NOTES TO THE FINANCIAL STATEMENTS 62

United States Government

Notes to the Financial Statements

for the Fiscal Years Ended September 30,

2017, and 2016

Note 1. Summary of Significant Accounting Policies

A. Reporting Entity

This Financial Report includes the financial status and activities of the executive branch, the legislative branch, and the

judicial branch of the government. The financial reporting period ends September 30 and is the same as used for the annual

budget. The legislative and judicial branches are not required by law to submit financial statement information to Treasury;

however, these branches are included in the Financial Report. Appendix A of this report lists the organizations and agencies

(entities) included in the U.S. Government’s consolidated reporting entity for the Financial Report, as well as some entities

not included in the reporting entity. Federal Accounting Standards Advisory Board’s (FASAB) Statement of Federal

Financial Accounting Concepts (SFFAC) 2, Entity and Display, provides criteria for determining which entities are included

in the reporting entity. Such criteria are summarized in Appendix A. Also, as discussed further in Appendix A, certain

entities are excluded from the Financial Report because they do not meet the criteria, such as Federal Home Loan Banks, or

were specifically excluded from the consolidated reporting entity in accordance with SFFAC 2, such as the Board of

Governors of the Federal Reserve System and bailout entities. Examples of bailout entities include the Federal Home Loan

Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae).

During fiscal year 2008, the government began a number of emergency economic measures relating to the economy that

involved various financing programs. Key initiatives beginning in fiscal year 2008 involved programs concerning Fannie

Mae and Freddie Mac (Government-Sponsored Enterprises [GSEs]), provision of a credit facility for GSEs and Federal

Home Loan Banks, purchase of Mortgage-Backed Securities (MBSs), see Note 1.H—Investments in Government-Sponsored

Enterprises and Note 8—Investments in Government-Sponsored Enterprises for detailed information.

Following GAAP for federal entities, the government has not consolidated into its financial statements the assets,

liabilities, or results of operations of any financial organization or commercial entity in which Treasury holds either a direct,

indirect, or beneficial equity investment. Even though some of the equity investments are significant, under SFFAC 2, these

entities meet the criteria of paragraph 50 and do not appear in the federal budget section “Federal Programs by Agency and

Account.” As such, these entities are not consolidated into the financial reports of the government. However, the values of

the investment in such entities are presented on the balance sheet.

Intragovernmental transactions are eliminated in consolidation, except as described in the Other Information—

Unmatched Transactions and Balances, see Note 1.S—Unmatched Transactions and Balances for detailed information.

B. Basis of Accounting and Revenue Recognition

Consolidated Financial Statements

The consolidated financial statements of the government were prepared using GAAP, primarily based on FASAB’s 

Statement of Federal Financial Accounting Standards (SFFAS). The consolidated financial statements include accrual-based 

financial statements and sustainability financial statements, which are discussed in more detail below, and the related notes to 

the consolidated financial statements. Collectively, the accrual-based financial statements, the sustainability financial 

statements, and the notes represent basic information that is deemed essential for the financial statements and notes to be 

presented in conformity with GAAP.
63 NOTES TO THE FINANCIAL STATEMENTS 

Accrual-Based Financial Statements

The accrual-based financial statements were prepared under the following principles:

• Expenses are generally recognized when incurred.

• Non-exchange revenue, including taxes, duties, fines, and penalties, are recognized when collected and adjusted for 

the change in net measurable and legally collectible amounts receivable. Related refunds and other offsets, including 

those that are measurable and legally payable, are netted against non-exchange revenue.

• Exchange (earned) revenue is recognized when the government provides goods and services to the public for a price. 

Exchange revenue includes user charges such as admission to federal parks and premiums for certain federal 

insurance.

The basis of accounting used for budgetary purposes, which is primarily on a cash basis (budget deficit) and follows 

budgetary concepts and policies, differs from the basis of accounting used for the financial statements which follow U.S. 

GAAP. See the Reconciliations of Net Operating Cost and Budget Deficit in the Financial Statements section.

Sustainability Financial Statements

The sustainability financial statements were prepared based on the projected present value of the estimated future 

revenue and estimated future expenditures, primarily on a cash basis, for a 75 year period1

. They include the Statements of 

Long-Term Fiscal Projections, covering all federal government programs, and the Statements of Social Insurance and the 

Statements of Changes in Social Insurance Amounts, covering social insurance programs (Social Security, Medicare, 

Railroad Retirement, and Black Lung programs). These estimates are based on economic as well as demographic 

assumptions presented in Notes 22 and 23. The sustainability financial statements are not forecasts or predictions. The 

sustainability financial statements are designed to illustrate the relationship between receipts and expenditures, if current

policy is continued. For this purpose, the projections assume that scheduled social insurance benefit payments would 

continue after related trust funds are projected to be exhausted, contrary to current law, and that debt could continue to rise 

indefinitely without severe economic consequences.

By accounting convention, the Statements of Social Insurance do not include projected general revenues that, under 

current law, would be used to finance the remainder of the expenditures in excess of revenues for Medicare Parts B and D 

that is reported in the Statements of Social Insurance. The Statements of Long-Term Fiscal Projections include all revenues 

(including general revenues) of the federal government.

New Standards Issued in Prior Years and Implemented in Current Year

Beginning in fiscal year 2016, the government implemented the requirements of new standards related to the reporting 

for: Inventories and Related Property and Property, Plant, and Equipment. The standards being implemented are: 

• FASAB issued SFFAS No. 48, Opening Balances for Inventory, Operating Materials and Supplies, and Stockpile 

Materials. SFFAS No. 48 permits a reporting entity to apply an alternative valuation method in establishing opening 

balances and applies when a reporting entity is presenting financial statements or one or more line items addressed 

by this statement. This method is permitted when presenting financial statements or one or more line items 

addressed in the standard. This standard can be applied for the first time or after a period during which existing 

systems could not provide the information necessary for producing GAAP-based financial statements without use of 

the alternative valuation methods. This is intended to provide an alternative method to adoption of GAAP when 

historical records and systems do not provide a basis for valuation of opening balances in accordance with SFFAS 

