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Statement of Federal Financial Accounting Standards 1:

Accounting for Selected Assets and Liabilities

Status

Summary

This statement defines and illustrates the distinction between Entity Assets and Non-entity

Assets, as well as Intragovernmental and Governmental Assets and Liabilities.

Assets available to an entity to use in its operations are entity assets while those assets not

available to an entity but held by the entity are non-entity assets. While both entity and non-entity

assets are to be reported in entity statements, the standards require the segregation of entity and

non-entity assets. In addition, a liability (due to Treasury or other entities) must be recognized in

an amount equal to non-entity assets.

Intragovernmental assets and liabilities arise from transactions among federal entities.

Governmental assets and liabilities arise from transactions of the federal government or an entity

of the federal government with nonfederal entities. The standards require that all selected assets

and liabilities addressed in SFFAS 1 be reported separately as intragovernmental or

governmental assets and liabilities.

The statement also establishes specific standards for six assets: Cash, Fund Balance with

Treasury, Accounts Receivable, Interest Receivable, Advances and Prepayments, and

Investments in Treasury Securities; and three liabilities: Accounts Payable, Interest Payable, and

Other Current Liabilities. The standards provide definitions of each asset and liability as well as

recognition, measurement, and disclosure requirements.

Issued March 30, 1993

Effective Date For fiscal years beginning after September 30, 1993.

Affects None.

Affected by • Paragraph 53, SFFAS 7, affects paragraph 41, by providing

additional guidance regarding accruing accounts receivable.

• SFFAS 31 amends paragraphs 26, 29, 31, 37 and 38, and adds

paragraph 38a.

• SFFAS 32 amends par. 86.

• TB 2020-1 clarifies paragraphs 40-52 by providing that

recognition of losses applies to both intragovernmental

receivables and receivables from nonfederal entities.

• Interpretation 10, Clarification of Non-federal Non-entity FBWT

Classification (SFFAS 1, Paragraph 31) :An Interpretation of

SFFAS 1 and SFFAS 31.

Related Guidance • TR 12, Accrual Estimates for Grant Programs

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Interpretation 10, Clarification of Non-federal Non-entity FBWT Classification (SFFAS 1,

Paragraph 31): An Interpretation of SFFAS 1 and SFFAS 31 clarifies SFFAS 1, paragraph 31 by

providing that non-federal non-entity amounts received for unfilled orders (including amounts a

customer advances for orders that may be placed in the future or deposits made as part of a bid

or settlement process) and deposited into the General Fund of the U.S. Government should be

reported as an intragovernmental asset by the component reporting entity.

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Table of Contents

Page

Summary 1

Introduction 4

General Standards 7

Specific Standards: 8

Cash 8

Fund Balance with Treasury 9

Accounts Receivable 11

Interest Receivable 13

Advances and Prepayments 14

Investments in Treasury Securities 14

Accounts Payable 16

Interest Payable 17

Other Current Liabilities 18

Appendix A: Basis of the Board’s Conclusions 19

Appendix B: Illustration of the Interest Method for Amortization 32

Appendix C: Glossary 35

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Introduction

Objective

1. In this Statement, the Board recommends accounting standards for selected assets and

liabilities of the federal government and its entities. The standards apply to both

governmental and commercial-type functions of the federal government.

2. The selected assets and liabilities are among the fundamental elements of federal

accounting and financial reporting. By recommending these standards in the Board’s first

Statement, the Board’s objective is to provide definitive accounting and reporting guidance

to federal agencies in these fundamental areas at the earliest stage of the Board’s

consideration and development of federal accounting standards.

3. In a separate project, the Board is identifying users’ needs and federal accounting and

reporting objectives. Although the Board’s deliberation on objectives has not been finalized,

there is a general consensus that one overall objective for accounting and financial

reporting is to assure accountability of federal governmental entities. The Board believes

that issuing these selected standards will help in fostering that overall objectives.

4. Specifically, the recommended standards would assist users of financial statements in:

• assessing the efficiency and effectiveness of the government’s management of its

assets and liabilities, and

• determining whether the government’s financial position improved or deteriorated over

the reporting period.

