fund earns from contributions by Federal

employees, annuitants, employer entities, and the Office of Personnel

Management (OPM) is an offset to the insurance premiums that it pays

to private firms. Trust revolving funds need capital in their operations,

just like other revolving funds, the source of which is predominantly

the revenue they have earned. When some of their capital is invested in

Treasury securities, the interest is related to their cost of operations in

the same way as the revenue earned from selling services.

Furthermore, the source of the invested balances is predominantly

revenue earned from the sales of services, for which they incurred

costs of operations when the revenue was earned. The interest they

receive should therefore be classified in the same way as the interest

received by other revolving funds, which is exchange revenue.

325. The source of balances for some trust revolving funds may not be

predominantly exchange revenue. For such exceptions, as explained in

the Basis for Conclusions, the interest should be classified in the same

way as the predominant source of balances rather than according to the

normal rule.
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326. Interest on uninvested funds received by direct loan and

guaranteed loan financing accounts.--A guaranteed loan financing

account holds uninvested balances as reserves against its loan

guarantee liabilities and earns interest on these balances that adds to its

resources to pay these liabilities. A direct loan financing account may

hold uninvested balances to bridge transactions that are integral to its

operations, such as when it borrows from Treasury to disburse direct

loans prior to the time of disbursement; it earns interest on these

balances to reflect the time value of money and thereby finance the

interest it pays on its debt to Treasury. Thus, in both cases, the interest

received by the financing account is earned through exchange

transactions with Treasury and is an offset to the financing accountís

related costs of operations. The interest is therefore an exchange

revenue of the financing account.

327. Interest received by Treasury.--Accounts or funds (including

direct loan and guaranteed loan financing accounts) may be authorized

to borrow from the Treasury or from the Federal Financing Bank (an

entity within Treasury) or other sources. The interest that the entity

pays on its borrowings is a cost to the entity and an inflow of resources

to the Treasury. The Treasury may be deemed to have borrowed from

the public to finance the outlays for which the entity borrowed, and

thus to have incurred a corresponding interest cost of its own. The

interest received by Treasury from the entity is therefore related to

Treasuryís cost of borrowing from the public and should be classified

as an exchange revenue.

Exchange transactions--intragovernmental:

gains and losses

328. Note: As explained in the introduction to

this appendix, transactions that are classified

as producing gains or losses should instead be

classified as producing revenue or expense if

they are usual and recurring for a particular

reporting entity.
142 APPENDIX B

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329. Retirement of debt securities prior to

maturity: revolving funds and trust revolving

funds.--Treasury securities held by revolving

funds and trust revolving funds are primarily

issued in the Government account series, which

can generally be redeemed on demand. Other

Treasury securities held by these funds may

also be callable or redeemable on demand. If

these debt securities are retired before

maturity, the difference, if any, between the

reacquisition price and the net carrying value

of the extinguished debt should be recognized

as a gain or loss by the fund that owned the

securities. The gain or loss should be

accounted for as a nonexchange gain or loss if

the interest on the associated debt securities

is classified as nonexchange revenue, and it

should be accounted for as an exchange gain or

loss if the interest on the associated debt

securities is classified as exchange revenue.

For revolving funds and trust revolving funds,

as explained elsewhere, the interest is

normally but not always an exchange revenue.

330. The difference, if any, between the

reacquisition price and the net carrying value

of the extinguished debt should be recognized

as a loss or gain in accounting for interest on

Treasury debt. The amount should be equal in

absolute value but with the opposite sign to

the gain or loss recognized by the revolving

fund or trust revolving fund. The amount should

be recognized as a gain or loss from exchange

in order to offset it against the gross

interest on Treasury debt in the Governmentwide consolidated financial statements.
CLASSIFICATION OF TRANSACTIONS 143

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Other financing sources--intragovernmental

331. Appropriations.--Appropriations--a form of

budget authority--permit an entity to incur

obligations and make payments and thus are a

means of financing the entity's cost. They are

not otherwise related to the entity's cost and

therefore are not an offset to its gross cost

in determining its net cost of operations. They

are not earned by the entity's activities,

demanded by the entity, or donated to the

entity. Therefore, appropriations provide an

other financing source instead of a revenue.

332. More precisely, "appropriations used" is 

recognized as an other financing source in

determining the entity’s operating results when

the entity receives goods and services or

provides benefits, grants, or other transfer

payments. To avoid double counting,

appropriations used are not recognized for the

appropriation of earmarked revenues or other

financing sources, which are already counted in

determining the entity’s operating results.

Appropriations that have been made available

for apportionment but have not been used are

recognized as “unexpended appropriations” in

the entity’s capital.
144 APPENDIX B

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333. Cost subsidies: difference between

internal sales price (reimbursement) and full

cost.--One entity may receive goods or services

from another entity without paying the full

cost of the goods or services or without paying

any cost at all. Other Federal accounting

standards may require the receiving entity to

recognize the full cost as an expense (or, if

appropriate, as an asset). In these cases the

difference between full cost and the internal

sales price or reimbursement (sometimes called

a "transfer price") is an imputed cost to the

receiving entity.38

334. The financing of the imputed cost is also imputed to the receiving

entity. Imputed financing is necessary so that the imputed cost does not

reduce the entity's operating results and net position. The imputed

financing equals the imputed cost and is recognized as an other

financing source. It is not a revenue, because the receiving entity does

not earn the amount imputed or demand its payment.

335. Cost subsidies: difference between the service cost of pensions

(and other retirement benefits), less the employee contributions, if any,

and the employer entity contributions.--The service cost of pensions

(and other retirement benefits) to the employer entity, less the

employee contributions, if any, is recognized as a cost to the employer

entity. The difference between the employer entity's cost and its

contributions, if any, is imputed to the employer entity as part of its

recognized cost. For pensions, the cost recognized by the employer

entity is more than its contribution for employees who are covered by

the Civil Service Retirement System and several minor systems (in a

few of which the employer entity does not make any contributions

toward the service cost). For retirement health care benefits, neither the

employees nor the employer entity make any contributions while the

employee is working.39 Therefore, the entire service

cost is recognized as a cost to the employer

entity and imputed to it.
CLASSIFICATION OF TRANSACTIONS 145

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336. The financing of the imputed cost is also

imputed to the employer entity.69 The imputed

financing is necessary so that the imputed cost

does not reduce the employer entity's operating

results and net position. The imputed financing

equals the imputed cost and is recognized as an

other financing source. It is not a revenue,

because the employer entity does not earn the

amount imputed or demand its payment.70

337. (This transaction differs from the

immediately preceding transaction, in which an

entity does not pay the full cost of the goods

or services it receives from another entity. In

the present case, the employer entity acquires

the services of the employees itself, but

another entity pays part of their cost.)