No. 3, Accounting for Inventory and Related Property. Reporting entities that meet either condition and elect to 

apply this statement should follow the guidance in SFFAS No. 21, Reporting Corrections of Errors and Changes in 

Accounting Principles. SFFAS No. 48 is effective beginning in fiscal year 2017. Early implementation was 

permitted. DOD did partially implement in 2016 and select component entities have continued to implement in 

2017. DOD has not declared full implementation yet.

• FASAB issued SFFAS No. 50, Establishing Opening Balances for General Property, Plant and Equipment. SFFAS 

No. 50 permits a reporting entity to apply an alternative valuation method in establishing opening balances and 

applies when a reporting entity is presenting financial statements or one or more line items addressed by this 

statement. This standard can be applied for the first time or after a period during which existing systems could not 

provide the information necessary for producing GAAP-based financial statements without use of the alternative 

valuation methods. This is intended to provide an alternative method to adoption of GAAP when historical records 

and systems do not provide a basis for valuation of opening balance in accordance with SFFAS No. 6, Accounting 

for Property, Plant, and Equipment. This application is available to each reporting entity only once per line item 

 1 With the exception of the Black Lung program, which has a rolling 25-year projection period through September 30, 2042.
 NOTES TO THE FINANCIAL STATEMENTS 64

addressed in this statement. Reporting entities meeting the conditions and electing to apply this statement should 

follow the guidance in SFFAS No. 21, Reporting Corrections of Errors and Changes in Accounting Principles.

SFFAS No. 50 is effective beginning in fiscal year 2017. Early implementation was permitted. DOD did partially 

implement in 2016 and select component entities have continued to implement in 2017. DOD has not declared full 

implementation yet.

New Standards Issued and Not Yet Implemented

FASAB issued the following new standards that are applicable to the Financial Report, but are not yet implemented at 

the governmentwide level for fiscal year 2017:

• In December 2014, FASAB issued SFFAS No. 47, Reporting Entity. SFFAS No. 47 establishes principles to 

identify organizations for which elected officials are accountable. The standard also guides preparers of general 

purpose federal financial reports in determining what organizations to report upon, whether such organizations are 

considered “consolidation entities” or “disclosure entities,” and what information should be presented about those

organizations. An organization is considered a consolidation entity if, based on assessment of the following 

characteristics as a whole, the organization: is financed through taxes and other non-exchange revenues, is governed 

by the Congress and/or President, imposes or may impose risks and rewards to the federal government, and provides 

goods and services on a non-market basis. Organizations listed in the budget, except for non-federal organizations 

receiving federal assistance, would generally qualify as consolidation entities (Consolidation aggregates the 

individual financial statements of organizations that constitute a reporting entity and results in presentation of 

information for a single economic entity representing consolidated activities supported by taxes and other nonexchange revenue, resources, and obligations). A disclosure entity has a greater degree of autonomy with the federal 

government than a consolidation entity. To avoid obscuring information about these more autonomous organizations 

while still providing accountability, certain information for each disclosure entity (such as the nature of the federal 

government’s relationship to the disclosure entity, magnitude of relevant activity, and future exposure) and the 

aggregation of the disclosure entities are only going to be disclosed at the governmentwide level. The standard also 

requires information to be provided about related party relationships (organizations are considered related parties if 

one party has the ability to exercise significant influence over the other party in making policy decisions). SFFAS 

No. 47 is effective for periods beginning after September 30, 2017 and early implementation is not permitted.

• In April 2016, FASAB issued SFFAS No. 49, Public-Private Partnerships Disclosure Requirements. SFFAS No. 49 

establishes principles to ensure disclosure about Public-Private Partnerships (P3s) are presented in the reporting 

entity’s general purpose federal financial reports (GPFFRs). P3s are defined as “risk sharing” arrangements or 

transactions lasting more than five years between public and private sector entities. Disclosure requirements 

comprise quantitative and qualitative information to assist users in understanding the nature of P3s. P3s disclosures 

help achieve the operating performance and budgetary integrity objectives outlined in SFFAC No. 1. P3s are a form 

of investments. They should be adequately disclosed in order to assist report users in determining: (a) the important 

assets of the U.S. government and how effectively they are being managed and (b) the identification of risks. SFFAS 

No. 49 is effective for periods beginning after September 30, 2018 and early implementation is permitted; however, 

it is not being early implemented in fiscal year 2017.

• In January 2017, FASAB issued SFFAS No. 51, Insurance Programs. SFFAS No. 51 establishes accounting and 

financial reporting standards to ensure that insurance programs are adequately defined and report consistent 

information about the liabilities for losses incurred and claimed as well as expected losses during remaining 

coverage. These will replace the insurance guarantee program standards provided in paragraphs 97-121 of SFFAS 

No. 5, Accounting for Liabilities of the Federal Government. To support consistency, it identifies three categories: 

1) exchange transaction insurance programs other than life insurance, 2) nonexchange transaction insurance 

programs and 3) life insurance programs. Insurance programs are categorized based upon the type of revenue 

received as defined by SFFAS No. 7, Accounting for Revenue and Other Financing and Concepts for Reconciling 

Budgetary and Financial Accounting, as amended. This provides guidance as to how and when insurance programs 

should recognize revenue, expenses and liabilities according to the aforementioned categories. The recognition 

measurement, and disclosure guidance provides for concise, meaningful and transparent information regarding the 

operating performance of insurance programs. SFFAS No. 51 is effective for periods beginning after September 30, 

2018 and early implementation is not permitted. 

• In May 2017, FASAB issued SFFAS 52, Tax Expenditures. SFFAS No. 52 requires certain information on tax 

expenditures to assist users of the Financial Report in understanding the existence, purpose, and impact of tax 

expenditures. It requires that the Financial Report include narrative disclosures and information regarding tax 

expenditures, the general purpose of tax expenditures, the impact on and treatment of tax expenditures within the 

federal budget process, and the impact of tax expenditures on the government’s financial position and condition. It 
65 NOTES TO THE FINANCIAL STATEMENTS 

also requires that the Financial Report alert readers regarding the availability of published information on tax 

expenditure estimates, such as those published annually by the Department of the Treasury’s Office of Tax Policy. 