Approach

5. The Board’s initial approach to developing accounting standards was to review the existing

accounting standards prescribed by the Government Accountability Office (GAO) in its

Policy and Procedures Manual for the Guidance of Federal Agencies, Title 2 Accounting,

(Title 2). The purpose of the review was to determine whether some of the Title 2 standards,

with any necessary modifications, could be recommended by the Board to the principals of

the Joint Financial Management Improvement Program (JFMIP).

6. Although the Title 2 standards had not been fully implemented by federal agencies, they

represented a starting point for further analysis. The Title 2 standards were reviewed in light

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of the accounting and reporting requirements established in the Chief Financial Officers

(CFOs) Act of 1990. At the time, the Board considered current accounting practices of

federal agencies. It also considered the findings from its project on user needs and

objectives of federal financial reporting. As a result of the review, the Board decided that

with certain modifications, accounting standards for selected assets and liabilities could be

recommended to the JFMIP principals.

7. These selected assets and liabilities involve less complex issues than other assets and

liabilities to be considered by the Board in the future. The Board also believes that the

selected assets and liabilities are so basic to financial reporting that they will not conflict with

any conceptual framework that the Board may develop.

8. The standards on the selected assets and liabilities were proposed in the Board’s first

Exposure Draft issued in September 1991, entitled Financial Resources, Funded Liabilities,

and Net Financial Resources and Federal Entities. A total of 69 respondents submitted their

comments to the Board on the Exposure Draft. A public hearing on the Exposure Draft was

held on February 28, 1992.

9. In preparing this Statement of recommended standards, the Board considered the

respondents’ comments. Based on the comments the Board received and its reevaluation in

relation to the Board’s current thinking on user needs and objectives of federal financial

reporting, the Board made changes to the proposals contained in the Exposure Draft. The

specific changes are discussed in Appendix A, “Basis of the Board’s Conclusions.”

Scope

10. The selected assets addressed in this Statement are:

• Cash

• Fund Balance with Treasury

• Accounts Receivable

• Interest Receivable

• Advances and Prepayments

• Investments in Treasury Securities

11. The selected liabilities addressed in this Statement are:

The Board is also addressing other assets and liabilities. It has issued a proposed standard for direct loans and loan

guarantees (see Exposure Draft entitled Accounting for Direct Loans and Loan Guarantees, September 15, 1992, and

Accounting for Inventory and Related Property, December 1992).

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• Accounts Payable

• Interest Payable

• Other Current Liabilities

Materiality

12. Except as otherwise noted, the accounting and reporting provisions of the accounting

standards recommended in this Statement need not be applied to items that are qualitatively

and quantitatively immaterial.

13. The determination of whether an item is material depends on the degree to which omitting

or misstating information about the item makes it probable that the judgment of a

reasonable person relying on the information would have been changed or influenced by the

omission or the misstatement.

Applicability

14. The accounting standards recommended in this Statement are applicable to the federal

government and its departments and agencies in the executive branch that fall within the

definition of “executive agency” as defined in 31 U.S.C. 102 and 3501.

Effective Date

15. The accounting standards recommended in this Statement will be effective for financial

statements prepared for fiscal years beginning after September 30, 1993. Earlier adoption is

encouraged.

Explanation

16. The Board’s focus in this Statement is on setting accounting standards for the individual

federal entity level of reporting. In this Statement, the standards are also applicable to

financial reporting by the U.S. government as a whole, except for those standards related to

intragovernmental assets and liabilities, which are defined in the general standards and

noted in specific standards.

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17. The word “entity” refers to a unit within the federal government, such as a department,

agency, bureau, or program, for which a set of financial statements will be prepared. The

word entity also encompasses a group of related or unrelated commercial functions,

revolving funds, trust funds, and/or other accounts for which financial statements are

prepared in accordance with OMB guidance on the form and content of financial statements.

General Standards

Intragovernmental vs. Governmental Assets and Liabilities

18. Intragovernmental assets and liabilities arise from transactions among federal entities.

Intragovernmental assets are claims of a federal entity against other federal entities.

Intragovernmental liabilities are claims against the entity by other federal entities.

19. Among the assets covered by this Statement, intragovernmental assets include an entity’s

fund balance with Treasury, investments in Treasury securities, accounts and interest

receivable from federal entities, and advances and prepayments to federal entities.

20. Intragovernmental liabilities include accounts and interest payable to federal entities and

other current liabilities due to federal entities, such as receipt of federal advances and

prepayments.