338. Contribution by the General Fund to the SMI trust fund.--The

General Fund makes a contribution to the SMI (Supplementary

Medical Insurance) trust fund. This appropriated payment is separate

from the transfer of earmarked premiums and is not a transfer of

earmarked taxes or other income. It does not arise from an exchange

transaction, because SMI does not sacrifice any value to the General

Fund in exchange for the payment, and the General Fund does not

receive anything of value from SMI. Instead, the payment constitutes a

General Fund subsidy of the SMI trust fund. Since the payment is not

demanded or earned, it is an other financing source to SMI rather than

a revenue.

 69The employer entity's own contribution, if any, is generally financed by an

appropriation but could be financed by earned revenue or other sources.

 70For further discussion of the accounting standards for pensions and other

retirement benefits for federal employees, see SFFAS No. 5, Accounting for

Liabilities of the Federal Government, pp. 20-36 and 56-63. The standards do

not cover accounting for the plan per se as distinct from the administering

entity. Nor do they cover defined contribution plans, or administrative

entities that are not Federal reporting entities.
146 APPENDIX B

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339. Examples of other payments of a similar nature (and also

classified as other financing sources) are the payment by the General

Fund to the social security trust funds for military service credits and

for certain uninsured persons at least 72 years old; and the payment by

the General Fund to the Railroad Retirement Board for the vested dual

benefit payments received by certain retirees under both the railroad

retirement and the social security systems. The quinquennial military

service credit adjustment paid between the General Fund and the social

security trust funds is likewise an other financing source to the social

security trust funds but one that may be either positive or negative.

340. Transfer by CCC to Federal Crop Insurance Corporation.--The

Commodity Credit Corporation (CCC) makes transfers to the Federal

Crop Insurance Corporation (FCIC), which it finances by an

appropriation. This payment does not arise from an exchange

transaction, because FCIC does not sacrifice anything of value to CCC,

and CCC does not receive anything of value from FCIC. It differs from

the contribution to SMI primarily in that it is paid by another program

entity (the CCC) rather than directly by the General Fund. Since the

payment is not demanded or earned, it is an other financing source to

FCIC rather than a revenue.

341. Interchange between the Railroad Retirement Board and the

Social Security and Hospital Insurance trust funds.--The Railroad

Retirement Board pays benefits equivalent to the amounts that would

have been paid if railroad workers had been covered under Social

Security since its inception, plus additional amounts unique to that

program. The railroad retirement program is partly financed by an

annual financial interchange that takes place between the Railroad

Social Security Equivalent Benefit Account (a trust fund) and the trust

funds for old-age and survivors insurance, disability insurance, and

hospital insurance (OASDHI). The interchange is designed to place

each of the OASDHI trust funds in the same position as it would have

been if railroad employment had been covered under Social Security

since its inception.

342. The amount of the payment reflects the difference between (a) the

benefits that the OASDHI trust funds would have paid to railroad

workers and their families if railroad employment had been covered by
CLASSIFICATION OF TRANSACTIONS 147

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OASDHI and (b) the payroll taxes that the OASDHI trust funds would

have received if railroad employment had been covered by OASDHI.

If benefits would have exceeded taxes, the OASDHI trust funds make

a payment to the Railroad Social Security Equivalent Benefit Account;

if benefits would have been less, the OASDHI trust funds receive a

payment. Currently OASI and DI make payments to that Account, and

HI receives payment. The interchange differs from the examples in the

previous cases primarily in that (a) the payment is between two trust

funds and (b) the payment may be made in either direction.

343. The financial interchange does not arise from an exchange

transaction, because it is a reallocation of resources among funds, all

of which are financed primarily from nonexchange revenue.

Furthermore, the nature of this reallocation is such that the transferring

entity does not receive anything of value and the recipient entity does

not sacrifice anything of value. Therefore, the recipient entity

recognizes the transfer-in as an other financing source, and the

transferring entity recognizes the transfer-out as a negative financing

source.

344. Transfer of cash and other capitalized assets without

reimbursement.--Cash and other capitalized assets may be transferred

without reimbursement from one Government entity to another. Cash

may include exchange revenue that is recognized by the transferring

entity in determining its net cost of operations but is required to be

transferred to the General Fund or another entity; other capitalized

assets may include general property, plant, and equipment. The

receiving entity does not sacrifice anything of value, and the

transferring entity does not acquire anything of value. Therefore, the

transfer is not an exchange transaction. The receiving entity recognizes

the transfer-in as an other financing source; the transferring entity

recognizes the transfer-out as a negative financing source. The amount

recorded by both entities is the transferring entity's book value of the

asset.

345. Transfer of property, plant, and equipment without

reimbursement: types that are expensed.--Property, plant, and

equipment (PP&E) of types that are expensed (i.e., stewardship PP&E)

may be transferred from one Government entity to another. If the asset
148 APPENDIX B

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was classified as stewardship PP&E in its entirety by both the

transferring entity and the recipient entity, the transfer does not affect

the net cost of operations or net position of either entity and therefore

in such a case it is not a revenue, a gain or loss, or other financing

source.