SFFAS No. 52 also encourages presentation of tax expenditures as other information (OI) in the Financial Report. 

SFFAS No. 52 is effective for periods beginning after September 30, 2017 and early implementation is permitted; 

however, it is not being early implemented. 

C. Accounts and Taxes Receivable

Accounts receivable represent claims to cash or other assets from entities outside the government that arise from the

sale of goods or services, duties, fines, certain license fees, recoveries, or other provisions of the law. Accounts receivable are

reported net of an allowance for uncollectible amounts. An allowance is established when it is more likely than not the

receivables will not be totally collected. The allowance method varies among the agencies in the government and is usually

based on past collection experience and is re-estimated periodically as needed. Methods include statistical sampling of

receivables, specific identification and intensive analysis of each case, aging methodologies, and percentage of total

receivables based on historical collection.

Taxes receivable consist primarily of uncollected tax assessments, penalties, and interest when taxpayers have agreed or

a court has determined the assessments are owed. Taxes receivable do not include unpaid assessments when taxpayers or a

court have not agreed that the amounts are owed (compliance assessments) or the government does not expect further

collections due to factors such as the taxpayer’s death, bankruptcy, or insolvency (write-offs). Taxes receivable are reported

net of an allowance for the estimated portion deemed to be uncollectible. The majority of the allowance for uncollectible

amounts is based on projections of collectible amounts from a statistical sample of unpaid assessments.

D. Loans Receivable and Loan Guarantee Liabilities

Direct loans obligated and loan guarantees committed after fiscal year 1991 are reported based on the present value of

the net cash flows estimated over the life of the loan or guarantee. The difference between the outstanding principal of the

direct loans and the present value of their net cash inflows is recognized as a subsidy cost allowance. The present value of

estimated net cash flows of the loan guarantees is recognized as a liability for loan guarantees.

The subsidy expense for direct or guaranteed loans disbursed during a fiscal year is the present value of estimated net

cash flows for those loans or guarantees. A subsidy expense also is recognized for modifications made during the year to

loans and guarantees outstanding and for re-estimates made as of the end of the fiscal year to the subsidy allowances or loan

guarantee liability for loans and guarantees outstanding.

Direct loans obligated and loan guarantees committed before fiscal year 1992 are valued under two different

methodologies within the government: the allowance-for-loss method and the present-value method. Under the allowancefor-loss method, the outstanding principal of direct loans is reduced by an allowance for uncollectible amounts; the liability

for loan guarantees is the amount the agency estimates would more likely than not require future cash outflow to pay default

claims. Under the present-value method, the outstanding principal of direct loans is reduced by an allowance equal to the

difference between the outstanding principal and the present value of the expected net cash flows. The liability for loan

guarantees is the present value of expected net cash outflows due to the loan guarantees.

E. Inventories and Related Property

Inventory is tangible personal property that is (1) held for sale, principally to federal agencies, (2) in the process of

production for sale, or (3) to be consumed in the production of goods for sale or in the provision of services for a fee. SFFAS

No. 3, Accounting for Inventory and Related Property, requires inventories held for sale and held in reserve for future sale

within the government to be valued using either historical cost or a method that reasonably approximates historical cost.

Historical cost methods include first-in-first-out, weighted average, and moving average. Any other valuation method may be

used if the results reasonably approximate one of the historical cost methods. FASAB issued additional guidance SFFAS No.

48, which permits a reporting entity to apply an alternative valuation method in establishing opening balances for inventory,

operating materials and supplies and stockpile materials and is intended to provide an alternative valuation method when

historical records and systems do not provide a basis for valuation of opening balances in accordance with SFFAS No. 3.
 NOTES TO THE FINANCIAL STATEMENTS 66

DOD values approximately 98 percent of resale inventory using the moving average cost method. Additionally, DOD

reports the remaining 2 percent of resale inventories at an approximation of historical cost using latest acquisition cost (LAC)

adjusted for holding gains and losses. DOD continues to implement SFFAS No. 48. Some components within DOD used the

deemed cost measures from this standard for fiscal year 2016; additional components used the deemed cost measure from the

standard in fiscal year 2017 using a combination of standard price (selling price), latest acquisition cost, estimated historical

cost, and historical cost as the basis for valuation.

Related property includes commodities, seized monetary instruments, forfeited and foreclosed property, raw materials

and work in process. Operating materials and supplies are valued at historical cost or on a basis that reasonably approximates

historical cost using the purchase and consumption method of accounting. Operating materials and supplies that are valued at

latest acquisition cost and standard pricing are not adjusted for holding gains and losses.

F. Property, Plant, and Equipment

Property, Plant and Equipment (PP&E) consists of tangible assets including buildings, equipment, construction in

progress, internal use software, assets acquired through capital leases (including leasehold improvements), and other assets

used to provide goods and services.

SFFAS No. 6 requires general PP&E to be recorded at cost. Cost shall include all costs incurred to bring the PP&E to a

form and location suitable for its intended use. PP&E used in government operations are carried at acquisition cost, with the

exception of some DOD equipment. In some instances, DOD equipment is valued at estimated historical costs, which are

calculated using internal DOD records. To establish a baseline, DOD accumulated information relating to program funding

and associated equipment, equipment useful life, program acquisitions, as well as disposals. The equipment baseline is

updated using expenditure information and information related to acquisitions and disposals. FASAB issued additional

guidance, SFFAS No. 50, which permits a reporting entity to apply an alternative method to establish opening balances for

general PP&E and is intended to provide an alternative valuation method when existing systems do not provide a basis for

valuation of opening balances in accordance with SFFAS No. 6. During fiscal year 2016, select DOD components

implemented this standard; additional components used the alternative valuation methods under the standard in fiscal year

2017 using historical records such as expenditure data, contracts, budget information, and engineering documentation as the

method of valuation. SFFAS No. 50 also permits a reporting entity to apply an alternative method to establish opening

balances for land and land rights which includes excluding land and land rights from the PP&E opening balance. If this

method is applied, future land and land right acquisitions should be expensed. DOD has extensive efforts underway to change

asset values to include the exclusion of land and land rights from opening balances in fiscal year 2018.