21. Governmental assets and liabilities arise from transactions of the federal government or

an entity of the federal government with nonfederal entities. Governmental assets are

claims of the federal government or an entity within the federal government against

nonfederal entities. Governmental liabilities are amounts that the federal government or an

entity within the federal government owes to nonfederal entities. The term nonfederal

entities encompasses domestic and foreign persons and organizations outside the U.S.

government. The term public is also used in this Statement to represent nonfederal entities.

22. Among the assets covered by this Statement, governmental assets that would be reported

by a federal entity include cash, accounts and interest receivable from nonfederal entities,

and advances and prepayments made to nonfederal entities.

23. Governmental liabilities include accounts and interest payable to nonfederal entities, other

liabilities due to nonfederal entities, and advances and prepayments received from

nonfederal entities.

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24. Intragovernmental assets and liabilities should be reported separately from governmental

assets and liabilities. This requirement applies to all of the selected assets and liabilities

addressed in this document.

Entity Assets vs. Non-entity Assets

25. Entity assets are those assets which the reporting entity has authority to use in its

operations. Non-entity assets are those assets that are held by an entity but are not

available to the entity. An example of non-entity assets are customs duty receivables that

the Customs Service collects for the U.S. government but has no authority to spend. A

similar example is federal income tax receivable that the Internal Revenue Service collects

for the U.S. government.

26. Both entity assets and non-entity assets under an entity’s custody or management should

be reported in the entity’s financial statements, except for non-entity assets meeting the

definition of fiduciary assets, which should not be recognized on the balance sheet, but

should be disclosed in accordance with the provisions of SFFAS 31, Accounting for

Fiduciary Activities. Non-entity assets recognized on an entity’s balance sheet should be

segregated from entity assets. An amount equal to non-entity assets should be recognized

as a liability (due to Treasury or other entities) recognized on the balance sheet.

Specific Standards

Cash

27. Cash, including imprest funds, should be recognized as an asset. Cash consists of:

a. coins, paper currency and readily negotiable instruments, such as money orders,

checks, and bank drafts on hand or in transit for deposit;

b. amounts on demand deposit with banks or other financial institutions; and

c. foreign currencies, which, for accounting purposes, should be translated into U.S.

dollars at the exchange rate on the financial statement date.

28. Entity cash. Entity cash is the amount of cash that the reporting entity holds and is

authorized by law to spend.

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29. Non-entity cash. Non-entity cash is cash that a federal entity collects and holds on behalf

of the U.S. government or other entities. In some circumstances, the entity deposits cash in

its accounts in a custodial capacity for the U.S. Treasury or other federal component

entities, or in a fiduciary capacity for non-federal parties.

a. Non-entity cash recognized on the balance sheet should be reported separately from

entity cash.

b. Non-entity cash meeting the definition of a fiduciary asset should not be recognized on

the balance sheet, but should be disclosed in accordance with the provisions of SFFAS

31, Accounting for Fiduciary Activities.

30. Restricted cash. Cash may be restricted. Restrictions are usually imposed on cash

deposits by law, regulation, or agreement. Non-entity cash is always restricted cash. Entity

cash may be restricted for specific purposes. Such cash may be in escrow or other special

accounts. Financial reports should disclose the reasons and nature of restrictions.

Fund Balance with Treasury

31. A federal entity’s fund balance with the Treasury (FBWT) is the aggregate amount of funds

in the entity’s accounts with Treasury for which the entity is authorized to make expenditures

and pay liabilities. FBWT is an intragovernmental item, except for fiduciary or other non-

federal non-entity FBWT. From the reporting entity’s perspective, the reporting entity’s

FBWT is an asset because it represents the entity’s claim to the federal government’s

resources. However, from the perspective of the federal government as a whole, it is not an

asset; and while it represents a commitment to make resources available to federal

departments, agencies, programs and other entities, it is not a liability. In contrast, fiduciary

and other non-federal non-entity FBWT is not intragovernmental, and it represents a liability

of the appropriate Treasury component and of the federal government as a whole to the

non-federal beneficiaries.

32. A federal entity’s fund balance with Treasury includes clearing account balances and the

dollar equivalent of foreign currency account balances. Foreign currency account balances

should be translated into U.S. dollars at exchange rates determined by the Treasury and

effective at the financial reporting date. A federal entity’s fund balance with Treasury also

includes balances for direct loan and loan guarantee activities held in the credit reform

program, financing, and liquidating accounts.

