NOTES TO THE FINANCIAL STATEMENTS 72

United States Government

Notes to the Financial Statements

for the Fiscal Years Ended September 30,

2021, and 2020

Note 1. Summary of Significant Accounting Policies

A. Reporting Entity

The government includes the executive branch, the legislative branch, and the judicial branch. This Financial Report

includes the financial status and activities related to the operations of the government. SFFAS No. 47, Reporting Entity

provides criteria for identifying organizations that are included in the Financial Report as consolidation entities or disclosure

entities. The determination as to whether an organization is a consolidation entity or disclosure entity is based on the

assessment of the following characteristics as a whole, the organization: a) is financed through taxes and other non-exchange

revenues; b) is governed by the Congress or the President; c) imposes or may impose risks and rewards to the government;

and d) provides goods and services on a non-market basis.

Consolidation entities are organizations that are consolidated in the financial statements. For disclosure entities, data is

not consolidated in the financial statements, instead information is disclosed in the notes to the financial statements

concerning: a) the nature of the federal government’s relationship with the disclosure entities; b) the nature and magnitude of

relevant activity with the disclosure entities during the period and balances at the end of the period; and c) a description of

financial and non-financial risks, potential benefits and, if possible, the amount of the federal government’s exposure to gains

and losses from the past or future operations of the disclosure entity or entities.

SFFAS No. 47 also provides guidance for identifying related parties and in determining what information to provide

about related party relationships of such significance that it would be misleading to exclude such information.

Based on the criteria in GAAP for federal entities, the assets, liabilities, and results of operations of Fannie Mae and

Freddie Mac are not consolidated into the government's consolidated financial statements. However, the values of the

investments in such entities, changes in value, and related activity with these entities are included in the government's

consolidated financial statements. Although federal investments in Fannie Mae and Freddie Mac are significant, these entities

do not meet the GAAP criteria for consolidation entities.

Under SFFAS No. 47 criteria, Fannie Mae and Freddie Mac were owned or controlled by the federal government as a

result of a) regulatory actions (such as organizations in receivership or conservatorship); or b) other federal government

intervention actions. Under the regulatory or other intervention actions, the relationship with the federal government is not

expected to be permanent. These entities are classified as disclosure entities based on their characteristics as a whole (see

Note 28—Disclosure Entities and Related Parties for additional information on these disclosure entities).

Also, under GAAP criteria, the FR System and SPVs are not consolidated into the government's consolidated financial

statements (see Note 8—Investments in Special Purpose Vehicles for additional information on SPVs and Note 28—

Disclosure Entities and Related Parties for additional information concerning the FR System).

For additional information regarding Reporting Entity, see Appendix A—Reporting Entity.

B. Basis of Accounting and Revenue Recognition

Consolidated Financial Statements

The consolidated financial statements of the government are prepared in accordance with the standards established by

FASAB. As permitted by FASAB standards, certain components of the federal government prepare their financial statements

following the standards established by FASB. Information from those components is included within the government's

consolidated financial statements without conversion to FASAB standards. Intra-governmental transactions are eliminated in
73 NOTES TO THE FINANCIAL STATEMENTS

consolidation, except as described in the Other Information–Unmatched Transactions and Balances. See Note 1.U—

Unmatched Transactions and Balances for additional information. The consolidated financial statements include accrualbased 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.

Accounting standards allow certain presentations and disclosures to be modified, if needed, to prevent the disclosure of

classified information. Accordingly, modifications may have been made to certain presentations and disclosures.

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 amounts receivable (modified cash basis). 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 GAAP.

See the Reconciliations of Net Operating Cost and Budget Deficit in the Financial Statements section and Note 30—COVID19 Activity in the notes to the financial statements.

New Standards Issued in Prior and Current Years and Implemented in Current Year

In FY 2016, the government began implementing the requirements of new standards related to the reporting for

inventory and related property, net and general PP&E. These standards are available to each reporting entity once per line

item addressed in the standard. 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. SFFAS No. 48 was effective beginning in FY 2017. Early implementation was permitted. DOD

did partially implement in 2016 and select component entities have continued to implement in 2017, 2018, 2019,

2020 and 2021. DOD has not declared full implementation yet; therefore, this standard continues to be partially

implemented each year.

• 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. SFFAS No. 50 was effective beginning in FY 2017. Early implementation was permitted. DOD did

partially implement in 2016 and select component entities have continued to implement in 2017, 2018, 2019, 2020

and 2021. DOD has not declared full implementation yet; therefore, this standard continues to be partially

implemented each year.

