FASAB Federal Accounting Standards Advisory Board

DEFERRAL OF THE EFFECTIVE DATE OF 

MANAGERIAL COST ACCOUNTING STANDARDS 

FOR THE FEDERAL GOVERNMENT IN SFFAS NO. 4

Statement of Recommended Accounting Standards

Number 9

October 1997

THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

David Mosso, Chairman

 Dr. Linda J. Blessing Norwood J. Jackson 

 James L. Blum Gerald Murphy 

 Philip T. Calder James E. Reid 

 Donald H. Chapin Nelson Toye 

Wendy M. Comes, Executive Director

The Secretary of the Treasury, the Director of the Office of Management and

Budget (OMB), 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

officials who established the Board then decide whether to adopt the

recommendations. If they do, the standard is published by OMB and the General

Accounting Office 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

441 G Street, NW, Suite 3B18

Washington, DC 20548

Telephone (202) 512-7350

Fax (202) 512-7366

Executive Summary i

EXECUTIVE SUMMARY

I. This statement is issued to amend the effective date of the

standards in Statement of Federal Financial Accounting

Standards (SFFAS) No. 4, Managerial Cost Accounting

Concepts and Standards for the Federal Government, issued

in July 1995. The original effective date was for reporting

periods beginning after September 30, 1996. The amended

effective date is for periods beginning after September 30,

1997.

II. In July 1997, the Federal Accounting Standards Advisory Board

(the Board) received a request from the CFO Council for a two

year deferral of the effect date of the managerial cost

accounting standards to fiscal year 1999. The CFO Council

representatives stated that many agencies have not been able

to implement the managerial cost accounting standards during

the two years since SFFAS No. 4 was issued, due to the

following reasons: (a) the Joint Financial Management

Improvement Program (JFMIP) has not issued its Managerial

Cost Accounting System Requirements, (b) the CFO Council

has not issued its managerial cost accounting guide, and (c)

most agencies do not have adequate cost accounting systems

in place. After considering the CFO Council's request, the

Board reluctantly agreed to propose deferring the effective date

of the managerial cost accounting standards for one year to

fiscal year 1998 and issued an Exposure Draft (ED) for public

comments. Most responses to the ED were in favor of the

proposal. 

III. After reviewing the comments to the ED, the Board decided to

recommend the one year deferral. At the same time, it

reemphasizes the importance of managerial cost accounting

to Federal program and financial management. The Chief

Financial Officers Act of 1990 requires the development of cost

information and the systematic measurement of performance. 

Reliable and relevant cost information is indispensable for

implementing the requirements of the Government

Performance and Results Act of 1993. The Board urges

Federal entities and their CFOs to give priority to implementing

the requirements in SFFAS No. 4.
ii Table of Contents

TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................... i

INTRODUCTION .................................................... 1

THE AMENDED EFFECTIVE DATE ..................................... 2

BASIS FOR CONCLUSIONS ........................................... 3

Reasons for the delay .......................................... 3

The Status of Interpretation No. 2 ................................ 5

The Status of SFFAS No. 7 ...................................... 6

ATTACHMENT: LETTER FROM CFO COUNCIL ........................... 7
Deferral of SFFAS No. 4 1

 In addition to managerial cost accounting standards, SFFAS No. 4 also contains managerial cost 1

accounting concepts which provide general guidance for managerial cost accounting but do not constitute

specific requirements. The effective date does not apply to those concepts. 

 The ED was published in FASAB News issue No. 45, August 1997. 2

 In April 1997, JFMIP issued an Exposure Draft on Managerial Cost Accounting System Requirements, 3

which is yet to be finalized as of this date. 

 The CFO Council's Governmentwide Cost Accounting Work Group issued an Exposure Draft of the 4

Managerial Cost Accounting Implementation Guide on June 30, 1997, which has not been finalized as of

this date.