346. However, if the asset that is transferred was classified as general

PP&E for the transferring entity but stewardship PP&E for the

recipient entity, it is recognized as a transfer-out (a negative other

financing source) of capitalized assets by the transferring entity.
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REVALUATIONS

347. Revaluation of capitalized property, plant, and equipment.--

Capitalized property, plant, and equipment (PP&E) may be removed

from the general PP&E accounts if it no longer provides service in the

operations of the entity because it has suffered damage, become

obsolete in advance of expectations, or is identified as excess. It is

recorded as an asset at its expected net realizable value. Any difference

between the book value and the expected net realizable value is

recognized as a gain or loss in determining the net cost of operations,

because the revaluation results from the entityís operations. The

expected net realizable value is adjusted at the end of each period, and

any further revaluation is also recognized as a gain or loss in

determining the net cost of operations.40

348. Since the revaluation does not affect

obligations incurred but does affect net cost,

an amount equal to the revaluation is

recognized in determining the reconciliation

between obligations incurred and net cost of

operations. A reconciliation is not needed in

determining the change in net position, because

the revaluation affects net cost and net

position equally.

349. Revaluation of inventory and related property.--Inventory and

related property may be revalued for such reasons as determination that

the property is excess, obsolete, or unserviceable; that stockpile

materials have decayed or been damaged; that a loss is estimated on

commodity purchase agreements; or that a change has occurred in the

net realizable value of commodities valued at the lower of cost or net

realizable value. The amount of revaluation is recognized as a loss or a

gain in determining the net cost of operations, because it results from

the entityís operations. Assets are correspondingly reduced or

increased.41
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350. Since the revaluation does not affect

obligations incurred, but does affect net cost,

an amount equal to the revaluation is

recognized in determining the reconciliation

between obligations incurred and net cost of

operations. A reconciliation is not needed in

determining the change in net position, because

the revaluation affects net cost and net

position equally.

TRANSACTIONS NOT RECOGNIZED AS

REVENUES, GAINS, OR OTHER FINANCING

SOURCES

351. Borrowing from the public.--Borrowing from the public is a

means of financing the Government's outlays. However, it is not a net

inflow of resources to the Treasury or other borrowing entity, because

the asset received (cash) is offset by an equal liability (debt).

Therefore, it is not revenue or an other financing source.

352. Borrowing from Treasury, the Federal Financing Bank, or other

Government accounts.-- An entity may be provided the authority to

borrow from Treasury, the Federal Financing Bank, or other

Government accounts. Intragovernmental borrowing is a means of

financing the entity's outlays. However, it is not a net inflow of

resources to the entity, because the asset received (cash) is offset by an

equal liability (debt). Therefore, it is not revenue or an other financing

source.
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353. Disposition of revenue to other entities: custodial transfers.--

Revenue, primarily nonexchange revenue, may be collected by an

entity acting on behalf of the General Fund or another entity within the

Government on whose behalf it was collected. The collecting entity

accounts for the disposition of revenue as part of its custodial activity.

These custodial transfers, by definition, do not affect the collecting

entityís net cost of operations or operating results, nor are they part of

the reconciliation between its obligations and net cost of operations.

(The receiving entity recognizes the revenue as nonexchange or

exchange revenue, depending on its nature, according to the applicable

revenue standards.)

354. Sales of different types of Government assets.--The sale of

Government assets (other than forfeited property) is an exchange

transaction, because each party receives and sacrifices something of

value. As a general rule, any difference between the sales proceeds and

book value is recognized as a gain or loss when the asset is sold. The

remainder of the transaction does not provide a net inflow of resources,

so no gain, revenue, or other financing source is recognized. If the

sales proceeds equal book value, there is no gain or loss, because the

exchange of one asset for another of equal recorded value is not a net

inflow of resources.

355. This general rule applies to property, plant, and equipment,

receivables (other than direct loans), foreclosed property associated

with pre-1992 direct loans and loan guarantees, and miscellaneous

assets. It does not apply to inventory, nor does it apply to forfeited

property (as explained in the previous section on nonexchange

revenue). It also does not apply to the sale of direct loans and the sale

of foreclosed property associated with post-1991 direct loans and loan

guarantees. The latter transactions are discussed in subsequent

paragraphs.

356. Acquisition of property, plant, and equipment through exchange.-

-The cost of property, plant, and equipment (PP&E) acquired through

an exchange of assets with the public is the fair value of the PP&E

surrendered at the time of exchange. If the fair value of the PP&E

acquired is more readily determinable than that of the PP&E

surrendered, the cost is the fair value of the PP&E acquired. If neither
152 APPENDIX B

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fair value is determinable, the cost of the PP&E acquired is the cost

recorded for the PP&E surrendered net of any accumulated

depreciation or amortization. In the event that cash consideration is

included in the exchange, the cost of PP&E acquired is increased (or

decreased) by the amount of the cash surrendered (or received).42

357. Any difference between the cost of the

PP&E acquired and the book value of the PP&E

surrendered is recognized as a gain or loss. If

the cost of the PP&E acquired equals the book

value of the PP&E surrendered, there is no gain

or loss (nor a revenue or other financing

source), because the exchange of one asset for

another of equal value does not provide a net

inflow of resources. Therefore, the amount of

the transaction equal to the book value of the

PP&E surrendered is not recognized as a gain, a

revenue, or an other financing source.

358. Transfer of property, plant, and equipment without

reimbursement: types that are expensed.--Property, plant, and

equipment (PP&E) of types that are expensed (i.e., stewardship PP&E)

may be transferred from one Government entity to another. If the asset

was classified as stewardship PP&E in its entirety by both the

transferring entity and the recipient entity, the transfer does not affect

the net cost of operations or net position of either entity and therefore

in such a case it is not a revenue, a gain or loss, or other financing

source.

359. However, if the asset that is transferred was classified as general

PP&E for the transferring entity but stewardship PP&E for the

recipient entity, it is recognized as a transfer-out (a negative other

financing source) of capitalized assets by the transferring entity.