33. An entity’s fund balance with Treasury is increased by (a) receiving appropriations,

reappropriations, continuing resolutions, appropriation restorations, and allocations, and (b)

receiving transfers and reimbursements from other agencies. An entity’s fund balance with

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Treasury is also increased by amounts borrowed from Treasury, Federal Financing Bank, or

other entities, and amounts collected and credited to appropriation or fund accounts that the

entity is authorized to spend or use to offset its expenditures.

34. An entity’s fund balance with Treasury does not include contract authority or unused

authority to borrow. Contract authority is a statutory authority under which contracts or other

obligations may be entered into prior to receiving an appropriation for the payment of

obligations. The later enacted appropriation provides cash to liquidate obligations.

Thus,

contract authority merely permits a federal entity to incur certain obligations but does not, in

itself, add funds to the agency’s accounts with Treasury.

35. Authority to borrow is a statutory authority that permits a federal agency to incur obligations

and make payments for specific purposes out of borrowed funds. Authority to borrow adds

funds to an agency’s accounts with Treasury only after the agency actually uses the

authority to borrow a specific amount of funds. Thus, authority to borrow is included in an

entity’s fund balance with Treasury only to the extent that funds are actually borrowed under

the authority.

36. An entity’s fund balance with Treasury is reduced by (a) disbursements made to pay

liabilities or to purchase assets, goods, and services, (b) investments in U.S. securities

(securities issued by Treasury or other federal government agencies), (c) cancellation of

expired appropriations; (d) transfers and reimbursements to other entities or to the Treasury,

and (e) sequestration or rescission of appropriations.

37. Disclosure should be made to distinguish three categories of funds within the FBWT

reported on the balance sheet: the obligated balance not yet disbursed the unobligated

balance, and non-budgetary FBWT. The obligated balance not yet disbursed is the amount

of funds against which budgetary obligations have been incurred, but disbursements have

not been made.

38. The unobligated balance is the amount of funds available to an entity against which no

claims have been recorded. Unobligated balances are generally available to a federal entity

for specific purposes stipulated by law. Unobligated balances may also include balances in

expired/canceled accounts that are available only for approved adjustments to prior

obligations. Certain unobligated balances may be restricted to future use and are not

apportioned for current use. Disclosure should be provided on such restrictions. Non-

budgetary FBWT includes unavailable receipt accounts, clearing accounts and other

accounts that do not represent budget authority, as well as non-entity FBWT that is

recognized on the balance sheet.

Source of definition: OMB Circular A-34.

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38a. In addition to entity and non-entity FBWT that is recognized on the balance sheet, a federal

entity may also administer fiduciary FBWT on behalf of non-federal entities or individuals.

Fiduciary FBWT is not recognized on the balance sheet, but is subject to separate

disclosure requirements for fiduciary FBWT, see SFFAS 31, Accounting for Fiduciary

Activities.

39. Federal entities should explain any discrepancies between fund balance with Treasury in

their general ledger accounts and the balance in the Treasury’s accounts and explain the

causes of the discrepancies in footnotes to financial statements. (Discrepancies due to time

lag should be reconciled and discrepancies due to error should be corrected when financial

reports are prepared.) Agencies also should provide information on unused funds in expired

appropriations that are returned to Treasury at the end of a fiscal year.

Accounts Receivable

40. Accounts receivable arise from claims to cash or other assets. The accounting standard for

accounts receivable is set forth below.

41. Recognition of receivables.

A receivable should be recognized when a federal entity

establishes a claim to cash or other assets against other entities, either based on legal

provisions, such as a payment due date, (e.g., taxes not received by the date they are due),

or goods or services provided. If the exact amount is unknown, a reasonable estimate

should be made. [See SFFAS 7, paragraph 53 for more.]

42. Separate reporting. Receivables from federal entities are intragovernmental receivables,

and should be reported separately from receivables from nonfederal entities.

43. Entity vs. Non-entity receivables. Receivables should be distinguished between entity

receivables and non-entity receivables. Entity receivables are amounts that a federal entity

claims for payment from other federal or nonfederal entities and that the federal entity is

authorized by law to include in its obligational authority or to offset its expenditures and

liabilities upon collection.