All PP&E is capitalized if the acquisition costs (or estimated acquisition cost for DOD) are in excess of capitalization

thresholds that vary considerably between the federal entities. Depreciation and amortization expense applies to PP&E

reported on the balance sheets except for land, unlimited duration land rights, and construction in progress. Depreciation and

amortization are recognized using the straight-line method over the estimated useful lives of the assets. All PP&E are

assigned useful lives depending on their category. The cost of acquisition, betterment, or reconstruction of all multi-use

heritage assets is capitalized as general PP&E and is depreciated. Construction in progress is used for the accumulation of the

cost of construction or major renovation of fixed assets during the construction period. The assets are transferred out of

construction in progress when the project is substantially completed. Internal use software includes purchased commercial offthe-shelf software, contractor-developed software, and software internally developed.

For financial reporting purposes, other than multi-use heritage assets, stewardship assets are not recorded as part of

PP&E. Stewardship assets consist of public domain land (stewardship land) and heritage assets. Examples of stewardship

land include national parks, wildlife refuges, national forests, and other lands of national and historical significance. Heritage

assets include national monuments, and historical sites that among other characteristics are of historical, natural, cultural,

educational, or artistic significance. Stewardship land and most heritage assets are considered priceless and irreplaceable, and

as such they are measured in physical units with no financial value assigned to them. Some heritage assets have been

designated as multi-use heritage assets, for example the White House, the predominant use of which is in government

operations. For more details on stewardship assets, see Note 24—Stewardship Land and Heritage Assets.
67 NOTES TO THE FINANCIAL STATEMENTS 

G. Debt and Equity Securities

Debt and equity securities are classified as held-to-maturity, available-for-sale, and trading. Held-to-maturity debt and

equity securities are reported at amortized cost, net of unamortized premiums and discounts. Available-for-sale debt and

equity securities are reported at fair value. Trading debt and equity securities are reported at fair value.

H. Investments in Government-Sponsored Enterprises

The senior preferred stock and associated common stock warrants in GSEs are presented at their fair value. The annual

valuation to estimate the asset’s fair value incorporates various forecasts, projections, and cash flow analyses. These

valuations are performed on the senior preferred stock and warrants and any changes in valuation, including impairment, are

recorded and disclosed in accordance with SFFAS No. 7, Accounting for Revenue and Other Financing Sources and

Concepts for Reconciling Budgetary and Financial Accounting, as amended. Since the valuation is an annual process, the

changes in valuation of the senior preferred stock and warrants are deemed usual and recurring. Accordingly, changes in

valuation are recorded as an exchange transaction which is either an expense or revenue. Since the costs of the senior

preferred stock and warrants are reflected in exchange transactions, any change in valuation is also recorded as an exchange

transaction.

The Housing and Economic Recovery Act of 2008 (HERA) established the Federal Housing Finance Agency (FHFA),

which was created to enhance authority over the GSEs, and provide the Secretary of the Treasury with certain authorities to

support the financial stability of the GSEs. In September 2008, Treasury entered into a Senior Preferred Stock Purchase

Agreement (SPSPA) with each GSE. The GSEs were placed under conservatorship and require that Treasury increase their

investment in the GSEs’ senior preferred stock if, at the end of any quarter, the FHFA, acting as the conservator, determines

that the liabilities of either GSE exceed its respective assets. The potential liabilities to the GSEs, if any, are assessed

annually and recorded at the gross estimated amount. For more detailed information on investments in GSEs, refer to Note

8—Investments in Government-Sponsored Enterprises.

I. Federal Debt

Accrued interest on Treasury securities held by the public is recorded as an expense when incurred, instead of when

paid. Certain Treasury securities are issued at a discount or premium. These discounts and premiums are amortized over the

term of the security using an interest method for all long-term securities and the straight line method for short-term securities.

Treasury also issues Treasury Inflation-Protected Securities (TIPS). The principal for TIPS is adjusted daily over the life of

the security based on the Consumer Price Index for all Urban Consumers (CPI-U).

J. Federal Employee and Veteran Benefits Payable

Generally, federal employee and veteran benefits payable are recorded during the time employee services are rendered.

The related liabilities for defined benefit pension plans, veterans’ compensation, burial and education benefits, postretirement health benefits, and post-retirement life insurance benefits, are recorded at estimated present value of future

benefits, less any estimated present value of future normal cost contributions. Normal cost is the portion of the actuarial

present value of projected benefits allocated as an expense for employee services rendered in the current year. Actuarial gains

and losses (as well as prior service cost, if any) are recognized immediately in the year they occur without amortization.

The Department of Veterans Affairs (VA) also provides certain veterans and/or their dependents with pension benefits,

based on annual eligibility reviews, if the veteran died or was disabled for nonservice-related causes. The actuarial present

value of the future liability for these VA pension benefits is a non-exchange transaction and is not required to be recorded on

the Balance Sheet. These benefits are expenses when benefits are paid rather than when employee services are rendered.

The liabilities for Federal Employees’ Compensation Act (workers compensation) benefits are recorded at estimated

present value of future benefits for injuries and deaths that have already been incurred.

Gains and losses from changes in long-term assumptions used to estimate federal employee pensions, Other Retirement

Benefits (ORB), and Other Postemployment Benefits (OPEB) liabilities are reflected separately on the Statement of Net Cost
 NOTES TO THE FINANCIAL STATEMENTS 68

and the components of the expense related to federal employee pension, ORB, and OPEB liabilities are disclosed in Note

12—Federal Employee and Veteran Benefits Payable as prescribed by SFFAS No. 33, Pensions, Other Retirement Benefits,

and Other Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount

Rates and Valuation Dates. In addition, SFFAS No. 33 also provides a standard for selecting the discount rate assumption for

present value estimates of federal employee pension, ORB, and OPEB liabilities.

K. Environmental and Disposal Liabilities

Environmental and disposal liabilities are recorded at the estimated current cost of removing, containing, treating,

and/or disposing of radioactive waste, hazardous waste, chemical and nuclear weapons, as well as other environmental

contaminations (including asbestos), assuming the use of current technology. Hazardous waste is a solid, liquid, or gaseous

waste that, because of its quantity or concentration, presents a potential hazard to human health or the environment.