360. If multi-use heritage assets are transferred and some cost was

recognized for them on the books of the transferring entity, that cost is

recognized as a transfer-out (a negative other financing source) of

capitalized assets. No amount is recognized by the entity that receives

the asset.43

361. Donation of property, plant, and equipment: types that are
CLASSIFICATION OF TRANSACTIONS 153

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________________________________________________

______

expensed.--The acquisition cost of stewardship property, plant, and

equipment (PP&E) is recognized as a cost when incurred. Such PP&E

consists of Federal mission PP&E, heritage assets, and stewardship

land. When such PP&E is donated to the Government, however, no

amount is recognized as a cost.44 Since the donation of

such PP&E does not affect the net cost or net

position of the recipient entity, it is not a

revenue, a gain, or an other financing source.
154 APPENDIX B

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________________________________________________

______

362. Negative subsidies on post-1991 direct loans and loan

guarantees.--A negative subsidy means that the direct loans or loan

guarantees are estimated to make a profit, apart from administrative

costs (which are excluded from the subsidy calculation by law). The

amount of the subsidy cost is recognized as an expense when the direct

loan or guaranteed loan is disbursed. A negative subsidy is recognized

as a direct reduction in expense, not as a revenue, gain, or other

financing source.45

363. Downward subsidy reestimates for post-1991 direct loans and

loan guarantees.--A downward subsidy reestimate means that the

subsidy cost of direct loans or loan guarantees is estimated to be less

than had previously been estimated. The initial subsidy cost is

recognized as an expense; a positive subsidy reestimate is recognized

as an expense; and a downward subsidy reestimate is recognized as a

direct reduction in expense, not as a revenue, gain, or other financing

source.

364. Fees on post-1991 direct loans and loan guarantees.--The present

value of estimated fees is included as an offset in calculating the

subsidy cost of direct loans and loan guarantees, which is recognized

as an expense when the loans are disbursed. The present value of

estimated fees is likewise included as one component in calculating the

value of loans receivable or loan guarantee liabilities. When cash is

received in payment of fees, the loans receivable decrease by an equal

amount (or the loan guarantee liabilities increase by an equal amount).

The increase in one asset is offset by an equal decrease in another asset

(or by an equal increase in liabilities). Therefore, fees are not

recognized as a revenue, a gain, or an other financing source.46
CLASSIFICATION OF TRANSACTIONS 155

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________________________________________________

______

365. Repayment of post-1991 direct loans.--The present value of

estimated loan repayments is included in the calculation of the subsidy

cost of direct loans, and this subsidy cost is recognized as an expense

when the loans are disbursed. The present value of estimated loan

repayments is likewise included in the value of the loans receivable.

When cash is received for the repayment of loans, the loans receivable

decrease by an equal amount. The increase in one asset is offset by an

equal decrease in another asset. Therefore, cash inflow from the

repayment is not recognized as a revenue, a gain, or an other financing

source.47

366. Repayment of pre-1992 direct loans.--When pre-1992 direct

loans are repaid in whole or in part, the entity exchanges one asset

(loans receivable) for another (cash) with equal value. There is no net

inflow of resources. Therefore, the amount of cash inflow equal to

book value is not recognized as a revenue, a gain, or an other financing

source.48

367. Repayment of receivables: except direct loans.--When

receivables other than direct loans are paid or repaid in whole or in

part, the entity exchanges one asset (loans receivable) for another

(cash) with equal value. There is no net inflow of resources. Therefore,

the amount of cash inflow equal to book value is not recognized as a

revenue, a gain, or an other financing source.49
156 APPENDIX B

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________________________________________________

______

368. Sales of direct loans.--The sale of a direct loan is a

modification according to the Federal Credit Reform Act of 1990

regardless of whether the loan being sold was obligated after FY 1991

or before FY 1992. The book value loss (or gain) on a sale of direct

loans equals the book value of the loans sold (prior to sale) minus the

net proceeds of the sale. It normally differs from the cost of

modification, which is recognized as an expense.50 Any

difference between the book value loss (or

gain) and the cost of modification is

recognized as a gain or loss.71 The amount of

cash inflow equal to book value is not a net

inflow of resources to the entity, because it

is an exchange of one asset for another of

equal recorded value. Therefore, the amount of

cash inflow equal to book value is not

recognized as a revenue, a gain, or an other

financing source.

369. Sales of foreclosed property: associated with post-1991 direct

loans and loan guarantees.--The net present value of the cash flow

from the estimated sales of foreclosed property is included in

calculating the subsidy cost of post-1991 direct loans and loan

guarantees. This subsidy cost is recognized as an expense when the

loans are disbursed. When property is foreclosed, the property is

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

flows. When the foreclosed property is sold, any difference between

the sales proceeds and the book value (i.e., the net present value as of

the time of sale) requires a reestimate of the subsidy expense, which is

recognized as a subsidy expense or a reduction in subsidy expense.

The amount of cash flow equal to book value is an exchange of one

asset for another of equal recorded value and therefore is not

recognized as a gain, a revenue, or an other financing source.51

 71SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 17 and 66-

69.
CLASSIFICATION OF TRANSACTIONS 157

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________________________________________________

______

370. Deposit fund transactions.--Deposit funds are

accounts outside the budget that record amounts that the Government

(a) holds temporarily until ownership is determined or (b) holds as an

agent for others. The standards and guidance in this Statement do not

apply to deposit funds except insofar as a particular deposit fund may

be classified as part of a Federal reporting entity or a disclosure may be

required due to a fiduciary relationship on the part of a Federal

reporting entity toward a deposit fund.
______________________________________________________

158

APPENDIX C: GLOSSARY
GLOSSARY 159

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______________________________________________________

This glossary provides definitions for many terms used in this Statement. The definitions may be

modified or superseded when relevant terms are considered or defined by the Board in future

projects.

Abatement

A reduction or cancellation of an assessed tax. (Cooper W, Ijiri Y, Kohler's

Dictionary for Accountants, 6th ed., Englewood Cliffs, NJ: PrenticeHall, 1983)

Apportionment

A distribution made by OMB of amounts available for obligation in an

appropriation or fund account into amounts available for specified time

periods, programs, activities, projects, objects, or combinations thereof.

The apportioned amount limits the obligations that may be incurred.

(OMB Circular A-34)

Assessments

Enforceable claims for nonexchange revenue for which specific amounts

due have been determined and the person from whom the tax or duty is

due has been identified. They include both self- assessments made by

persons filing tax returns and assessments made by the collecting

entities as a result of audits, investigations, and litigation. Although the

term is normally used in connection with taxes, as used in this

Statement assessments also include determinations of amounts due for

any other kind of nonexchange revenue. Specifically excluded from the

definition of assessments, as used in this Statement, are compliance

assessments. Compliance assessments, as defined by IRS and Customs,

do not represent financial receivables.