Non-entity receivables are amounts that the entity collects on

The word recognition used in this document bears the same meaning as used by the Financial Accounting Standards

Board (FASB) in its conceptual statements. It means the process of formally recording or incorporating an item into the

financial statements of an entity as an asset, liability, revenue, expense, or the like. A recognized item is depicted in

both words and numbers, with the amount included in the statement totals. Recognition comprehends both initial

recognition of an item and recognition of subsequent changes in or removal of a previously recognized item. FASB

Statement of Financial Accounting Concepts No. 5, par. 6.

An entity may have receivables that, once collected, can be used as offsets to the entity’s budget authority and

outlays only when authorized by Congress. Before receiving the authorization, however, those receivables are

non-entity receivables.

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behalf of the U.S. government or other entities, and the entity is not authorized to spend.

Receivables not available to an entity are non-entity assets and should be reported

separately from receivables available to the entity.

44. Recognition of losses due to uncollectible amounts. Losses on receivables should be

recognized when it is more likely than not that the receivables will not be totally collected.

The phrase more likely than not means more than a 50 percent chance of loss occurrence.

45. An allowance for estimated uncollectible amounts should be recognized to reduce the gross

amount of receivables to its net realizable value.

The allowance for uncollectible amounts

should be reestimated on each annual financial reporting date and when information

indicates that the latest estimate is no longer correct.

46. Measurement of losses. Losses due to uncollectible amounts should be measured

through a systematic methodology. The systematic methodology should be based on

analysis of both individual accounts and a group of accounts as a whole.

47. Individual account analysis. Accounts that represent significant amounts should be

individually analyzed to determine the loss allowance. Loss estimation for individual

accounts should be based on (a) the debtor’s ability to pay, (b) the debtor’s payment record

and willingness to pay, and (c) the probable recovery of amounts from secondary sources,

including liens, garnishments, cross collections and other applicable collection tools.

48. The allowance for losses generally cannot be based solely on the results of individual

account analysis. In many cases, information may not be available to make a reliable

assessment of losses on an individual account basis or the nature of the receivables may

not lend itself to individual account analysis. In these cases, potential losses should be

assessed on a group basis.

49. Group analysis. To determine the loss allowance on a group basis, receivables should be

separated into groups of homogeneous accounts with similar risk characteristics.

50. The groups should reflect the operating environment. For example, accounts receivable can

be grouped by: (a) debtor category (business firms, state and local governments, and

Governmental receipts include collections arising from the sovereign and regulatory powers unique to the federal

government, e.g., income tax receipts, customs duties, court fines, certain license fees, etc. A federal entity may be

responsible for collecting these receipts on behalf of the U.S. government, but is not authorized to use the monies

collected to offset its expenditures.

In the Board’s Exposure Draft, Accounting for Direct Loans And Loan Guarantees, September 15, 1992, receivables

are accounted for on a net present value basis. [See SFFAS No. 2]

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individuals), (b) reasons that gave rise to the receivables (tax delinquencies, erroneous

benefit payments, trade accounts based on goods and services sold, and transfers of

defaulted loans to accounts receivable), or (c) geographic regions (foreign countries, and

domestic regions). Within a group, receivables are further stratified by risk characteristics.

Examples of risk factors are economic stability, payment history, alternative repayment

sources, and aging of the receivables.

51. Statistical estimation by modeling or sampling is one appropriate method for estimating

losses on groups of receivables. Statistical estimation should take into consideration factors

that are essential for estimating the level of losses, including historical loss experience,

recent economic events, current and forecast economic conditions, and inherent risks.

52. Disclosure. Agencies should disclose the major categories of receivables by amount and

type, the methodology used to estimate the allowance for uncollectible amounts, and the

total allowance.

Interest Receivable

53. Interest receivable should be recognized for the amount of interest income earned but not

received for an accounting period. Interest receivable should be recognized as it is earned

on investments in interest-bearing securities. Interest also should be recognized on

outstanding accounts receivable and other U.S. government claims against persons and

entities in accordance with provisions in 31 U.S.C. 3717, Interest and Penalty Claims. (See

also Federal Claims Collection Standards, 4 CFR Part 103, paragraph 102.13.)

54. No interest should be recognized on accounts receivable or investments that are

determined to be uncollectible unless the interest is actually collected. Payments received

from the debtor are required to be applied first to penalty and administrative cost charged,

second to interest receivable, and third to outstanding debt principal, per Federal Claims

Collection Standards, 4 C.F.R. 102.13(f).