Remediation consists of removal, decontamination, decommissioning, site restoration, site monitoring, closure as well as

post-closure cost, treatment, and/or safe containment. Where technology does not exist to clean up radioactive or hazardous

waste, only the estimable portion of the liability (typically monitoring and safe containment) is recorded.

L. Insurance and Guarantee Program Liabilities

Insurance and guarantee programs (such as Federal Crop Insurance Program and Benefit Pension Plans Program)

provide protection to individuals or entities against specified risks except for those specifically covered by federal employee

and veteran benefits, social insurance, and loan guarantee programs. Insurance and guarantee program funds are commonly

held in revolving funds in the government and losses sustained by participants are paid from these funds. Many of these

programs receive appropriations to pay excess claims and/or have authority to borrow from the Treasury. The values of

insurance and guarantee program liabilities are particularly sensitive to changes in underlying estimates and assumptions.

Insurance and guarantee programs with recognized liabilities in future periods (i.e., liabilities that extend beyond one year)

are reported at their actuarial present value.

M. Deferred Maintenance and Repairs

Deferred maintenance and repairs are maintenance and repairs that were not performed when they should have been or

scheduled maintenance and repairs that were delayed or postponed. Maintenance is the act of keeping fixed assets in

acceptable condition, including preventative maintenance, normal repairs, and other activities needed to preserve the assets,

so they continue to provide acceptable service and achieve their expected life. Maintenance and repairs exclude activities

aimed at expanding the capacity of assets or otherwise upgrading them to serve needs different from those originally

intended. Deferred maintenance and repairs expenses are not accrued in the Statements of Net Cost or recognized as

liabilities on the Balance Sheet. However, deferred maintenance and repairs information is disclosed in the unaudited RSI

section of this report. Please see unaudited RSI, Deferred Maintenance & Repairs for additional information including

measurement methods.

N. Contingencies

Liabilities for contingencies are recognized on the Balance Sheet when both:

• A past transaction or event has occurred, and

• A future outflow or other sacrifice of resources is probable and measurable.

The estimated contingent liability may be a specific amount or a range of amounts. If some amount within the range is a 

better estimate than any other amount within the range, then that amount is recognized. If no amount within the range is a 

better estimate than any other amount, then the minimum amount in the range is recognized and the range is disclosed.

Contingent liabilities that do not meet the above criteria for recognition, but for which there is at least a reasonable 

possibility that a loss may be incurred, are disclosed in Note 18—Contingencies. 
69 NOTES TO THE FINANCIAL STATEMENTS 

O. Commitments

In the normal course of business, the government has a number of unfulfilled commitments that may require the use of

its financial resources. Note 19—Commitments describes the components of the government’s actual commitments that are

disclosed due to their nature and/or their amount. They include long-term leases, undelivered orders, and other commitments.

P. Social Insurance

A liability for social insurance programs (Social Security, Medicare, Railroad Retirement, Black Lung, and

Unemployment) is recognized for any unpaid amounts currently due and payable to beneficiaries or service providers as of

the reporting date. No liability is recognized for future benefit payments not yet due. For further information, see Note 22—

Social Insurance and the unaudited RSI—Social Insurance section.

Q. Funds from Dedicated Collections

Generally, funds from dedicated collections are financed by specifically identified revenues, provided to the 

government by non-federal sources, often supplemented by other financing sources that remain available over time. These 

specifically identified revenues and other financing sources are required by statute to be used for designated activities, 

benefits, or purposes, and must be accounted for separately from the government’s general revenues. The three required 

criteria for a fund from dedicated collections are:

• A statute committing the government to use specifically identified revenues and/or other financing sources that are 

originally provided to the government by a non-federal source only for designated activities, benefits, or purposes;

• Explicit authority for the fund to retain revenues and/or other financing sources not used in the current period for 

future use to finance the designated activities, benefits, or purposes; and

• A requirement to account for and report on the receipt, use, and retention of the revenues and/or other financing 

sources that distinguishes the fund from the government’s general revenues.

For more details on funds from dedicated collections, see Note 20—Funds from Dedicated Collections.

R. Related Party Transactions

Federal Reserve System

The Federal Reserve System (FR System) was created by Congress under the Federal Reserve Act of 1913. The FR 

System consists of the Federal Reserve Board of Governors (Board), the Federal Open Market Committee (FOMC), and the 

Federal Reserve Banks (FRBs). Collectively, the FR System serves as the nation’s central bank and is responsible for 

formulating and conducting monetary policy, issuing and distributing currency (Federal Reserve Notes), supervising and 

regulating financial institutions, providing nationwide payment systems (including large-dollar transfers of funds, Automated 

Clearing House (ACH) operations, and check collection), providing certain financial services to federal agencies and fiscal 

principals, and serving as the U.S. government’s bank. Monetary policy includes actions undertaken by the FR System that 

influence the availability and cost of money and credit as a means of helping to promote national economic goals. The FR 

System also conducts operations in foreign markets in order to counter disorderly conditions in exchange markets or to meet 

other needs specified by the FOMC to carry out its central bank responsibilities. The FR System is not included in the federal 

budget. It is considered an independent central bank, and its decisions are not ratified by the executive branch of the federal 

government.

The government interacts with the FRBs in a variety of ways, including the following:

• The FRBs serve as the government’s fiscal agent and depositary, executing banking and other financial transactions 

on the government’s behalf. The government reimburses the FRBs for these services, the cost of which is included 

on the Statements of Net Cost;

• The FRBs hold Treasury and other federal securities in the FRBs’ System Open Market Account (SOMA) for the 

purpose of conducting monetary policy (Note 11—Federal Debt Securities Held by the Public and Accrued Interest);
 NOTES TO THE FINANCIAL STATEMENTS 70

• The FRBs hold gold certificates issued by the government in which the certificates are collateralized by gold (Note 

2—Cash and Other Monetary Assets);

• The FRBs hold Special Drawing Rights (SDR) certificates issued by the government which are collateralized by 

SDRs (see Note 2—Cash and Other Monetary Assets); and,

• The FRBs are required by Board policy to transfer their excess earnings to the government, which are included in Other 

Taxes and Receipts on the Statements of Operations and Changes in Net Position.