New Standards Issued and Not Yet Implemented

As of September 2021, FASAB has issued the following new standards that are applicable to the Financial Report, but

are not yet implemented at the government-wide level for FY 2021:

In April 2018, FASAB issued SFFAS No. 54, Leases: An Amendment of SFFAS No. 5, Accounting for Liabilities of the

Federal Government, and SFFAS No. 6, Accounting for Property, Plant, and Equipment. SFFAS No. 54 revises the financial

reporting standards for federal lease accounting. It provides a comprehensive set of lease accounting standards to recognize

federal lease activities in the reporting entity’s financial statements and includes appropriate disclosures. This statement

requires that federal lessees (for other than intra-governmental leases) recognize a lease liability and a right-to-use lease asset

at the commencement of the lease term, unless it meets any of the scope exclusions or the definition/criteria of short-term

leases, or contracts or agreements that transfer ownership, or intra-governmental leases. A federal lessor would recognize a

lease receivable and deferred revenue, unless it meets any of the scope exclusions or the definition/criteria of short-term

leases, contracts or agreements that transfer ownership, or intra-governmental leases. SFFAS No. 58, Deferral of the Effective

Date of SFFAS No. 54, Leases, issued in June 2020, defers the effective date of SFFAS No. 54 to FY 2024 and early

implementation is not permitted.
NOTES TO THE FINANCIAL STATEMENTS 74

In July 2021, FASAB issued SFFAS No. 59, Accounting and Reporting Government Land. Per SFFAS No. 59, starting

in FY 2026, land and permanent land rights will no longer be capitalized, and the previously capitalized amounts will be

removed from the Balance Sheet. Also, starting in FY 2026, SFFAS No. 59 requires certain disclosures in the notes to the

financial statements, including estimated acreage of land and permanent land rights and its predominant use. For FY 2022

through FY 2025, such disclosures are required to be presented as RSI. These include:

• Estimated acres of general PP&E land and stewardship land using three predominant use sub-categories:

o Conservation and preservation land;

o Operational land; and

o Commercial use land.

• Estimated acres of land held for disposal or exchange.

C. Accounts Receivable, Net

Accounts receivable includes the amount of taxes receivable that 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 allowance for uncollectible amounts represents the difference between gross taxes receivable and the

amounts estimated to be collectible.

Other 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 entities in the government and is usually

based on past collection experience and is reestimated periodically as needed. Methods may include statistical sampling of

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

receivables based on historical collection. See Note 3—Accounts Receivable, Net for additional information.

D. Loans Receivable, Net

Direct loans committed after FY 1991 are recognized as assets at the PV of their estimated net cash inflows. The

difference between the outstanding principal of the direct loans and the PV of their net cash inflows is recognized as a

subsidy cost allowance.

For direct loans disbursed during a fiscal year, a subsidy expense is recognized. The amount of the subsidy expense

equals the PV of estimated cash outflows over the life of the loans minus the PV of estimated cash inflows. For the fiscal year

during which new direct loans are disbursed, the components of the subsidy expense of those new direct loans are recognized

separately among interest subsidy costs, default costs, fees and other collections, and other subsidy costs. Credit programs

reestimate the subsidy cost allowance for outstanding direct loans by taking into account all factors that may have affected

the estimated cash flows. Any adjustment resulting from the reestimates is recognized as a subsidy expense (or a reduction in

subsidy expense).

Direct loans obligated before FY 1992 are valued under two different methodologies within the government: the

allowance-for-loss method and the PV method. Under the allowance-for-loss method, the outstanding principal of direct

loans is reduced by an allowance for uncollectible amounts. Under the PV method, the outstanding principal of direct loans is

reduced by an allowance equal to the difference between the outstanding principal and the PV of the expected net cash flows.

See Note 4—Loans Receivable, Net and Loan Guarantee Liabilities for additional information.

E. Loan Guarantee Liabilities

Loan guarantees committed after FY 1991 are recognized as liabilities at the PV of their estimated net cash outflows.

Disclosure is made of the face value of guaranteed loans outstanding, and the amount guaranteed.

For guaranteed loans disbursed during a fiscal year, a subsidy expense is recognized. The amount of the subsidy

expense equals the PV of estimated cash outflows over the life of the loans minus the PV of estimated cash inflows. The
75 NOTES TO THE FINANCIAL STATEMENTS

subsidy cost is reestimated each year taking into account all factors that may have affected the estimated cash flows. Any

adjustment resulting from the reestimates is recognized as a subsidy expense (or a reduction in subsidy expense).

Loan guarantees committed before FY 1992 are valued under two different methodologies within the government: the

allowance-for-loss method and the PV method. Under the allowance-for-loss method the liability for loan guarantees is the

amount the entity estimates would more likely than not require future cash outflow to pay default claims. Under the PV

method, the liability for loan guarantees is the PV of expected net cash outflows due to the loan guarantees. See Note 4—

Loans Receivable, Net and Loan Guarantee Liabilities for additional information.

