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Investments Not Held to Maturity

March 8, 2001

Purpose

The intent of this scenario is to provide SGL guidance on how to report investments not held to maturity. The guidance is

needed for the few Federal entities that are required to report investments at fair value on their audited financial statements. These

entities are limited to those that either (a) are required by law or policy to publish financial statements pursuant to the standards issued

by the Financial Accounting Standards Board (FASB)1 or (b) have an audit finding to report investments not held to maturity at fair

value.

For those entities that are required to produce financial statements in accordance with FASB, the scenario does not address

how to report investments not held to maturity in on the entity’s audited financial statements but does address how to meet the FACTS

I reporting requirements.2

For those entities that are required to produce financial statements according the FASAB standards, the scenario is used for the

FACTS I reporting as well as the entity’s audited financial statements. These entities currently use Financial Accounting Standards

Board Statement #115 (FAS-115) “Accounting for Certain Investments in Debt and Equity Securities as guidance for valuing

securities not held to maturity. This scenario, however, does not incorporate all requirements of FAS-115 because of conflicts

between FAS-115 and the FASAB standards as explained below.

Differences between FAS-115 and the FASAB Standards

Federal agencies are required to follow guidance in the FASAB standards. Investments are addressed in FASAB Standard #1

(SFFAS No. 1) “Accounting for Selected Assets and Liabilities” but only investments held to maturity. SFFAS No. 1 does not

1 SFFAS No. 8 paragraph 40 2 “When the financial information on such entities is included in general purpose financial reports of a larger Federal reporting entity (including Treasury’s

consolidated financial report), standards recommended by FASAB and issued by OMB and GAO should be used if the difference arising from differences

between Federal accounting standards and FASB’s would be material to users of the report of the larger entity.” SFFAS No. 8 paragraph 40.
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address how to value or report securities that will not be held to maturity but does advise agencies to continue their current practices

(paragraph 141). The current practice of the Federal agencies that report investments at fair value is to follow the guidance in

Financial Accounting Standards Board Statement #115 (FAS-115) “Accounting for Certain Investments in Debt and Equity

Securities”.

According to FAS-115, a security not held to maturity can be classified as either trading or available-for-sale. If the security is

classified as trading (i. e. bought and held primarily for sale in the near term), the accounting treatment is fair value with unrealized

holding gains and losses included in earnings. If the security is classified as available-for-sale, the treatment is fair value, with

unrealized holding gains and losses excluded from earnings and reported as a separate component of shareholders’ equity. Currently,

Federal agencies that have trading or available-for-sale securities follow the guidance in FAS-115.

A conflict exists between SFFAS No. 7 and how available-for-sale investments are reported per FAS-115. Although SFFAS

No. 7 does not specifically address securities classified as available-for-sale, it does address the use of equity accounts and the

treatment of interest on investments. The FASAB Board determined that several equity accounts should be eliminated per SFFAS

No. 7, paragraphs 217 – 2233

, but FAS-115 requires that unrealized holding gains and losses be reported as a separate component of

equity. Since SFFAS No. 7 takes precedence, an SGL equity account can not be established to meet FAS-115 requirements.

SFFAS No. 7 also addresses the treatment of interest on investments. Interest on investments has the same classification as the

predominant source of the invested balances. In most cases the invested balances of trust and special funds derive predominantly from

the funds’ earmarked taxes which are non exchange transactions with the public. Therefore, in such cases, the interest on Treasury

securities should not be deducted from gross costs of the trust (or special fund) in determining net cost of operations. The interest

received from invested balances of trust funds and special funds is, therefore, normally non exchange revenue.4

If the treatment of interest on investments is applied to unrealized gains and losses on investments, the exchange and non

exchange classification is significant. An unrealized loss or gain classified as non exchange is reported on the statement of changes in

net position and an exchange unrealized gain and loss is reported on the net cost statement. Exchange and non exchange revenues

3 Paragraphs 82 and 100 of Statement of Federal Financial Accounting Concepts no. 2 (SFFAC 2) also support the position that unexpended appropriations and

cumulative results of operations are the only equity accounts currently available. 4 SFFAS No. 7 paragraphs 306 and 307
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are not addressed in FAS-115, instead, the major classifications are trading and available-for-sale. The treatment of trading and

available-for-sale is not parallel to that of exchange and non exchange revenue. Once again, SFFAS No. 7 takes precedence.

The following diagram illustrates the differences between FAS-115 and SFFAS No. 7.

FAS-115 FAS-115 Accounting treatment SFFAS No. 7 USSGL Interpretation

Trading securities Fair value with unrealized

holding gains and losses

included in earnings

If the predominant source is

exchange revenue, classify

interest as exchange.

If predominant source is non

exchange, classify interest as

non exchange.

Gains and losses are treated the same as

interest:

-If exchange, the gain and loss

will flow through the net cost statement.