The government also consults with the FR System on matters affecting the economy and certain financial stabilization 

activities (Note 4—Loans Receivable and Loan Guarantee Liabilities, Net). The above financial activities involving the 

government are accounted for and disclosed in the government consolidated financial statements. In accordance with SFFAC 

No. 2, Entity and Display, the FR System’s assets, liabilities, and operations are not consolidated into the government’s 

financial statements, and are, therefore, not a part of the reporting entity.

Federal Reserve System Structure

The Board is an independent organization governed by seven members who are appointed by the President and 

confirmed by the Senate. The full term of a Board member is 14 years, and the appointments are staggered so that one term 

expires on January 31 of each even-numbered year. The Board has a number of supervisory and regulatory responsibilities 

for institutions including, among others, state-chartered banks that are members of the FR System, bank holding companies, 

and savings and loan holding companies. In addition, the Board has general supervisory responsibilities for the 12 FRBs, and 

issues currency (Federal Reserve Notes) to the FRBs for distribution.

The FOMC is comprised of the seven Board members and five of the 12 FRB presidents, and is charged with 

formulating and conducting monetary policy primarily through open market operations (the purchase and sale of certain

securities in the open market), the principal tool of national monetary policy. These operations affect the amount of reserve

balances available to depository institutions, thereby influencing overall monetary and credit conditions. The 12 FRBs are 

chartered under the Federal Reserve Act, which requires each member bank to own the capital stock of its FRB. Supervision 

and control of each FRB is exercised by a board of directors, of which three are appointed by the Board of Governors of the 

FR System, and six are elected by their member banks.

The FRBs participate in formulating and conducting monetary policy, distribute currency and coin, and serve as fiscal 

agents for the government, other federal agencies, and fiscal principals. Additionally, the FRBs provide short-term loans to 

depository institutions and loans to participants in programs or facilities with broad-based eligibility in unusual and exigent 

circumstances when approved by the Board and the Treasury Secretary.

Federal Reserve System Assets and Liabilities

The FRBs hold Treasury and other securities in the SOMA for the purpose of conducting monetary policy. Treasury 

securities held by the FRBs totaled $1,964.7 billion and $1,750.2 billion at September 30, 2017 and 2016, respectively (Note 

11—Federal Debt Securities Held by the Public and Accrued Interest). These assets are generally subject to the same market 

(principally interest-rate) and credit risks as other financial instruments. In the open market, the FR System purchases and 

sells Treasury securities as a mechanism for controlling the money supply.

The FRBs have deposit liabilities with Treasury and depository institutions. The FRBs issue Federal Reserve Notes, the 

circulating currency of the United States, which are collateralized by the Treasury securities and other assets held by the 

FRBs. Financial and other information concerning the FR System, including financial statements for the Board and the FRBs, 

may be obtained at https://www.federalreserve.gov.

FRB Residual Earnings Transferred to the Government

FRBs generate income from interest earned on securities, reimbursable services provided to federal agencies, and the 

provision of priced services to depository institutions, as specified by the Monetary Control Act of 1980. Although the FRBs 

generate earnings from carrying out open market operations (via the earnings on securities held in the SOMA account), their 

execution of these operations is for the purpose of accomplishing monetary policy rather than generating earnings. Each FRB 

is required by Board policy to transfer to the government its residual (or excess) earnings, after providing for the cost of 

operations, payment of dividends, and surplus funds not to exceed an FRB’s allocated portion of an aggregate of $10 billion 

for all FRBs. This is in accordance with the provisions of a new statute, Fixing America’s Surface Transportation Act of 2015 

(P.L. 114-94). These residual earnings may vary due to, among other things, changes in the SOMA balance levels that may 

occur in conducting monetary policy. Under P.L. 114-94, if an FRB’s earnings for the year are not sufficient to provide for 

the cost of operations, payment of dividends, or allocated portion of $10 billion aggregate surplus funds limitation, an FRB 

will suspend its payments to the government until such earnings become sufficient. The FRB residual earnings of $81.3

billion and $115.7 billion for fiscal years ended September 30, 2017 and 2016, respectively, are reported as other taxes and 

receipts on the Statements of Operations and Changes in Net Position. Accounts and taxes receivables, net, includes a 
71 NOTES TO THE FINANCIAL STATEMENTS 

receivable for FRB’s residual earnings which represents the earnings due to the General Fund as of September 30, but not 

collected by the General Fund until after the end of the month. As of September 30, 2017 and 2016, interest receivable on 

FRB’s residual earnings are $0.3 billion and $0.4 billion, respectively (Note 3—Accounts and Taxes Receivables, Net).

Other Related Parties

The federal government, through the FHFA is the conservator for Fannie Mae and Freddie Mac. See Note 8—

Investments in Government-Sponsored Enterprises.

The Secretary of Transportation has possession of two long term notes with the National Railroad Passenger Service 

Corporation (more commonly referred to as Amtrak). The first note is for $4 billion and matures in 2975 and the second note 

is for $1.1 billion and matures in 2082 with renewable 99 year terms. Interest is not accruing on these notes as long as the 

current financial structure of Amtrak remains unchanged. If the financial structure of Amtrak changes, both principal and 

accrued interest are due and payable. The Department of Transportation (DOT) does not record the notes in its financial 

statements since the notes, with maturity dates of 2975 and 2082, are considered fully uncollectible due to the lengthy terms 

and Amtrak’s history of operating losses.

In addition, DOT has possession of all the preferred stock shares (109.4 million) of Amtrak. Congress, through DOT, 

has continued to fund Amtrak since approximately 1972; originally through grants, then, beginning in 1981, through the 

purchase of preferred stock, and then through grants again after 1997. The Amtrak Reform and Accountability Act of 1997

changed the structure of the preferred stock by rescinding the voting rights with respect to the election of the Board of 

Directors and by eliminating the preferred stock’s liquidation preference over the common stock. The Act also eliminated 

further issuance to DOT of preferred stock. DOT does not record the Amtrak preferred stock in its financial statements 

because, under the Corporation's current financial structure, the preferred shares do not have a liquidation preference over the 

common shares, the preferred shares do not have any voting rights, and dividends are neither declared nor in arrears.