F. Inventory and Related Property, Net

Inventory is tangible personal property that is: 1) held for sale, principally to federal entities; 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. OM&S

is tangible personal property to be consumed in normal operations and stockpile materials are strategic and critical materials

being held due to statutory requirements for use in national defense, conservation, or national emergencies.

SFFAS No. 3, Accounting for Inventory and Related Property, requires that inventories, OM&S, and stockpile materials

are valued using either historical cost or a method that reasonably approximates historical cost. Historical cost methods

include first-in-first-out, weighted average, and MAC. Historical cost includes all appropriate purchase and production costs

incurred to bring the items to their current condition and location. Any abnormal costs, such as excessive handling or rework

costs, are charged to operations of the period. Donated inventory and operating materials and supplies are valued at their FV

at the time of donation. Inventory as well as operating materials and supplies acquired through exchange of nonmonetary

assets (e.g., barter) are valued at the FV of the asset received at the time of the exchange. Any difference between the

recorded amount of the asset surrendered and the FV of the asset received is recognized as a gain or a loss.

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, Opening Balances for Inventory, Operating Materials and Supplies, and

Stockpile Materials, which permits a reporting entity to apply an alternative valuation method in establishing opening

balances for inventory, OM&S, 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.

As the largest contributor of inventory and related property, net; DOD values substantially all of its inventory available

and purchased for resale using the MAC method as of September 30, 2021. OM&S are valued using various methods

including MAC, standard price, historical cost, replacement price, and direct method. DOD uses both the consumption

method (expensed when issued to an end user for consumption in normal operations) and the purchase method (expensed

when purchased) of accounting for OM&S. See Note 5—Inventory and Related Property, Net, for additional information.

G. General Property, Plant, and Equipment, Net

General PP&E consists of tangible assets (e.g., buildings and structures, furniture and fixtures, equipment, and land)

that have an estimated useful life of two or more years, are not intended for sale in the ordinary course of business and are

intended to be used or available for use by the entity. General PP&E also includes software, land rights, and assets acquired

through capital leases.

SFFAS No. 6, Accounting for Property, Plant, and Equipment requires that general PP&E is recorded at cost. Cost

includes all costs incurred to bring the general PP&E to a form and location suitable for its intended use. General PP&E used

in government operations are carried at acquisition cost, with the exception of some DOD equipment. FASAB issued

additional guidance, SFFAS No. 50, Establishing Opening Balances for General Property, Plant, and Equipment, which

states that a reporting entity may choose one of three alternative methods for establishing an opening balance for general

PP&E. The alternative methods include using deemed cost to establish opening balances of general PP&E, selecting between

deemed cost and prospective capitalization of internal use software, and allowing an exclusion of land and land rights from

opening balances with disclosure of acreage information and expensing of future acquisitions. DOD has partially

implemented SFFAS No. 50 by electing to exclude certain land and land rights. For certain DOD components that have

implemented SFFAS No. 50, with respect to land and land rights, acreage information is disclosed, and such land and land

rights are not included on the Balance Sheet.

An entity electing to exclude land and land rights from its general PP&E opening balances must disclose, with a

reference on the Balance Sheet to the related disclosure, the number of acres held at the beginning of each reporting period,

the number of acres added during the period, the number of acres disposed of during the period, and the number of acres held
NOTES TO THE FINANCIAL STATEMENTS 76

at the end of each reporting period. DOD usually records general PP&E at the estimated historical cost. However, when

applicable DOD will continue to adopt SFFAS No. 50.

Costs to acquire general PP&E, extend the useful life of existing general PP&E, or enlarge or improve its capacity, that

exceed federal entities’ capitalization thresholds are capitalized and depreciated or amortized. Depreciation and amortization

expense is recognized on all capitalized general PP&E, except land and land rights of unlimited duration. In the case of

constructed general PP&E, this is recorded as construction work in process until it is placed in service, at which time the

balance is transferred to general PP&E. See Note 6—General Property, Plant, and Equipment, Net, for additional

information.

For financial reporting purposes, heritage assets (excluding multi-use heritage assets) and stewardship land are not

recorded as part of general PP&E. Since heritage assets are intended to be preserved as national treasures, it is anticipated

that they will be maintained in reasonable repair and that there will be no diminution in their usefulness over time. Many

assets are clearly heritage assets. For example, the National Park Service manages the Washington Monument, the Lincoln

Memorial and the Mall. Heritage assets that are predominantly used in general government operations are considered multiuse heritage assets and are included in general PP&E. Stewardship land is also consistent with the treatment of heritage assets

in that much of the government’s land is held for the general welfare of the nation and is intended to be preserved and

protected. Stewardship land is land owned by the government but not acquired for or in connection with general PP&E.