-If non exchange, the gain and loss

will flow through the statement of

changes in net position

Available-for-sale

securities

Fair value with unrealized

holding gains and losses

excluded from earnings and

reported as separate component

of equity

If the predominant source is

exchange revenue, classify

interest as exchange.

If predominant source is non

exchange, classify interest as

non exchange.

Equity accounts eliminated per 

paragraphs 217 – 223.

Gains and losses are treated the same as

interest:

-If exchange, the gain and loss will

flow through the net cost statement.

-If non exchange, the gain and loss

will flow through the statement of

changes in net position

Based on paragraphs 217 - 223, a new

equity account will not be established.
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Conclusion

For those Federal entities that are required to produce financial statements in accordance with the FASAB standards, this

scenario is to be used in preparing the entity’s audited financial statements and the FACTS I submission. A new equity account will

not be established. Non exchange gains and losses will through the statement of changes in net position while exchange gains and

losses will flow through the net cost statement. An allowance account is being proposed to capture the accumulated unrealized gains

and losses and separate accounts for unrealized gains and losses on investments are proposed.

For those Federal entities that are required to produce financial statements in accordance with FASB, the following scenario

will be used in preparing the FACTS I submission. Please note for entities subject to FASB reporting, differences may exist between

the entity’s audited financial statements and the FACTS I submission.
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1. Trial balances prior to investment purchases.

The revenue is classified as exchange.

Budgetary

4114 Appropriated Trust or Special Fund Receipts $60,000,000

4510 Apportionments $60,000,000

Proprietary

1010 Fund Balance with Treasury $60,000,000

5900 Other Revenue $60,000,000

2. During the year, a Treasury note (nonmarketable, market based) is purchased. The par

value is $9,000,000 and the discount is

$1,500,000.

TC B128

Budgetary

None

Proprietary

1610 Investments in U.S. Securities

Issued by Fiscal Service $ 9,000,000

1611 Discount on U.S. Securities

Issued by Fiscal Service $ 1,500,000

1010 Fund Balance with Treasury $ 7,500,000

3. At yearend the discount on the note is amortized.

SFFAS No. 1 requires agencies to use the interest

method (paragraph 71).

TC 510

Budgetary

No entry

Proprietary

1613 Amortization of Discount and Premium on U.S.

Treasury Securities Issued by Fiscal Service $ 250,000

5310 Interest Revenue $ 250,000
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4. At yearend it is determined that the Treasury

note is available for sale. If Financial

Accounting Standards Board Statement no. 115

(FAS-115) is followed, available for sale

securities are valued at market with unrealized

holding gains and losses excluded from earnings

and reported as a separate component of

shareholders’ equity. The market value

adjustment is the difference between the

amortized cost and the current market value.

The current market value is $7,850,000 and the

amortized cost is $7,750,000 (par $9,000,0000 –

discount $1,500,000 + amortization $ 250,000).

New TC is needed

Budgetary

No entry

Proprietary

1618 Market Adjustment - Investments

7180 Unrealized Gains – Investments

$ 100,000

$100,000

5. During the year a second treasury note is

purchased. The par value is $20,000,000 and the

discount is $3,000,000.

Budgetary

None

Proprietary

1610 Investments in U.S. Securities

Issued by Fiscal Service

1611 Discount on U.S. Securities

Issued by Fiscal Service

1010 Fund Balance with Treasury

$ 20,000,000

$ 3,000,000

$ 17,000,000

6. At yearend the discount on the second Treasury

note is amortized. SFFAS No. 1 requires

agencies to use the interest method (paragraph

71).

TC 510

Budgetary

No entry

Proprietary

1613 Amortization of Discount and Premium on U.

Treasury Securities Issued by Fiscal Service

5310 Interest Revenue

S.

$ 60 ,000

$ 60,000
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7. At year-end the second Treasury note is

classified as a trading security. If FAS-115 is

followed, trading securities are valued at market

with unrealized holding gains and losses

included in earnings. The market value

adjustment is the difference between the

amortized cost and the current market value.

The current market value is $17,040,000 and the

amortized cost is $17,060,000 (par $20,000,000

– discount $3,000,000 + amortization $ 60,000).

New TC is needed

Budgetary

No entry

Proprietary

7280 Unrealized Losses – Investments $ 20,000

1618 Market Adjustment – Investments $ 20,000

8. Pre closing adjusted trial balance Budgetary

4114 Appropriated Trust or Special Fund Receipts

4510 Apportionments

Proprietary

1010 Fund Balance with Treasury

1610 Investments in U.S. Securities Issued by Fiscal 

Service

1611Discount on U.S. Securities Issued by Fiscal Service

1613 Amortization of Discount and Premium on U.S.

Treasury Securities Issued by Fiscal Service

1618 Market Adjustment - Investments

5310 Interest Revenue

5900 Other Revenue

7180 Unrealized Gains – Investments

7280 Unrealized Losses – Investments

$60,000,000

$60,000,000

$ 35,500,000

$ 29,000,000

$ 4,500,000

$ 310,000

$ 80,000

$ 310,000

$ 60,000,000

$ 100,000

$ 20,000 .