INTRODUCTION

1 This statement is issued to amend the effective date of the

managerial cost accounting standards prescribed in Statement

of Federal Financial Accounting Standards (SFFAS) No. 4,

Managerial Cost Accounting Concepts and Standards for the

Federal Government, which was issued in July 1995. The 1

standards in SFFAS No. 4 were effective for reporting periods

beginning after September 30, 1996. The amended effective

date is for reporting periods beginning after September 30,

1997. 

2 In August 1997, the Board issued an exposure draft (ED) in 2

which it proposed a deferral of the effective date of managerial

cost accounting standards. The ED was issued after

considering a request presented to the Board by the CFO

Council. (See Attachment: Letter from the CFO Council, dated

June 26, 1997.) In their request, the CFO Council

representatives stated that most agencies were having

difficulties in implementing the cost accounting standards

because (a) the Managerial Cost Accounting System

Requirements have not yet been issued, (b) the CFO Council 3

has yet to issue a managerial cost accounting guide, and (c) 4

most agencies do not have adequate cost systems in place. 

The CFO Council representatives requested that the effective

date of SFFAS No. 4 be deferred for two years to reporting

periods that begin after September 30, 1998. They also

requested that "relevant portions" of SFFAS 7, Accounting for

Revenue and Other Financing Sources, be delayed to that

same date.
2 Deferral of SFFAS No. 4

3 After considering the reasons presented by the CFO Council, 

the Board reluctantly proposed a one year delay for SFFAS No.

4, to reporting periods beginning after September 30, 1997,

and issued the ED for that proposal. No delay was proposed

for any part of SFFAS No. 7, which is effective for reporting

periods beginning after September 30, 1997. The Board noted

that cost accounting is required by the Chief Financial Officers

Act of 1990 (the CFO Act), and reliable cost information is

necessary for implementing the Government Performance and

Results Act (GPRA) of 1993. The Board also observed that

the cost accounting standards allow Federal entities without a

sophisticated cost accounting system to use cost studies or

cost finding techniques to meet the requirements of the cost

accounting standards. The Board further observed that during

the past two years since SFFAS No. 4 was issued, most

agencies should have had sufficient time to develop at least

the basic cost accounting processes as described in

paragraph 71, SFFAS No. 4.

4 The Board received 26 responses to the ED. Most

respondents supported the Board's proposal for a one year

deferral of the cost accounting standards in SFFAS No. 4 to

fiscal year 1998. After considering the comments, including

those opposed to any delay and those favoring a two year

delay, the Board decided to recommend the one year deferral

to the FASAB principals.

THE AMENDED EFFECTIVE DATE

5 The effective date of the managerial cost accounting standards

provided in paragraph 30, SFFAS No. 4, is amended as

follows:

"The managerial cost accounting standards prescribed in

SFFAS No. 4 shall be effective for fiscal periods beginning after

September 30, 1997. Earlier implementation is encouraged."
Deferral of SFFAS No. 4 3

BASIS FOR CONCLUSIONS

Reasons for the delay

6 After considering the CFO Council's presentation and the

responses to the ED, the Board is convinced that as of the end

of fiscal year 1997, most agencies were not ready to produce

cost information as required in the cost accounting standards. 

As described in CFO Council's request and in the responses

to FASAB's ED, many agencies need more time and guidance

to define responsibility segments and to develop procedures

for accumulating and assigning costs. They also said that they

need more time to upgrade or expand their accounting

systems, and to promote the use of cost measures among

program and financial managers. 

7 Most respondents stated that the one year delay should not

significantly affect implementation of the Government

Performance and Results Act of 1993 (GPRA). With regard to

the GPRA requirement that Federal agencies measure and

report outputs, outcomes, and related costs by segments for

fiscal year 1999 and thereafter, the respondents stated that

with the one year deferral of the cost accounting standards,

agencies will have time to align their cost accounting

structures with the GPRA measures.

8 Under these circumstances, the Board concluded that a one

year deferral would be appropriate. The deferral would provide

the Federal entities with an opportunity to engage top-level

agency officials, budget analysts, and program and financial

managers in the processes of developing, collecting and using

cost information. 