Basic Financial Statements
160 APPENDIX C

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______________________________________________________

As used in this Statement, the basic financial statements are those on which

an auditor would normally be engaged to express an opinion. The term

"basic" does not necessarily mean that other financial information not

covered by the auditor's opinion is less important to users than that

contained in the basic statements; it merely connotes the expected

nature of the auditor's review of, and association with, the information.

The basic financial statements in financial reports prepared pursuant to the

Chief Financial Officers Act, as amended, are called the "principal

financial statements." The Form and Content of these statements are

determined by OMB.

Budget Authority

The authority provided by Federal law to incur financial obligations that

will result in immediate or future outlays. Specific forms of budget

authority include:

ï appropriations, which may be provided in appropriations acts or

other laws and which permit obligations to be incurred and

payments to be made;

ï borrowing authority, which permits obligations to be incurred but

requires funds to be borrowed to liquidate the obligation;

ï contract authority, which permits obligations to be incurred but

requires a subsequent appropriation or offsetting collections to

liquidate the obligations; and

ï spending authority from offsetting collections, which permits

offsetting collections to be credited to an expenditure account

and permits obligations and payments to be made using the

offsetting collections (the offsetting collections credited to an

account are deducted from gross budget authority of the

account.)

Budget authority may be classified by period of availability (one year,

multiple-year, or no year), by nature of the authority (current or

permanent), by the manner of determining the amount available

(definite or indefinite), or as gross (without reduction of offsetting
GLOSSARY 161

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______________________________________________________

collections) and net (with reductions of offsetting collections). (OMB

Circular A-11; OMB, The Budget System and Concepts, 1996; and

GAO, A Glossary of Terms Used in the Federal Budget Process,

Exposure Draft, January 1993)

Budgetary Accounting

Budgetary accounting is the system that measures and controls the use of

resources according to the purposes for which budget authority was

enacted; and that records receipts and other collections by source. It

tracks the use of each appropriation for specified purposes in separate

budget accounts through the various stages of budget execution from

appropriation to apportionment and allotment to obligation and eventual

outlay. This system is used by the Congress and the Executive Branch to

set priorities, to allocate resources among alternative uses, to finance

these resources, and to assess the economic implications of federal

financial activity at an aggregate level. Budgetary accounting is used to

comply with the Constitutional requirement that ìNo Money shall be

drawn from the Treasury, but in Consequence of Appropriations Made

by Law; and a regular Statement and Account of the Receipts and

Expenditures of all public Money shall be published from time to time.î

(See Statement of Federal Financial Accounting Concepts No. 1,

Objectives of Federal Financial Reporting, September 1993:15, 35-36,

and 61-62.)

Cost

Defined in SFFAC No. 1, Objectives of Federal Financial Reporting as the

monetary value of resources used (para. 195). Defined more specifically

in SFFAS No. 4, Managerial Cost Accounting Concepts and Standards

for the Federal Government, as the monetary value of resources used or

sacrificed or liabilities incurred to achieve an objective, such as to

acquire or produce a good or to perform an activity or service (page

105). Depending on the nature of the transaction, cost may be charged to

operations immediately, i.e., recognized as an expense of the period, or

to an asset account for recognition as an expense of subsequent periods.

In most contexts within Accounting for Revenue and Other Financing

Sources, "cost" is used synonymously with expense. See also "Full

Cost."
162 APPENDIX C

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______________________________________________________

Dedicated Collections (or Taxes)

See "earmarked taxes."

Directed Flows of Resources

Expenses to nonfederal entities imposed by federal laws or regulations

without providing federal financing. In the case of state and local

governments, directed flows are known as "unfunded mandates." The

costs and financing of federal regulations do not flow through the

Government, but their effects are similar to direct federal expenditures

and revenue.

Drawbacks

Refunds of all or part of duties on imported goods that are subsequently

exported or destroyed. Typically these arise when imported materials are

used to manufacture a product that is later exported. In such cases, most

of the duties originally paid are refundable when the finished product is

exported.

Earmarked Taxes

Taxes levied by the Government that are dedicated by law to finance a

specific federal program. (SFFAS No. 5, Accounting for Liabilities of

the Federal Government, page 71.)

Exchange Revenue

Inflows of resources to a governmental entity that the entity has earned.

They arise from exchange transactions, which occur when each party to

the transaction sacrifices value and receives value in return.

Expended Appropriations

The dollar amount of appropriations used to fund goods and services

received or benefits or grants provided.
GLOSSARY 163

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______________________________________________________

Full Cost

The total amount of resources used to produce the output. More

specifically, the full cost of an output produced by a responsibility

segment is the sum of (1) the costs of resources consumed by the

responsibility segment that directly or indirectly contribute to the output,

and (2) the costs of identifiable supporting services provided by other

responsibility segments within the reporting entity and by other

reporting entities. (SFFAS No. 4, Managerial Cost Accounting

Concepts and Standards for the Federal Government, p. 36) All direct

and indirect costs to any part of the Federal Government of providing

goods, resources, or services. (OMB Circular A-25).

General Fund

Accounts for receipts not earmarked by law for a specific purposes, the

proceeds of general borrowing, and the expenditure of these moneys.

(OMB, The Budget System and Concepts)

General Purpose Financial Reports

Reports intended to meet the common needs of diverse users who typically

do not have the ability to specify the basis, form, and content of the

reports they receive.

Governmental Receipts

Collections from the public that result primarily from the exercise of the

Government's sovereign or governmental powers. Governmental

receipts consist mostly of individual and corporation income taxes and

social insurance taxes but also include excise taxes, compulsory user

charges, customs duties, court fines, certain license fees, gifts and

donations, and deposits of earnings by the Federal Reserve System.

They are compared to outlays in calculating a surplus or deficit. (OMB,

The Budget System and Concepts)
164 APPENDIX C

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______________________________________________________

Nonexchange Revenue

Inflows of resources to the Government that the Government demands or

that it receives by donations. The inflows that it demands include taxes,

duties, fines, and penalties.

Offsetting Collections

Collections from the public that result from business-type or marketoriented activities and collections from other Government accounts.