$ 64,910,000 $ 64,910,000
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9. Closing entries Budgetary

4201 Total Actual Resources Collected $60,000,000

4114 Appropriated Trust or Special Fund Receipts $60,000,000

Proprietary

5310 Interest Revenue $ 310,000

5900 Other Revenue $60,000,000

7180 Unrealized Gains – Investments $ 100,000

3310 Cumulative Results of Operations $60,410,000

3310 Cumulative Results of Operations $ 20,000

7280 Unrealized Losses - Investments $ 20,000

10. Post closing trial balance Budgetary

4201 Total Actual Resources Collected $60,000,000

4510 Apportionments $60,000,000

Proprietary

1010 Fund Balance with Treasury $ 35,500,000

1610 Investments in U.S. Securities Issued by Fiscal Service $ 29,000,000

1611 (.911) Discount in U.S. Securities Issued by Fiscal Service $ 4,500,000

1613 Amortization of Discount and Premium on U.S.

Treasury Securities Issued by Fiscal Service $ 310,000

1618 Market Adjustment - Investments $ 80,000

3310 Cumulative Results of Operations . $ 60,390,000

$ 64,890,000 $ 64,890,000
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11. Balance Sheet Assets 1010 $ 35,500,000

Investments 1610 $ 29,000,000

1611 $ (4,500,000)

1613 $ 310,000

1618 $ 8 )

$ 24,890,000

Total assets $ 60,390,000

Net position 3310 $60,390,000

$60,390,000

12. Net Cost Statement Costs 7180 $ ( 100,000)

7280 $ 20,000

In this illustration the unrealized loss and gain flow Less earned revenues 5310 $ ( ,310,000)

through the net cost statement because the 5900 $(60,000,000)

predominant source of funds is exchange revenue. Net Cost $(60,390,000)

The unrealized loss and gain may also flow through

the statement of changes in net position if the

predominant source of funds is non exchange

revenue.

Note, if agencies are reporting available for sale

securities per FAS-115, the unrealized gain or loss

is a separate component of equity. This scenario,

however, does not accommodate an equity account

for unrealized gains and losses.
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13. Statement of Changes in Net Position 1. Net cost $(60,390,000)

2G. Financing Sources-Other NA

3. Net results of operations (Calc 2-1) $ 60,390,000

4. Prior period adjustments NA

5. Net change in cum. Results of operations

(Calc 3+/-4) $ 60,390,000

6. Increase (decrease) in unexpended appropriations NA

7. Change in net position (Calc 5+/-6) $ 60,390,000

8. Net position, beginning of period NA

9. Net position, end of period (Calc 7+8) $ 60,390,000

14. USSGL 2108 Col. 1 Col. 2 Col. 5 Col. 6 Col.11

20X5227 $35,500,000 $35,500,000 $60,000,000

SGL 1010 SGL 4510

20X5227.971 $29,000,000 $29,000,000

SGL 1610

20X5227.911 $ (4,500,000) $(4,500,000)

SGL 1611

TOTALS $35,500,000 + $24,500,000 = $60,000,000

15. SF 133 1A. Appropriations 4114E $60,000,000

7 $60,000,000

9. 4510 $60,000,000

11. $60,000,000
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16. Statement of Budgetary Resources 1A. Appropriations 4114E $60,000,000

5. Total budgetary resources $60,000,000

7A. Unobligated balances available 4510E $60,000,000

9. Total status of budgetary resources $60,000,000

17. Statement of Financing

1H.LessTrust or special fund receipts related to exchange revenue in the entity’s budget

5900 $(60,000,000)

3A. Depreciation and amortization

1613 subtract net debit balance ( 310,000)

3C. Revaluation of assets and liabilities

7180 (100,000)

7280 20,000

5. Net cost $(60,390,000)
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Account Title: Market Adjustment - Investments

Account Number: 1618

Normal Balance: Either

Definition: The accumulated unrealized gain or loss on investments other than investments in zero coupon bonds. Unrealized gain or

loss is due to adjustments for fair value

Justification: This account will provide a mechanism for agencies to report investments at market value on the balance sheet.

Currently, a limited number of agencies are required to report investments at market value. These agencies are limited to those that

prepare commercial GAAP based financial statements or those that have an audit finding to report investments at market value

Account Title: Unrealized Gains - Investments

Account Number: 7180

Normal Balance: Credit

Definition: The unrealized gains on investments resulting from adjustment of investments to fair value

Justification: Same as above

Account Title: Unrealized Losses - Investments

Account Number: 7280

Normal Balance: Debit

Definition: The unrealized losses on investments resulting from adjustment of investments to fair value.

Justification: Same as above