Because most federal land is not directly related to general PP&E, it is deemed to be stewardship land and accordingly, it is

not reported on the Balance Sheet. Examples of stewardship land include national parks and forests. For additional

information on stewardship assets, see Note 27—Stewardship Property, Plant, and Equipment.

H. Investments

Most investments are held by component entities that apply FASB standards and are not converted to FASAB standards

in consolidation as permitted by SFFAS No. 47, Reporting Entity. These investments are reported at FV. FV is the estimate

of the price at which an orderly transaction to sell the asset would take place between market participants at the measurement

date under current market conditions. Market or observable inputs are used as the preferred source of values, followed by

assumptions based on hypothetical transactions in absence of market inputs. Certain investments are measured at FV using

NAV per share. NAV is the amount of net assets attributable to each share of capital stock (other than senior equity

securities, that is, preferred stock) outstanding at the close of the period. See Note 7—Investments for additional information.

I. Investments in Special Purpose Vehicles

Treasury invested in common stock warrants and equity investments in SPVs for the purpose of enhancing the liquidity

of the U.S. financial system. These equity investments are reported at FV. In addition to SPV investments, warrants are held

for the purchase of common stock received as compensation from recipients of financial assistance to support ongoing

employment of aviation workers during the pandemic under the CARES Act, coupled with the CAA and ARP enacted in FY

2021. The warrants are assets of the U.S. government and Treasury is precluded from using the cash proceeds realized from

the financial instruments received. These investment holdings are also reported at FV.

The valuation to estimate the investment’s FV incorporates forecasts, projections, and cash flow analyses. Changes in

valuation, including impairments, are deemed usual and recurring and thus are recorded as exchange transactions on the

Statement of Net Cost and investments in SPVs on the Balance Sheet. See Note 8—Investments in Special Purpose Vehicles

for additional information.

J. Investments in Government-Sponsored Enterprises

The senior preferred stock and associated warrants for the purchase of common stock in the GSEs (Fannie Mae and

Freddie Mac) are presented at their FV. SPSPAs, which Treasury entered into with each GSE when they were placed under

conservatorship, can result in payments to the GSEs when, at the end of any quarter, the FHFA, acting as the conservator,

determines that the liabilities of either GSE exceed its respective assets. Such payments result in an increase to the liquidation

preference of investment in the GSEs’ senior preferred stock, with a corresponding decrease to cash held by Treasury for

government-wide operations. In addition, the liquidation preference of investments in the GSEs will increase, based on the

quarterly earnings of the GSEs, up to the adjusted capital reserve amounts set for each GSE.
77 NOTES TO THE FINANCIAL STATEMENTS

The valuation to estimate the investment’s FV incorporates forecasts, projections, and cash flow analyses. Changes in

valuation, including impairments, are deemed usual and recurring and thus are recorded as exchange transactions on the

Statement of Net Cost and investments in GSEs on the Balance Sheet. The government also records dividends related to these

investments as exchange transactions which are accrued when declared.

The potential liabilities to the GSEs, if any, are assessed annually and recorded at the gross estimated amount. For

additional information on investments in GSEs, refer to Note 9—Investments in Government-Sponsored Enterprises.

K. Federal Debt and Interest Payable

Federal debt is primarily comprised of Treasury securities, which are debt instruments issued to the public to raise

money needed to operate the federal government and pay off maturing obligations. Treasury issues these debt instruments to

the public in the form of marketable bills, notes, bonds, TIPS and FRNs, and in the form of nonmarketable securities

including Government Account Series securities, U.S. Savings Securities, and State and Local Government Series securities.

The amount of the debt, or principal, is also called the security’s face value or par value. To accurately reflect the federal

debt, Treasury records principal transactions with the public at par value at the time of the transaction. 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 (term greater than one year) and the straight-line method for short-term

securities (term of one year or less). In addition, the principal for TIPS is adjusted daily based on the Consumer Price Index

for all Urban Consumers. Certain Treasury securities also pay interest. For marketable securities, Treasury issues notes and

bonds that pay semi-annual interest based on the security’s stated interest rate, while FRNs, which have interest rates that are

indexed to the highest accepted discount rate of the most recent Treasury 13-week bill auction, pay interest quarterly based

on the interest rate at the time of payment. TIPS, on the other hand, pay a semi-annual fixed rate of interest applied to the

inflation-adjusted principal. However, for all security types accrued interest is recorded as an expense when incurred, instead

of when paid. See Note 13—Federal Debt and Interest Payable for additional information.

L. 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, education and training benefits, postretirement health benefits, and life insurance benefits, are recorded at estimated PV of future benefits, less any estimated PV

of future normal cost contributions. Normal cost is the portion of the actuarial PV 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.