These collections are deducted from gross disbursements in calculating

outlays, rather than counted in governmental receipts. Some offsetting

collections are credited directly to appropriation or fund accounts;

others, called offsetting receipts, are credited to receipt accounts. The

authority to spend offsetting collections is a form of budget authority.

(OMB, The Budget System and Concepts)

Other Financing Sources

Inflows of resources that increase net position of a reporting entity but that

are not revenues or gains. Borrowing is not included as other financing

sources, since it does not increase the net resources of the reporting

entities.

Proprietary Accounting

Also known as financial accounting, a process that supports accrual

accounting and financial reporting that attempts to show actual financial

position and results of operations by accounting for assets, liabilities,

net position, revenues, and expenses. (See Tierney, Cornelius E.,

Handbook of Federal Accounting Practices, Reading Massachusetts:

Addison-Wesley, 1982:122).

Revenue Adjustment

A contra revenue account that is used to report reduction in revenue when

realization is not probable (less likely than not). It includes , returns,

allowances, and price redeterminations but not credit losses (due to the

inability of the debtor to pay the established or negotiated price).
GLOSSARY 165

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______________________________________________________

Revolving Fund

A fund consisting of permanent appropriation and expenditures of

collections, from both the public and other Governmental agencies and

accounts, that are earmarked to finance a continuing cycle of businesstype operations. (OMB Circular A-34)

Special Fund

Federal fund accounts for receipts earmarked for specific purposes and the

associated expenditure of those receipts. (OMB, The Budget System and

Concepts)

Tax Expenditure

A revenue forgone attributable to a provision of the federal tax laws that

allows a special exclusion, exemption, or deduction from gross income

or provides a special credit, preferential tax rate, or deferral of tax

liability. (see GAO, A Glossary of Terms Used in the Federal Budget

Process, Exposure Draft, February 1993)

Tax Gap

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

Treasury Warrant

An official document that the Secretary of the Treasury issues pursuant to

law and that establishes the amount of monies authorized to be

withdrawn from the central accounts that Treasury maintains. Warrants

for currently unavailable special and trust fund receipts are issued when

requirements for their availability have been met. (GAO, A Glossary of

Terms Used in the Federal Budget Process, Exposure Draft, February

1993)
166 APPENDIX C

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______________________________________________________

Trust Funds

Accounts that are designated by law as trust funds, for receipts earmarked

for specific purposes and the associated expenditure of those receipts

(OMB, Budget System and Concepts).

Trust Revolving Funds

Accounts that record permanent appropriation and expenditure of

collections used to carry out a cycle of business type operations in

accordance with a statute that designates the fund as a trust fund. (OMB

Circular A-34)
______________________________________________________

167

INDEX OF TRANSACTIONS CLASSIFIED IN APPENDIX B

Acquisition of property, plant, and equipment (116)

Acquisition of property, plant, and equipment through exchange

(135)

Appropriations (128)

Borrowing from the public (134)

Borrowing from Treasury, the Federal Financing Bank, or other 

Government accounts (134)

Cancellation of debt (122), (127)

Contribution by the general fund to the SMI trust fund (130)

Cost subsidies: difference between internal sales price

(reimbursement) and full cost (128)

Cost Subsidies: difference between the service cost of pensions

and employer entity contributions (129)

Customs Service fees (101)

Deposit fund transactions (140)

Deposits by states for unemployment trust fund (99)

Deposits of earnings, Federal Reserve System (102)

Disposition of revenue to other entities: custodial transfers

(134)

Diversion fees, Department of Justice (112)

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

expensed (137)

Donations: except types of property, plant, and equipment that are

expensed (103)

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

Employer entity contributions to health benefit plans for current

coverage of Federal employees (123)

Employer entity contributions to retirement plans for Federal

employees (123)

Employer entity contributions to social insurance programs (120)

Employer entity payments for unemployment benefits and workers

compensation (124)

Federal employee contributions to health benefits plan for current

coverage (113)

Federal employee contributions to retirement plans (112)

Fees on post-1991 direct loans and loan guarantees (138)

Fines and penalties (104)

Forfeitures (105)

Individual income taxes, corporation income taxes, social

insurance taxes and contributions, excise taxes, estate and gift

taxes,and customs duties (97)

Interchange between the Railroad Retirement Board and the Social

Security and Hospital Insurance trust funds (131)

Interest (unless classified elsewhere) (108)

Interest on delinquent taxes and other receivables that arise as a

result of custodial operations (111)

Interest on post-1991 direct loans (110)

Interest on Treasury securities held by revolving funds (124)

Interest on Treasury securities held by trust funds and special

funds except trust revolving funds (119)

Interest on Treasury securities held by trust revolving funds
______________________________________________________

(125)

Interest on uninvested funds held by direct loan and guaranteed

loan financing accounts (126)

Interest received by one fund from another (120)

Interest received by Treasury (126)

Intragovernmental sales of goods and services by a fund other than

a revolving fund (122)

Intragovernmental sales of goods and services by a revolving fund

(122)

168

Negative subsidies on direct loans and loan guarantees under

credit reform (137)

Penalties due to delinquent taxes in connection with custodial

activity (104)

Premiums for SMI (Supplementary Medical Insurance), bank deposit

insurance, pension benefit guarantees, crop insurance, life

insurance, and other insurance (112)

Proceeds from the auction of the radio spectrum (109)

Regulatory user fees such as patent and copyright fees;

immigration and consular fees; SEC registration and filing fees;

and Nuclear Regulatory Commission fees (111)

Reimbursement for cleanup costs (115)

Reimbursement for collecting revenue (114)

Rents, royalties, and bonuses on Outer Continental Shelf (OCS)

(108)

Repayment of post-1991 direct loans (138)

Repayment of pre-1992 direct loans (138)

Repayment of receivables: except direct loans (139)

Retirement of debt securities prior to maturity (118)

Retirement of debt securities prior to maturity: revolving funds

and trust revolving funds (127)

Retirement of debt securities prior to maturity: trust funds and

special funds except trust revolving funds (121)

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

Revaluation of inventory and related property (133)

Sales of different types of Government assets (135)