In general, Amtrak is not a department, agency, or instrumentality of the government or DOT. Of the 10 members of 

Amtrak’s Board of Directors, eight are appointed by the President and are subject to confirmation by the United States 

Senate. Once appointed, board members, as a whole, act independently without the consent of the government or any of its 

officers to set Amtrak policy, determine its budget, and decide operational issues. The Secretary of Transportation and the 

President of Amtrak (a nonvoting member) are statutorily appointed to the 10 member board. Traditionally, the Secretary of 

Transportation has designated the FRA Administrator to represent the Secretary at Board meetings.

The Export-Import Bank of the United States (Ex-Im Bank) has contractual agreements with the Private Export Funding 

Corporation (PEFCO). PEFCO, which is owned by a consortium of private-sector banks, industrial companies, and financial 

services institutions, makes and purchases from private sector lenders, medium-term and long-term fixed-rate and variablerate loans guaranteed by Ex-Im Bank to foreign borrowers to purchase U.S. made equipment “export loans”.

Ex-Im Bank’s credit and guarantee agreement with PEFCO provides that Ex-Im Bank will guarantee the due and 

punctual payment of interest on PEFCO’s secured debt obligations which Ex-Im Bank has approved, and grants to Ex-Im 

Bank a broad measure of supervision over PEFCO’s major financial management decisions, including entitlement to have 

representatives and attend and participate in all meetings of PEFCO’s board of directors, advisory board, and exporters’ 

council, and to review PEFCO’s financials and other records. This agreement extends through December 31, 2020.

The contractual agreements provide that Ex-Im Bank will (1) guarantee the due and punctual payment of principal, as 

well as interest on export loans made by PEFCO and (2) guarantee the due and punctual payment of interest on PEFCO’s 

long-term secured debt obligations when requested by PEFCO. Related to the amounts for Ex-Im Bank as shown in Note 4—

Loans Receivable and Loan Guarantee Liabilities, Net, these guarantees to PEFCO, aggregating $6.4 billion and $5.7 billion 

at September 30, 2017, and 2016, respectively, are included within the principal amounts guaranteed by the United States. 

The estimated losses related to these transactions is included within the guaranteed loan liability. Ex-Im Bank received fees 

for the agreements totaling $0.07 billion and $0.05 billion for fiscal years 2017 and 2016, respectively, which are included as 

earned revenue on the Statements of Net Cost. 

S. Unmatched Transactions and Balances

The reconciliation of the change in net position requires that the difference between ending and beginning net position 

equals the difference between revenue and cost, plus or minus prior-period adjustments.

The unmatched transactions and balances are needed to bring the change in net position into balance. The primary 

factors affecting this out of balance situation are:

• Unmatched intragovernmental transactions and balances between federal agencies; and

• Errors and restatements in federal agencies’ reporting.
 NOTES TO THE FINANCIAL STATEMENTS 72

As intragovernmental transactions and balances reduce to immaterial amounts, the corresponding individual lines in the 

Unmatched Transactions and Balances table are adjusted to remove the differences for the fiscal year. Please refer to the table 

of Unmatched Transactions and Balances in Other Information (Unaudited) for examples of the individual lines. Materiality 

for these adjustments is considered in the absolute value, when at or below $0.1 billion.

Refer to the Other Information (unaudited)—Unmatched Transactions and Balances for detailed information.

T. Prior-Period Adjustments

During fiscal years 2016 and 2017, the Pension Benefit Guaranty Corporation (PBGC) and DOD reported prior period

adjustments impacting the financial statements. DOD reported an increase of over $37 billion and a $1.5 billion decrease in

fiscal year 2017 and 2016, respectively, to beginning net position due to implementation of SFFAS No. 48, Opening

Balances for Inventory, Operating Materials and Supplies, and Stockpile Materials and SFFAS No. 50 Establishing Opening

Balances for General Property, Plant and Equipment. DOD adopted SFFAS No. 48 for stockpile materials for selected

components, which is reported in Inventories and Related Property. In addition, DOD adopted SFFAS No. 50 for PP&E for

selected components, which is reported in PP&E.

In fiscal year 2016, PBGC’s trust fund was reported as a fiduciary activity. During fiscal year 2017, the trust fund was

reassessed for fiduciary fund reporting in the Financial Report. Based on the reassessment of the guidance within the federal

accounting standards and the guidance provided by the establishment of PBGC under the Employee Retirement Income

Security Act (ERISA), as amended, and the U.S. Code it was determined that PBGC’s trust fund assets and liabilities should

be consolidated in the financial statements and not reported as fiduciary activity in the notes. As a result the prior year

financial statements were restated thus reversing the change in accounting principle of an increase of $0.1 billion to net

position previously reported in fiscal year 2016.

Note 20—Funds from Dedicated Collections included $0.2 billion in prior-period adjustments for Gulf Coast

Ecosystem Restoration Council and Department of Housing and Urban Development for fiscal year 2017.

U. Reclassifications

The Railroad Retirement and Black Lung programs are combined on the Statements of Social Insurance (SOSI) in

2016. In previous years, these programs were broken out and displayed separately.

In fiscal year 2017, additional lines were included in the presentation of the Statement of Changes in Cash Balance from

Budget and Other Activities to provide a further breakdown of certain categories of transactions.

A review was done to enhance the format and readability of the Financial Report leading to consolidation of immaterial

lines within tables and removal of information not required by FASAB.

V. Restatements

In fiscal year 2017, the assets and liabilities of PBGC were reassessed for reporting purposes. In fiscal year 2016

PBGC’s revolving fund was consolidated in the financial statements and the trust fund was reported as fiduciary activity in

the notes. For fiscal year 2017, both funds were consolidated in the financial statements. This change resulted in a correction

of errors for the prior fiscal year 2016 financial statements which is reported as a restatement of the amounts on the Balance

Sheet, Statement of Net Cost, Statement of Operations and Changes in Net Position, Reconciliations of Net Operating Cost

and Budget Deficit, Statements of Changes in Cash Balance from Budget and Other Activities, Note 2—Cash and Other

Monetary Assets ($3.3 billion increase), Note 3—Accounts and Taxes Receivable ($0.1 billion decrease), Net, Note 7—Debt

and Equity Securities ($60.0 billion increase), Note 9—Other Assets ($1.1 billion increase), Note 15—Insurance and

Guarantee Program Liabilities ($64.7 billion increase), and Note 16—Other Liabilities ($4.0 billion increase).