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 pension program for veterans is not accounted for as a

“federal employee pension plan” under SFFAS No. 5, Accounting for Liabilities of the Federal Government, due to

differences between its eligibility conditions and those of federal employee pensions. Therefore, a future liability for pension

benefits is not recorded. These benefits are recognized as expenses when benefits are paid rather than when employee

services are rendered.

In accordance with 38 CFR § 17.36(c), the VA makes an annual enrollment decision that identifies which veterans, by

priority, will be treated for that fiscal year based on funds appropriated, estimated collections, usage, the severity index of

enrolled veterans, and changes in cost. While VA expects to continue to provide medical care to veterans in future years, an

estimate of this amount cannot be reasonably made. These medical care expenses are recognized in the period the medical

care services are provided.

The actuarial liability for FECA benefits is recorded at estimated PV 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, ORB, and OPEB

liabilities are reflected separately on the Statement of Net Cost and the components of the expense related to federal

employee pension, ORB, and OPEB liabilities are disclosed in Note 14—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 PV estimates of federal employee pension, ORB, and

OPEB liabilities. See Note 14—Federal Employee and Veteran Benefits Payable for additional information.
NOTES TO THE FINANCIAL STATEMENTS 78

M. Environmental and Disposal Liabilities

Environmental and disposal liabilities are recorded at the estimated current cost of the cleanup plan, including the level

of restoration to be performed, the current legal or regulatory requirements, and the current technology. Cleanup costs are the

costs of removing, containing, or disposing of hazardous waste. 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. Cleanup costs

include, but are not limited to, decontamination, decommissioning, site restoration, site monitoring, closure, and post-closure

costs. 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. See Note 15—Environmental and Disposal Liabilities for additional

information.

N. Benefits Due and Payable

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. See Note 16—Benefits Due and Payable

for additional information.

O. Insurance and Guarantee Program Liabilities

Insurance programs are authorized by law to financially compensate a designated population of beneficiaries by

accepting all or part of the risk for losses incurred as a result of an adverse event. Certain consolidation entities with

significant insurance and guarantee programs (i.e., PBGC, FDIC and FCSIC) apply FASB standards, and are not converted to

FASAB standards in consolidation, as permitted by SFFAS No. 47.

PBGC recognizes a single-employer program liability for trusteed, terminated and probable plan terminations. The

liability is PBGC's best estimate of the losses, net of plan assets, and the PV of expected recoveries (from sponsors and

members of their controlled group) for plans that are likely to terminate in the future. PBGC recognizes a multiemployer

program liability for future financial assistance to insolvent plans and to plans deemed probable to becoming insolvent.

FDIC records a liability for FDIC-insured institutions that are likely to fail when the liability is probable and reasonably

estimable, absent some favorable event such as obtaining additional capital or merging. The FDIC liability is derived by

applying expected failure rates and loss rates to the institutions based on supervisory ratings, Balance Sheet characteristics,

and projected capital levels.

PBGC's exposure to losses from plan terminations and FDIC's exposure to losses from insured institutions that are

classified as reasonably possible are disclosed in Note 22—Contingencies.

All other insurance and guarantee programs are accounted for in the consolidated financial statements in accordance

with SFFAS No. 51, Insurance Programs.

Programs that administer direct loans and loan guarantees, qualify as social insurance, are authorized to engage in

disaster relief activities, provide grants, provide benefits or assistance based on an individual’s or a household income and/or

assets, assume the risk of loss arising from federal government operations, pay claims through an administrative or judicial

role for individuals or organizations who claim they have been harmed by a federal entity, indemnify contractors, agreement

partners, and other third parties for loss or damage incurred while or caused by work performed for a federal entity, or are

workers’ or occupational illness compensation programs that compensate current or former employees (or survivors) and

certain third parties for injuries and occupational diseases obtained while working for a federal entity are excluded from

insurance programs.

There are three categories of insurance programs: 1) exchange transaction insurance programs other than life insurance;

2) non-exchange transaction insurance programs; and 3) life insurance programs.

For exchange transaction insurance programs other than life insurance, revenues are recognized when earned over the

insurance arrangement period and liabilities are recognized for unearned premiums, unpaid insurance claims, and for losses

on remaining coverage. Losses on remaining coverage represent estimated amounts to be paid to settle claims for the period

after year-end through the end of insurance coverage in excess of the summation of unearned premiums and premiums due

after the end of the reporting period.
79 NOTES TO THE FINANCIAL STATEMENTS

For non-exchange transaction insurance programs, revenue is recognized the same as other non-exchange transaction

revenue, no unearned premium liability is recorded and a liability is only recognized for unpaid insurance claims.

For life insurance programs, revenue is recognized when due and liabilities are recognized for unpaid insurance claims

and future policy benefits. The liability for future policy benefits represents the expected PV of future claims to be paid to, or

on behalf of, existing policyholders, less the expected PV of future net premiums to be collected from those policyholders.