55. However, until the interest payment requirement is officially waived by the government entity

or the related debt is written off, interest accrued on uncollectible accounts receivable

should be disclosed.

56. Interest receivable from federal entities should be accounted for and reported separately

from interest receivable from the public.

Accounting for imputed interest, interest on long-term leases, interest on loans, and interest on amounts deposited in

credit reform accounts will be addressed when the Board considers accounting standards in these areas.

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Advances and Prepayments

57. Advances are cash outlays made by a federal entity to its employees, contractors, grantees,

or others to cover a part or all of the recipients’ anticipated expenses or as advance

payments for the cost of goods and services the entity acquires. Examples include travel

advances disbursed to employees prior to business trips, and cash or other assets

disbursed under a contract, grant, or cooperative agreement before services or goods are

provided by the contractor or grantee.

58. Prepayments are payments made by a federal entity to cover certain periodic expenses

before those expenses are incurred. Typical prepaid expenses are rents paid to a lessor at

the beginning of a rental period. Progress payments made to a contractor based on a

percentage of completion of the contract are not advances or prepayments.

59. Advances and prepayments should be recorded as assets. Advances and prepayments are

reduced when goods or services are received, contract terms are met, progress is made

under a contract, or prepaid expenses expire. A travel advance, for example, should be

initially recorded as an asset and should be subsequently reduced when travel expenses

are actually incurred. Amounts of advances and prepayments that are subject to refund (for

example, a settled travel claim indicating the traveler owes part of the advance to the

government) should be transferred to accounts receivable.

60. Advances and prepayments paid out by an entity are assets of the entity. On the other hand,

advances and prepayments received by an entity are liabilities of the entity (see the

recommended standard for other current liabilities). In financial reports of an entity,

advances and prepayments the entity paid out (assets) should not be netted against

advances and prepayments that the entity received (liabilities).

61. Advances and prepayments made to federal entities are intragovernmental items and

should be accounted for and reported separately from those made to nonfederal entities.

Investments in Treasury Securities

62. Scope. This standard applies to investment by federal entities in Treasury securities,

including (a) nonmarketable par value Treasury securities, (b) market-based Treasury

securities expected to be held to maturity, and (c) marketable Treasury securities expected

to be held to maturity. This standard does not apply to investments by federal entities in

securities (debt and equity) and other financial instruments issued by other than the U.S.

Treasury.

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63. Nonmarketable par value Treasury securities are special series debt securities that the U.S.

Treasury issues to federal entities at face value (par value). The securities are redeemed at

face value on demand; thus investing entities recover the full amounts invested.

64. Market-based Treasury securities are debt securities that the U.S. Treasury issues to

federal entities without statutorily determined interest rates. Although the securities are not

marketable, their terms (prices and interest rates) mirror the terms of marketable Treasury

securities.

65. Marketable Treasury securities, including Treasury bills, notes, and bonds, are initially

offered by Treasury to the marketplace and can then be bought and sold on securities

exchange markets. Their bid and ask prices are publicly quoted by the marketplace.

66. Treasury securities expected to be held to maturity. Aside from nonmarketable par

value Treasury securities, this standard applies to market-based and marketable Treasury

securities that are expected to be held to maturity. An investment in securities is expected to

be held to maturity only if the investing entity has the intent and ability to hold those

securities to maturity. An investment in Treasury securities should not be considered as

expected to be held to maturity if the investing entity is likely to sell the securities in

response to short-term cash needs, changes in market interest rates, or for other reasons.

67. Separate accounting and reporting for federal and nonfederal securities. Investments

of a federal entity in U.S. securities (securities issued by Treasury and federal agencies) are

intragovernmental investments. These U.S. securities also represent intragovernmental

liabilities of the Treasury Department or other federal entities that issue the securities.

Investments in securities issued by the U.S. Treasury or other federal entities should be

accounted for and reported separately from investments in securities issued by nonfederal

entities.

68. Initial recording. The three types of Treasury securities covered by this standard

(nonmarketable par value Treasury securities, market-based Treasury securities expected

to be held to maturity, and marketable Treasury securities expected to be held to maturity)

should be recognized at their acquisition cost. If the acquisition is made in exchange for

nonmonetary assets, the acquired securities should be recognized at the fair market value

of either the securities acquired or the assets given up, whichever is more definitively

determinable.