Sales of direct loans (117), (139)

Sales of foreclosed property associated with post-1991 direct

loans and loan guarantees (140)

Sales of foreclosed property associated with pre-1992 direct loans

and loan guarantees (117)

Sales of goods and services (107)

Sales of goods and services in undercover operations (107)

Sales of government property: other than property, plant, and

equipment (115)

Sales of property, plant, and equipment: types that are

capitalized (115)

Sales of receivables: except direct loans (117)

Seigniorage (118)

Social insurance taxes and contributions paid by Federal employees

(99)

Transfer by CCC to Federal Crop Insurance Corporation (131)

Transfer of cash and other capitalized assets without
______________________________________________________

reimbursement (132)

Transfer of property, plant, and equipment (132), (136)

User fees, Harbor Maintenance trust fund (100)
______________________________________________________

170

LIST OF ABBREVIATIONS

CFS--Consolidated Financial Statements

FASAB--Federal Accounting Standards Advisory Board

FASB--Financial Accounting Standards Board

GAO--General Accounting Office

GASB--Governmental Accounting Standards Board

GPRA--Government Performance and Results Act

IRS--Internal Revenue Service

MMS--Minerals Management Service

OCS--Outer Continental Shelf

OMB--Office of Management and Budget

PP&E--Property, Plant, and Equipment

RSI--Required Supplementary Information

SEC--Securities and Exchange Commission

SFFAC--Statement of Federal Financial Accounting Concepts

SFFAS--Statement of Federal Financial Accounting Standards

SGL--Standard General Ledger
______________________________________________________

FASAB TASKFORCE ON REVENUE AND OTHER FINANCING SOURCES

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

Peter BenEzra--Agriculture

Christine Bonham--GAO

Debra Carey--Interior

Christine Chang--Treasury

Robert Dacey--GAO*

Lowell Dworin--Treasury

Robert Hamilton--Customs Service

Gregory Holloway--GAO

Linda Hoogeveen--OMB

Martin Ives--FASAB Member/New York University

Robert Kilpatrick--OMB*

Allan Lund--Treasury

Thomas Luter--Treasury*

JoEllen McCormack--GAO*

Dennis Mitchell--Treasury

Richard Nieman--Energy Department

Marvin Phaup--CBO

Joel Platt--Treasury

Darlene Schongalla--Interior

Charles Sims--Interior

Deborah Taylor--GAO

Dana Thiebeau--Treasury

William Truitt--Justice

Ellen Waterhouse--IRS

*

working group member

Individual members of the task force do not necessarily agree with all

aspects of the Board's recommendations.
THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

Elmer B. Staats, Chairman

 James L. Blum Gerald Murphy 

 Donald H. Chapin James E. Reid 

 Martin Ives Cornelius E. Tierney 

 Norwood Jackson Alvin Tucker 

 The Secretary of the Treasury, the Director of the Office of Management

and Budget, and the Comptroller General established the Federal Accounting

Standards Advisory Board (the FASAB or "the Board") in October 1990 to

consider and recommend accounting principles for the United States

Government.

 The Board communicates its recommendations by publishing recommended

accounting standards after considering the financial and budgetary

information needs of Congress, executive branch agencies, and other users of

federal financial information. The Board also considers comments from the

public on its proposed recommendations, which are published for comment as

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

the Board, then decide whether to adopt the recommendations. If they do, the

standard is published by the OMB and the GAO and then becomes effective.

 Additional background information is available from the FASAB,

including: (1) the "Memorandum of Understanding among the General Accounting

Office, the Department of the Treasury, and the Office of Management and

Budget, on Federal Government Accounting Standards and a Federal Accounting

Standards Advisory Board" and (2) the "Mission Statement of the Federal

Accounting Standards Advisory Board."

Federal Accounting Standards Advisory Board

Ronald S. Young, Executive Director

750 First Street, NE, Room 1001

Washington, DC 20002

Telephone (202) 512-7350

Fax (202) 512-7366

 1..As explained in para. 44 of SFFAS Number 1, Accounting for

Selected Assets and Liabilities, "more likely than not" means more than a

50 percent chance. "Not probable" means the converse, i.e., less than a

50 percent chance.

 2..Statement of Federal Financial Accounting Concepts No. 1,

Objectives of Federal Financial Reporting.

standard is an exception to the general principle of SFFAS No. 5, Accounting for

es of the Federal Government, which, but for this exception, would require a loss on a

to be recognized at the time when expected costs exceeded expected revenue. However, the

loss must be disclosed: see the disclosure requirement in paragraph 0 (d) below.

pricing guidance in OMB Circular No. A-25 does not apply to prices set by law or

order.

 5..SFFAS No. 1, Accounting for Selected Assets and Liabilities, para. 41, states that "a

receivable should be recognized . . . based on legal provisions, such as a payment due
______________________________________________________

date (e.g., taxes not received by the date they are due) . . ." Under the revenue

standard, past due taxes are not recognized on the date they are due, but rather on the

date when tax returns are received without sufficient payment or legally enforceable

claims against non-compliant taxpayers are established through enforcement processes.

 6..

SFFAS No. 1, para. 44-51. 7..For the recognition criteria for donated property, plant and equipment, see SFFAS

No. 6, Accounting for Property, Plant, and Equipment, para. 30, 62, and 71.

accounting standards will determine the criteria for the imputation of costs and how

sts shall be measured. This standard provides guidance for accounting for the

ding financing source that is reported in such cases.

 explained in the Basis for Conclusions, in the private sector, the term "net results of

s" is synonymous with net income and net income is the "bottom line" measure of

ce for profit-seeking businesses. For most Government reporting entities, on the other

s is not the "bottom line" for performance measurement. See para. 0 and following.

e transfers are distinguished from custodial transfers in that transfers involve assets

e been earned or in use by the entity in carrying out its programs whereas custodial

involve funds that have been collected on behalf of another entity. Accounting for

transfers is described in the section covering nonexchange revenue.

information on funds is reported separately and the basis of accounting is not in

e with applicable accounting standards, the report should state that it is prepared on

of legal requirements.

category includes representational organizations, retired federal employees, federal

responding as individuals, and federal contractors, as well as academics and other

revolving funds that are self-financing do not recover full cost from their customers if

not charged for all of their own costs, such as pension and retirement health benefits

employees.