Life insurance programs are disclosed in Note 14—Federal Employee and Veteran Benefits Payable. See Note 17—Insurance

and Guarantee Program Liabilities for additional information.

P. Deferred Maintenance and Repairs

DM&R 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. DM&R are not

expensed in the Statements of Net Cost or accrued as liabilities on the Balance Sheet. However, DM&R information is

disclosed in the unaudited RSI section of this report. Please see unaudited RSI—Deferred Maintenance and Repairs for

additional information including measurement methods.

Q. Commitments

Commitments reflect binding agreements that may result in the future expenditure of financial resources that are not

recognized or not fully recognized on the Balance Sheet and should be disclosed. Commitments may include, for example,

certain long-term leases, undelivered orders, P3s, international or other agreements in support of international economic

development, or agreements in support of financial market stability. See Note 21—Commitments for additional information.

R. 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 and a description

of the nature of the contingency is disclosed.

A contingent liability is disclosed if any of the conditions for liability recognition do not meet the above criteria and

there is at least a reasonable possibility that a loss may be incurred. See Note 22—Contingencies for additional information.

S. 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
NOTES TO THE FINANCIAL STATEMENTS 80

• 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.

Funds from dedicated collections on the Statement of Operations and Changes in Net Position are presented on the

consolidated basis. The consolidated dedicated collections presentation eliminates balances and transactions between funds

from dedicated collections held by the entity. For additional information on funds from dedicated collections, see Note 23—

Funds from Dedicated Collections.

T. Sustainability Financial Statements

The sustainability financial statements were prepared based on the projected PV of the estimated future revenue and

estimated future expenditures, primarily on a cash basis, for a 75-year period.1 They include the SLTFP, covering all federal

government programs, and the SOSI and the SCSIA, 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 25—Social Insurance and 26—Long-Term Fiscal Projections. 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, among other

things, that scheduled social insurance benefit payments would continue after related trust funds are projected to be depleted,

contrary to current law, and that debt could continue to rise indefinitely without severe economic consequences.

SOSI and SCSIA are based on the selection of accounting policies and the application of significant accounting

estimates, some of which require management to make significant assumptions. Further, the estimates are based on current

conditions and expectations of future conditions. Actual results could differ materially from the estimated amounts. Each

statement includes information to assist in understanding the effect of changes in assumptions to the related information.

By accounting convention, General Fund transfers to Medicare Parts B and D reported in the SOSI are eliminated when

preparing the government-wide consolidated financial statements. The SOSI shows the projected General Fund transfer(s) as

eliminations 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 SOSI. The SLTFP include all revenues (including general revenues) of the

federal government.

U. 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 includes unmatched intra-governmental balances on the Balance Sheet and includes unmatched intra-governmental

current year transactions on the Statement of Operations and Changes in Net Position to reconcile the change in net position

to ensure beginning and ending net position equals the difference between revenue and cost, plus or minus prior-period

adjustments. Unresolved intra-governmental differences (i.e., unmatched transactions and balances) result in errors in the

consolidated financial statements. The ultimate effect on the accrual-based financial statements of resolving and correcting

these differences has not been fully determined and could be material.

The unmatched transactions and balances are needed to balance the accrual-based financial statements. The Statement

of Operations and Changes in Net Position and the Balance Sheet include specific lines for the unmatched transactions and

balances, while the unmatched transactions and balances are recorded in existing lines in the Statement of Net Cost. The

primary factors affecting this out of balance situation are:

• Unmatched intra-governmental transactions and balances between federal entities; and

• Errors and restatements in federal entities’ reporting.

As intra-governmental 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 additional information.

1 With the exception of the Black Lung program, which has a rolling 25-year projection period that begins on the September 30 valuation date each year.
81 NOTES TO THE FINANCIAL STATEMENTS

V. Changes in Accounting Principle

A change in accounting principle results from either adopting a new accounting pronouncement or an entity adopting an

allowable alternative accounting principle on the basis that is preferable. Generally, as applicable, changes in accounting

principle are shown as an adjustment to beginning net position in the Statement of Operations and Changes in Net Position of

the period in which the change is implemented.

Adjustments to beginning net position in FY 2021 for changes in accounting principle was $0.7 billion, mostly due to

DOD’s continued 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.