In fiscal year 2017, errors were noted in the presentation of Federal Housing Administration’s (FHA) fiscal year 2016

Note 4—Loans Receivable and Loan Guarantee Liabilities, Net that required correction of balances reported in fiscal year

2017. The corrections resulted in the restatement of the prior year amounts for FHA’s principal amount of loans under

guarantee ($2.9 billion increase), principal amount guaranteed by the United States ($2.5 billion increase), and subsidy

expense (income) for the fiscal year ($8.1 billion increase).
73 NOTES TO THE FINANCIAL STATEMENTS 

W. Fiduciary Activities

Fiduciary activities are the collection or receipt, as well as the management, protection, accounting, investment and

disposition by the government of cash or other assets in which non-federal individuals or entities have an ownership interest

that the government must uphold. Fiduciary cash and other fiduciary assets are not assets of the government and are not

recognized on the Balance Sheet. See Note 21—Fiduciary Activities, for further information.

X. Use of Estimates

The government has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues,

expenses, and the disclosure of contingent liabilities to prepare these financial statements. There are a large number of factors

that affect these assumptions and estimates, which are inherently subject to substantial uncertainty arising from the likelihood

of future changes in general economic, regulatory, and market conditions. As such, actual results will differ from these

estimates and such differences may be material.

Significant transactions subject to estimates include loans and credit program receivables, federal employee and veteran

benefits payable, credit reform subsidy costs, investments in GSEs, and other non-federal securities and related impairment,

tax receivables, loan guarantees, depreciation, imputed costs, other actuarial liabilities, cost and earned revenue allocations,

as well as contingencies and any related recognized liabilities.

The government recognizes the sensitivity of credit reform modeling to slight changes in some model assumptions and

uses regular review of model factors, statistical modeling, and annual re-estimates to reflect the most accurate cost of the

credit programs to the U.S. Government. Federal Credit Reform Act of 1990 (FCRA) loan receivables and loan guarantees

are disclosed in Note 4—Loans Receivable and Loan Guarantee Liabilities, Net.

The forecasted future cash flows used to determine credit reform amounts are sensitive to slight changes in model

assumptions, such as general economic conditions, specific stock price volatility of the entities in which the government has

an equity interest, estimates of expected default, and prepayment rates. Therefore, forecasts of future financial results have

inherent uncertainty.

The annual valuation performed as of September 30 on the preferred stock and warrants comprising the Investments in

GSEs line item on the Balance Sheets incorporates various forecasts, projections, and cash flow analyses to develop an

estimate of the asset’s fair value. The value of the senior preferred stock is estimated by first estimating the fair value of the

total equity of each GSE (which, in addition to the senior preferred stock, is comprised of other equity instruments including

common stock, common stock warrants, and junior preferred stock). The fair value of the total equity is based on a

discounted cash flow valuation methodology, whereby the primary input is the present value of the projected quarterly

dividend payments. The fair value of the GSE’s other equity instruments are then deducted from its total equity, with the

remainder representing the fair value of the senior preferred stock. The primary input into the warrants valuation is the

market value of the shares of common stock of the GSEs which, along with the junior preferred stock, are traded on the overthe-counter (OTC) Bulletin Board. Treasury evaluates the need for adjusting the OTC market-based valuation of the warrants

for the effects, if any, of significant events occurring after the close of the market but before the end of the measurement date.

Treasury records any changes in valuation, including impairment, and discloses changes in accordance with SFFAS No. 7,

Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting, as

amended. Since the valuation is an annual process, Treasury deems changes in valuation of the preferred stock and warrants

as usual and recurring.

Treasury performs annual calculations, as of September 30, to assess the need for recording an estimated liability in

accordance with SFFAS No. 5, Accounting for Liabilities of The Federal Government, related to the government’s funding

commitment to the GSEs under the SPSPAs. Liability recognition is predicated on the probable future occurrence of an

excess of liabilities and minimum capital reserve amounts, as defined, over the assets of either GSE at the end of any

reporting quarter. The occurrence of future GSE deficits, which ultimately determines the liability to the GSEs, is most

sensitive to future changes in the housing price index and, to a lesser extent, future changes in guarantee fees received by the

GSEs on single family mortgages and interest rates. For more detailed information on investments in GSEs and the amended

SPSPAs, see Note 8—Investments in Government-Sponsored Enterprises.

The government offers its employees’ pension and other post-employment retirement benefits, as well as life and health

insurance. The Office of Personnel Management administers the largest civilian plan and the Department of Defense and

Department of Veterans Affairs administer the military plans. Generally the benefits payable are recorded during the time

employee services are rendered. The related liabilities for defined benefit pension plans, veterans’ compensation and burial
 NOTES TO THE FINANCIAL STATEMENTS 74

benefits, post-retirement health benefits, life insurance benefits, education benefits, and Federal Employees’ Compensation

Act benefits are recorded at estimated present value of future benefits, less any estimated present value of future normal cost

contributions. See Note 12—Federal Employee and Veteran Benefits Payable for additional information.

Y. Credit Risk

Credit risk is the potential, no matter how remote, for financial loss from a failure of a borrower or counterparty to

perform in accordance with underlying contractual obligations. The government takes on credit risk when it makes direct

loans or guarantees to non-federal entities, provides credits to foreign entities, or becomes exposed to institutions which

engage in financial transactions with foreign countries.

The government also takes on credit risk related to committed, but undisbursed direct loans, funding commitments to

GSEs, guarantee of money market funds, and other activities. These activities generally focus on the underlying problems in

the credit markets. These programs were developed to provide credit where borrowers are not able to get access to credit with

reasonable terms and conditions. Because these programs attempt to correct for a market imperfection, it can expose the

government to potential costs and losses. The extent of the risk assumed is described in more detail in the notes to the

financial statements, and where applicable, is factored into credit reform models and reflected in fair value measurements.