C No. 1, Objectives of Federal Financial Reporting, p. 39, paragraphs 126 and 128.

ods of calculating depletion based on the economic cost of extraction, such as

ed here, should be distinguished from depletion methods allowed under the Internal

ode.

ular No. A-25, User Charges, as revised July 8, 1993, establishes Federal policy

fees assessed for government services and for the sale or use of government goods or

. It implements the provisions of Title V of the Independent Offices Appropriations Act

31 U.S.C. 9701), which generally calls for "each service or thing of value provided by

y . . . to a person . . . to be self-sustaining to the extent possible" and says that

hall be based on a number of specified criteria including "the costs to the Government."

dance of Circular A-25 also applies to the assessment of user charges under other

However, Circular A-25 is intended to be applied only to the extent permitted by law or

order; it does not apply to the legislative and judicial branches or to mixed-ownership

t corporations; and its requirements are deemed to be met by other OMB circulars that

uidance concerning a specific user charge area.

if all taxpayers filed returns, the underlying event criteria for most taxpayers is

come for the calendar year, whereas the government's fiscal year ends September 30.

required estimated tax payments do not eliminate the problem of measuring taxes based

rtificial" nine months period ending September 30 for calendar year taxpayers whose

r the following three month "stub" period ending December 31 could be disproportionate.

uant to law, Customs establishes legal assessments for fines in amounts which frequently

y exceed the value of the goods, then subsequently abates the fine to a fraction of that

lso in accordance with applicable law. Full disclosure and explanation of practice

d better understanding of the significance of assessments, abatements, and uncollectible
______________________________________________________

eported by Customs in its disclosures required by para. 0.

r details see Net Tax Gap and Remittance Gap Estimates (Supplement to Publication 7285),

on 1415 (4-90), Internal Revenue Service; and Tax Gap: Many Actions Taken, But a

Compliance Strategy Needed, GAO/GGD-94-123, May 1994.

nts appropriated to liquidate contract authority or repay debt are not available to incur

ations and hence are not considered budget authority.

al insurance" does not include programs established solely or primarily for Federal

, such as pension and other retirement plans. "Social insurance" taxes and contributions do,

include payments made by or on behalf of Federal employees to social insurance plans, such

Security and Medicare.

al insurance" does not include programs established solely or primarily for Federal

, such as pension and other retirement plans.

e fees are sometimes called the "COBRA user fees." This term comes from the Consolidated

udget Reconciliation Act of 1985, which established these fees.

C No. 2, Entity and Display, pp. 14-15.

term "donations" includes wills disposing of property and judicial proceedings other than

es.

amends SFFAS No. 3, Accounting for Inventory and Related Property, with respect to

es related to satisfying tax liabilities.

partial recognition of associated cost distinguishes interest from rents, royalties, and

on the Outer Continental Shelf and the auction of the radio spectrum. For the latter

ons, see the subsequent paragraphs.

-1991 direct loans consist of direct loans that were obligated after September 30, 1991,

re-1992 direct loans consist of direct loans that were obligated before October 1, 1991. The

unting that is used for post-1991 direct loans is also used for pre-1992 direct loans that

fied and transferred to financing accounts; loans receivable arising from defaulted postranteed loans; and loans receivable arising from defaulted pre-1992 guaranteed loans that

fied and transferred to financing accounts.

ral employee retirement plans do not include social insurance, such as Social Security and

ales price may include the fair value of items received in exchange.

SFFAS No. 6, Accounting for Property, Plant, and Equipment, pp. 10-11.

FFAS No. 3, Accounting for Inventory and Related Property, pp. 20-23.

difference is due to the different interest rates used to discount future cash flows for

ng the subsidy cost (and subsidy allowance) when the loan is made and for calculating the

modification at a later time. If the sale is with recourse, the present value of the

loss from the recourse is also recognized as an expense.

S No. 5, Accounting for Liabilities of the Federal Government, p. 17.

ial insurance" does not include programs established solely or primarily for Federal

, such as pension and other retirement plans.

further discussion of the accounting standards for pensions and other retirement benefits

al employees, see SFFAS No. 5, Accounting for Liabilities of the Federal Government, pp. 20-

6-63. The standards do not cover accounting for the plan per se as distinct from the

ring entity. Nor do they cover defined contribution plans, or administrative entities that

ederal reporting entities.

SFFAS No. 6, Accounting for Liabilities of the Federal Government, p. 37 and p. 64, footnote

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

.

red employees do pay premiums, however, and the service cost to the employer entity is

et of the actuarial present value of those future premiums.
______________________________________________________

S No. 6, Accounting for Property, Plant, and Equipment, pp. 12-13.

SFFAS No. 3, Accounting for Inventory and Related Property, pp. 6-7, 11, 13, 24, and 26.

FFAS No. 6, Accounting for Property, Plant, and Equipment, pp. 10-11.

No. 6, Accounting for Property, Plant, and Equipment, pp. 17-18, 20.

standards on direct loans and loan guarantees, see SFFAS No. 2, Accounting for Direct Loans

Guarantees. The accounting for negative subsidy costs is symmetrical to the accounting for

subsidy costs.

ee component of the subsidy cost is required to be disclosed separately.

he actual repayment is different from the previous estimate, the present value of the

e between cash inflows and outflows over the term of the loan--calculated as of the date of

ent--is reestimated and is recognized as a subsidy expense or a reduction in subsidy

he loan is not repaid, the unpaid amount is recognized as an adjustment to the bad debt

and does not affect revenue, gains, or other financing sources.

he receivable is not repaid, the unpaid amount is recognized as an adjustment to the bad

wance and does not affect revenue, gains, or other financing sources.

difference is due to the different interest rates used to discount future cash flows for

ng the subsidy cost (and subsidy allowance) when the loan is disbursed and for calculating

of modification at a later time. If the sale is with recourse, the present value of the

loss from the recourse is also recognized as an expense.

SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, pp. 18 and 79-82; and SFFAS

counting for Inventory and Related Property, pp. 20-23 and 37-38.