Also, in FY 2021 CAA required VA to record obligations for hospital care or medical services furnished at non-VA

facilities at the time of approval. VA accounted for this new authority as a retrospective change that is analogous to a change

in accounting principle by adjusting FY 2020 amounts on the Balance Sheet and other financial statements. These

restatements impacted the liabilities, costs, and net position of the government and are reflected on the following statements:

1) on the Balance Sheet, accounts payable, federal employee and veteran benefits payable, and net position for funds other

than those from dedicated collections; 2) on the Statement of Net Cost, gross cost; 3) on the Statement of Operations and

Changes in Net Position, funds other than those from dedicated collections and the total columns, net cost, and net position

end of period; and 4) on the Reconciliation of Net Operating Cost and Budget Deficit, net operating cost, federal employee

and veteran benefits payable, and accounts payable. In total, the government’s reported FY 2020 net cost increased by $0.2

billion and FY 2020 net position decreased by $0.1 billion as a result of VA’s retrospective changes. Refer also to the Note

12—Accounts Payable and Note 14—Federal Employee and Veteran Benefits Payable.

Adjustments to beginning net position in FY 2020 for changes in accounting principle was $12.5 billion between the

funds from dedicated collections and funds other than those from dedicated collections due to Note 23—Funds from

Dedicated Collections applying SFFAS No. 43, Funds from Dedicated Collections: Amending Statement of Federal

Financial Accounting Standards 27, Identifying and Reporting Earmarked Funds. SFFAS No. 43 is not a new standard but

does allow a reporting methodology change between combined (excluding eliminations between funds from dedicated

collections) and consolidated (including eliminations between funds from dedicated collections) when deemed necessary.

The reporting methodology was changed from combined in FY 2019 to consolidated in FY 2020. See Note 23—Funds from

Dedicated Collections for additional information.

W. Correction of Errors

Correction of errors in financial statements result from mathematical mistakes, mistakes in the application of accounting

principles, or oversight or misuse of facts that existed at the time financial statements were prepared. When preparing

comparative financial statements, if the material error occurred in the prior period presented and the effect is known, then the

affected line items of the prior period are restated.

DOD followed SFFAS No. 21, Reporting Corrections of Errors and Changes in Accounting Principle and corrected FY

2020 errors identified as part of a department-wide effort to improve financial reporting. These corrections resulted in

restatements of amounts in the consolidated financial statements, including a correction of error of $6.0 billion on the FY

2020 Statement of Operations and Changes in Net Position. These restatements are reflected on the following statements: 1)

on the Balance Sheet; 2) on the Statement of Net Cost, gross cost; 3) on the Statement of Operations and Changes in Net

Position, funds other than those from dedicated collections and the total columns, net cost, unmatched transactions and

balances, correction of errors, and net position end of period; and 4) on the Reconciliation of Net Operating Cost and Budget

Deficit, net operating cost acquisition of capital assets, investments, inventory and related property, net, adjustment to

beginning net position, and all other reconciling items. In total, the government’s reported FY 2020 net cost increased by

$0.8 billion and FY 2020 net position increased by $4.9 billion. Refer also to Note 5—Inventory and Related Property, Net,

Note 6—General Property, Plant, and Equipment, Net, Note 7—Investments, and Unmatched Transactions and Balances in

Other Information (unaudited).

For FY 2020, a restatement was made that decreased the other commitments for U.S. participation in the IMF reported

in Note 21—Commitments. Refer to the individual note for additional information.
NOTES TO THE FINANCIAL STATEMENTS 82

X. Changes in Presentation

Changes in presentation are done to improve clarity of the presentation of the Financial Report and include changes

since the prior year that are not the result of correction of errors or changes in accounting principles. In FY 2021, the

Statement of Operations and Changes in Net Position broke out the Unmatched transactions and balances from Net operating

(cost)/revenue line and is presented as a standalone line in the net position section. Also, in FY 2021 the Balance Sheet was

modified to present additional items separately including advances and prepayments, other deferred revenue, and liability for

advances and prepayments, which were previously reported in Note 11—Other Assets and Note 19—Other Liabilities.

Advances and prepayments is now reported in Note 10—Advances and Prepayments, other deferred revenue and liability for

advances and prepayments are reported in Note 18—Advances from Others and Deferred Revenue, and the corresponding

changes to Reconciliation of Net Operating Cost and Budget Deficit Statement. Further breakout of the all other reconciling

items for allocations of special drawing rights was included in the Reconciliation of Net Operating Cost and Budget Deficit

Statement. Statements of Changes in Cash Balance and Budget and Other Activities enhanced the presentation by breaking

out special purpose vehicle disbursements, repayments of special purpose vehicle investments, and allocations of special

drawing rights. In addition, refer to the following individual notes and other information for separate changes in presentation;

Note 5—Inventory and Related Property, Net, Note 7—Investments, Note 20—Collections and Refunds of Federal Revenue,

and Unmatched Transactions and Balances in Other Information (unaudited). The FY 2020 presentation was modified to

conform to the FY 2021 presentation. Refer to the individual notes and Other Information (unaudited) for additional

information.