9 Several respondents reiterated the CFO Council's original

request for a two year delay to fiscal year 1999, on the grounds

that their systems would not be ready within fiscal year 1998. 

The Board cannot agree with this request. It believes that cost

accounting capability must be developed in time to fully support

the GPRA reporting. The Board thus urges Federal entities to

give implementation of SFFAS No. 4 a high priority and take

immediate actions to define and
4 Deferral of SFFAS No. 4

structure responsibility segments and develop costing

methodologies.

10 Several respondents said that, after the effective date, Federal

entities should be given a transitional period in which they

could have flexibility to develop and improve their cost

accounting systems and procedures gradually. The Board

disagrees with this approach for two reasons: (a) such a

transitional period would add uncertainty to the required

implementation, (b) a degree of flexibility for developing cost

accounting systems and procedures is already built in the

standards, and thus a transitional provision is not necessary. 

11 The Board notes that the standards already provide a sufficient

degree of flexibility to Federal entities. For example, paragraph

70, SFFAS No. 4, provides that managerial cost accounting

processes can be accomplished through the use of a cost

accounting system or the use of cost finding techniques or

other cost studies and analyses. Paragraph 266 further

provides that "Federal agencies can take a gradual approach

to the development of cost systems, if necessary, while

developing basic cost information through other means in the

short run." Federal agencies are expected to refine and

improve their costing procedures, methods, and systems, as

they gain experience in using cost information (paragraph 24,

SFFAS No. 4). Those who are not familiar with the criteria of

implementation should review the standard on "Requirement

for Cost Accounting" in paragraphs 67 through 76, SFFAS No.

4.

12 Several respondents were opposed to any deferral. They

pointed out that the original effective date was more than two

years after SFFAS No. 4 was issued, and it provided enough

lead time for agencies to implement the cost accounting

standards. They stated that if the delay in implementing the

standards was caused by a lack of action, a mere deferral

could only cause continued inaction. The Board recognizes

that many agencies have made significant progress in

improving general accounting and financial reporting. The

Board anticipates that the one year deferral will bring similar

progress in implementing the cost accounting standards.
Deferral of SFFAS No. 4 5

The Status of Interpretation No. 2

13 In January 1997, FASAB issued Interpretation No. 2,

Accounting for Treasury Judgment Fund Transactions. The

Treasury Judgment Fund was established by Congress to pay,

in whole or part, the court judgments or settlements negotiated

by the Justice Department on behalf of Federal agencies. 

Interpretation No. 2 requires that if a loss in litigation is probable

and estimable, the reporting entity in the litigation should

recognize an expense and liability for the full amount of the

estimated loss, although the loss may be paid by the Treasury

Judgment Fund. The Interpretation reflects the cost principle in

SFFAS No. 4, and is based on the principle of recognizing

contingent liabilities in SFFAS No. 5, Accounting for Liabilities

of the Federal Government. The Interpretation was made

effective for reporting periods beginning after September 30,

1996, the same as SFFAS No. 4 and No. 5.

14 The ED raised a question: If SFFAS No. 4 were deferred as

proposed, should Interpretation No. 2 be deferred as well? 

Some respondents believed that Interpretation No. 2 should be

deferred to fiscal year 1998. They were concerned with

difficulties in collecting reliable information to estimate the

probable litigation losses. Other respondents, however, did not

believe that Interpretation No. 2 should be delayed for the

following reasons: (1) the recognition of litigation losses and

liabilities is not dependent on cost accounting capabilities, and

(2) the recognition of contingent liabilities and losses is

required by SFFAS No. 5, which is not deferred. 

15 The Board agrees with the view that Interpretation No. 2 is

based on the principle provided in SFFAS No. 5 of recognizing

contingent liabilities, and that its implementation should not be

deferred. As with all matters in litigation, the data should come

from agencies' management and their legal offices and the

Department of Justice. Deferring the Interpretation is not a

positive solution to the data gathering problem. 
6 Deferral of SFFAS No. 4

The Status of SFFAS No. 7

16 Those respondents who preferred a two year delay for SFFAS

No. 4 also reiterated the CFO Council's original request to

defer certain cost-related portions of SFFAS No. 7, Accounting

for Revenue and Other Financing Sources to fiscal year 1999. 