69. If the acquisition cost differs from the face (par) value, the security should be recorded at the

acquisition cost, which equals the security’s face value plus or minus the premium or

discount on the investment. A discount is the excess of the security’s face amount over its

purchase price. A premium is the excess of the purchase price over the security’s face

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value. The balance in the valuation account is treated as a contra account to the debt

security.

70. Valuation subsequent to acquisition. Subsequent to their acquisition, investments in

Treasury securities should be carried at their acquisition cost, adjusted for amortization, if

appropriate, as explained below.

71. If an amount of premium or discount exists, the carrying amount of the investments should

be adjusted in each reporting period to reflect the amortization of the premium or the

discount. Premiums and discounts should be amortized over the life of the Treasury security

using the interest method. Under the interest method, the effective interest rate (the actual

interest yield on amounts invested) multiplied by the carrying amount of the Treasury

security at the start of the accounting period equals the interest income recognized during

the period (the carrying amount changes each period by the amount of the amortized

discount or premium). The amount of amortization of discount or premium is the difference

between the effective interest recognized for the period and the nominal interest for the

period as stipulated in the Treasury security. (See Appendix B for an illustration of the

interest method of amortization.)

72. Disclosure of market value. For investments in market-based and marketable Treasury

securities, the market value of the investments should be disclosed. For purposes of

determining a market value, investments should be grouped by type of security, such as

marketable or market-based Treasury securities. The market value of investments in a

group is calculated by the market price of securities of that group at the financial reporting

date multiplied by the number of notes or bonds held at the financial reporting date.

73. Investment reclassification. In rare instances, significant unforeseeable circumstances

may cause a change in an entity’s intent or ability to hold to maturity certain securities that

are initially classified as expected to be held to maturity. In these circumstances, the

affected securities should be reclassified as securities available for sale or early redemption

(redemption before the security’s maturity). Once a security is reclassified it is no longer

subject to this standard.

Accounts Payable

74. Accounts payable are amounts owed by a federal entity for goods and services received

from, progress in contract performance made by, and rents due to other entities.

75. Accounts payable are not intended to include liabilities related to on-going continuous

expenses such as employees’ salary and benefits, which are covered by other current

liabilities. (See recommended standard for Other Current Liabilities.)

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76. Amounts owed for goods or services received from federal entities represent

intragovernmental transactions and should be reported separately from amounts owed to

the public.

77. When an entity accepts title to goods, whether the goods are delivered or in transit, the

entity should recognize a liability for the unpaid amount of the goods. If invoices for those

goods are not available when financial statements are prepared, the amounts owed should

be estimated.

78. When a contractor provides the government with goods that are also suitable for sale to

others, the liability usually arises when the contractor physically delivers the goods and the

government receives them and takes formal title. However, when a contractor builds or

manufactures facilities or equipment to the government’s specifications, formal acceptance

of the products by the government is not the determining factor for accounting recognition.

Constructive or de facto receipt occurs in each accounting period, in accordance with the

following paragraph.

79. For facilities or equipment constructed or manufactured by contractors or grantees

according to agreements or contract specifications, amounts recorded as payable should be

based on an estimate of work completed under the contract or the agreement. The estimate

of such amounts should be based primarily on the federal entity’s engineering and

management evaluation of actual performance progress and incurred costs.

80. The reporting entity should disclose accounts payable not covered by budgetary resources.

Interest Payable

81. Interest payable should be recorded for the amount of interest expense incurred and unpaid.

Interest incurred results from borrowing funds from Treasury, Federal Financing Bank, other

federal entities, or the public. Interest also should be recorded on late payment of bills by the

federal entity (see provisions in 31 U.S.C. 3901 through 3907, Prompt Payment) and on

refunds (see provisions in 26 U.S.C. 6611). Interest payable of an entity on borrowed funds

and unpaid bills should be recognized at the end of each period.

82. Interest payable to federal entities is an intragovernmental liability and should be accounted

for separately from interest payable to the public.

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Other Current Liabilities

83. The term other current liabilities is used to report current liabilities that are not recognized in

specific categories such as accounts payable; interest payable; debt owed to the public,

Treasury, or other entities; and liabilities for loan guarantee losses. Other current liabilities

may include unpaid expenses that are accrued for the fiscal year for which the financial

statements are prepared and are expected to be paid within the fiscal year following the

reporting date.