Y. 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 24—Fiduciary Activities, for additional information.

Z. 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 are included in the balance of loans receivable, net, federal employee and

veteran benefits payable, investments, investments in SPVs, investments in GSEs, tax receivables, loan guarantee liabilities,

depreciation, 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 reestimates to reflect the most accurate cost of the

credit programs to the U.S. government. Federal Credit Reform Act of 1990 loan receivables and loan guarantees are

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

Estimates are also used to determine the FV of investments in SPVs and GSEs. The FV of the SPV preferred equity

investments is estimated based on a discounted cash flow valuation methodology, whereby the primary input is the PV of the

projected annual cash flows associated with these investments. The value of the GSEs senior preferred stock is estimated by

first estimating the FV 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 FV of the total equity

is based on a discounted cash flow valuation methodology, whereby the primary input is the PV of the projected quarterly

cash flows to equity holders. The FV of the GSEs’ other equity instruments are then deducted from its total equity, with the

remainder representing the FV of the senior preferred stock.

Factors impacting the FV of the GSE warrants include the nominal exercise price and the large number of potential

exercise shares, the market trading of the common stock that underlies the warrants as of September 30, the principal market,
83 NOTES TO THE FINANCIAL STATEMENTS

and the market participants. Other factors impacting the FV include, the holding period risk related directly to the assumption

of the amount of time that it will take to sell the exercised shares without depressing the market. For additional information

on investments in SPVs and GSEs, see Note 8—Investments in Special Purpose Vehicles and Note 9—Investments in

Government-Sponsored Enterprises.

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, and to the government’s funding

commitment to the GSEs under the SPSPAs. For additional information on investments in GSEs and the amended SPSPAs,

see Note 9—Investments in Government-Sponsored Enterprises.

AA. 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 that engage

in financial transactions with foreign countries.

The government also takes on credit risk related to committed, but undisbursed direct loans, CARES Act Section 4003

COVID-19 credit program receivables, funding commitments to GSEs, CARES Act Section 4003 Section 13(3) funding

provided to CCF, MSF, MLF, TALF, and other activities. Many of these programs were developed or provided credit support

to the pandemic emergency relief programs of the Federal Reserve Board, to provide credit where borrowers are not able to

get access to credit with reasonable terms and conditions. These programs 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 FV measurements.

AB. Treaties and Other International Agreements

For financial reporting purposes, treaties and other international agreements may be understood as falling into three

broad categories:

• No present or contingent obligation to provide goods, services, or financial support;

• Present obligation to provide goods, services, or financial support; or

• Contingent obligation to provide goods, services, or financial support.

The proper financial reporting of treaties and other international agreements depends on the probable future outflow or

other sacrifice of resources as a result of entering into the agreement.

In many cases, treaties and other international agreements establish frameworks that govern cooperative activities with

other countries, but leave to the discretion of the parties whether to engage in any such activities. In other cases, the

agreements may contemplate specific cooperative activities, but create no present or contingent obligations to engage in

them. Cooperative activities relevant to these treaties and other international agreements fall under the first category, which

does not result in the U.S. government incurring any financial liability. Since these treaties and other international agreements

have no financial impact, they are not reported or disclosed in this Financial Report.

Some treaties and other international agreements fall under the second category, and involve a present obligation, and

therefore result in liability recognition. Such present obligation may relate to the U.S. government providing financial and inkind support, including assessed contributions, voluntary contributions, grants, and other assistance to international

organizations in which it participates as a member. Examples of such agreements include those that establish international

organizations under which the U.S. government undertakes obligations to pay assessed dues to the organization; grant

agreements under which the U.S. government provides foreign assistance funds to other countries; and claims settlement

agreements under which the U.S. government agrees to pay specific sums of money to settle claims. For additional

information related to treaties and other international agreements that fall under the second category, refer to Note 21—

Commitments.

The last category encompasses those treaties or other international agreements which result in contingencies that may

require recognition or disclosure in the financial statements. Such contingencies may stem from commitments in a treaty or

other international agreement to provide goods, services, or financial support when a future event occurs, or from litigation,

claims, or assessments forged by other parties to the agreement. For additional information related to treaties and other

international agreements that fall under the last category, refer to Note 22—Contingencies.
NOTES TO THE FINANCIAL STATEMENTS 84

AC. Public-Private Partnerships

Federal P3s are risk-sharing arrangements or transactions with expected lives greater than five years between public and

private sector entities. Such arrangements or transactions provide a service or an asset for government and/or general public

use where in addition to the sharing of resources, each party shares in the risks and rewards of said arrangements or

transactions. The P3s that are deemed material to the consolidated financial statements and have met the criteria of SFFAS

No. 49, Public-Private Partnerships, are disclosed. See Note 29—Public-Private Partnerships for additional information.