While no specific paragraphs were mentioned, they were

concerned with the requirements for matching costs with

revenues by sub-organizations (equivalent to responsibility

segments). (See, for example, paragraphs 116 through 126,

SFFAS No. 7.) They stated that they are modifying their

systems to accommodate those requirements, but their

systems work could not be completed in fiscal year 1998.

17 With the effective date of SFFAS No. 4 deferred to fiscal year

1998, the cost accounting standards should be implemented

and the necessary cost information should be accumulated to

support implementation of SFFAS No. 7 for that year. Thus,

the Board is not convinced that SFFAS No. 7 needs to be

deferred. The Board believes that it is highly important to relate

SFFAS No. 4 and No. 7 to measuring program performance

and results. While the standards in SFFAS No. 4 provide more

detail in cost concepts, procedures, and methodologies,

SFFAS No. 7 brings cost information into focus in measuring

the net results of programs and activities. The integrated

implementation of those two statements is crucial for meeting

the objectives of financial reporting by Federal entities and for

implementing the GPRA requirements.
Deferral of SFFAS No. 4 7

ATTACHMENT: LETTER FROM CFO COUNCIL

The CFO Council's letter is reprinted on the next two pages.
United States Government

 Chief Financial Officers Council

JUN 26, 1997

Mr. Dave Mosso, Chairman

Financial Accounting Standards Advisory Board

441 G Street, N. W.

Washington, D.C. 20548

Dear Mr. Mosso:

The Chief Financial Officers Council (CFOC) recognizes the importance for

Federal agencies to move forward and implement the Statement of Federal

Financial Accounting Standards (SFFAS) No.4, Managerial Cost Accounting

Concepts and Standards for the Federal Government. We believe this standard,

effective for reporting periods after September 30,1996, is essential to support the

cost effectiveness of mission performance and to provide full accountability to

taxpayers over our resources.

The Council is concerned, however, over the impediments and difficulties most

agencies are having in implementing this standard. These difficulties exist due to

the following:

o The Managerial Cost Accounting System Requirements have not yet been

issued;

o The Managerial Cost Accounting Guidance, which will help agencies in

implementing SFFAS No.4, will not be issued until later this Summer;

o Adequate cost Systems are not in place to meet the requirements of the

Results Act to provide program cost and performance information in an

agency's annual performance report. Agency Performance Reports

required under the Results Act are not due until March 2000. It will be

several years before agencies will have the necessary cost systems in

place.

For the above reasons, the Council requests FASAB to change the effective date

for SFFAS No.4, and in relevant portions of its companion, SFFAS No. 7,

Accounting for Revenue and Other Financial Sources (effective for reporting

periods after September 30,1997), to the "revised effective date" for reporting

periods after September 30, 1998. Given that the systems and cost accounting

guidance needed by agencies have not been issued and only 4 months remain in

this fiscal year, we feel this request is justified. Additionally, this request is further

supported by the fact that the Results Act Performance Report requirements are

not statutorily required until FY 1999.
While we recommend a change in the effective implementation date, we fully

acknowledge and support the critical importance of the cost and revenue

standards. Based on the importance and usefulness of anticipated cost

information for internal agency management and other purpose, in addition to the

significant benefits that are often derived from early implementation of Federal

accounting standards, we nevertheless encourage Federal agencies to

implement these standards as soon as practicable based on the capabilities of

agency systems and the maturity of agency cost accounting practices. While

such early, voluntary implementation is encouraged, the Council requests that the

Board change the mandatory implementation date to fiscal periods after

September 30, 1998.

Specific questions regarding this request may be directed to Frank M. Sullivan,

Chair, CFOC Cost Accounting Committee, at (202) 273-5504 or via E-Mail at

'fs@mail.va.gov".

Sincerely,

Arnold G. Holz

Executive Vice-Chair

Chief Financial Officers Council