84. Typical examples of other current liabilities to be recognized are: (a) accrued employees’

wages, bonuses, and salaries for services rendered in the current fiscal year for which

paychecks will be issued in the following year; (b) accrued entitlement benefits payable,

such as Old Age Survivors Insurance (OASI) and Veterans Compensation and Pension

benefits applicable to the current period but not yet paid, and (c) annuities for the current

fiscal year administered by trust, pension, or insurance programs for which payment would

be made in the following fiscal year. Such liabilities may be presented on the face of the

financial reports as Other Current Liabilities or as one or more separate categories

depending on the materiality of the amounts.

85. Federal entities may receive advances and prepayments from other entities for goods to be

delivered or services to be performed. Before revenues are earned, the current portion of

the advances and prepayments should be recorded as other current liabilities. After the

revenue is earned (goods or services are delivered, or performance progress is made

according to engineering evaluations), the entity should record the appropriate amount as a

revenue or financing source and should reduce the liability accordingly. Other current

liabilities due to federal entities are intragovernmental liabilities that should be reported

separately from those due to employees and the public.

86. The reporting entity should disclose the amount of current liabilities not covered by

budgetary resources. The U.S. government-wide financial statements need not include this

disclosure.

The provisions of this Statement need not be applied to information if the effect of

applying the provision(s) is immaterial. Refer to Statement of Federal Financial

Accounting Concepts 1, Objectives of Federal Financial Reporting, chapter 7, titled

Materiality, for a detailed discussion of the materiality concepts.

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Appendix A: Basis Of The Board’s Conclusions

87. This Appendix provides a discussion on the substantive comments that the Board received

from respondents to Exposure Draft No. 1, “Financial Resources, Funded Liabilities, and

Net Financial Resources of Federal Entities” (November 18, 1991) and from testimony at a

public hearing on the Exposure Draft held February 28, 1992. The Appendix explains the

basis of the Board’s conclusions on issues raised by the respondents.

This Statement may be affected by later Statements. The FASAB Handbook is updated annually

and includes a status section directing the reader to any subsequent Statements that amend this

Statement. Within the text of the Statements, the authoritative sections are updated for changes.

However, this appendix will not be updated to reflect future changes. The reader can review the

basis for conclusions of the amending Statement for the rationale for each amendment.

Basic Concepts

88. Net financial resources. In the Exposure Draft, the Board proposed the concept of net

financial resources . The term net financial resources was referred to as an entity’s total

financial resources less its total funded liabilities (Exposure Draft, page 11). The Exposure

Draft stated that the amount of net financial resources provides a general measure of an

entity’s financial sufficiency before new appropriations are provided. The Exposure Draft

further stated that information on the components of an entity’s net financial resources

(obligated and unobligated balances of budget authority and other items) can provide

additional insight into an entity’s financial situation.

89. Many respondents do not see convincing evidence that the concept of net financial

resources is useful. They point out that there are no concrete examples to illustrate how the

information can be used. Some respondents also do not believe that the measure of net

financial resources is well defined. They point out that one of the elements missing from the

concept is the amount of unfunded liabilities. They state that without measuring unfunded

liabilities, the measure of net financial resources is incomplete and can be misleading.

90. The Board has decided to postpone consideration of the net financial resources concept.

The Board believes that the usefulness of the concept can be further explored after it

completes its project on users’ needs and objectives for financial accounting and reporting.

91. Entity financial resources. In the Exposure Draft, the Board discussed the concept of

entity financial resources. The concept was defined as assets of a federal entity that consist

of (a) the entity’s cash and funds authorized and available for disbursement (excluding

contract authority and unused authority to borrow), (b) resources of the entity that are

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expected to be converted into cash to satisfy liabilities, and (c) conversion of cash into

another form (for example prepayments) that would be consumed. Under this definition, the

Exposure Draft identified as financial resources: cash, funds with Treasury, claims to cash

(for example accounts receivable and loans receivable), claims to goods and services (for

example advances and prepayments), inventories held for sale, and investments.

92. As indicated in the Exposure Draft, financial resources are a subset of assets that provide

liquidity (cash and assets that can be converted to cash) to meet a federal entity’s

operational needs. The concept was considered useful because federal entities obtain

resources from the budget to finance their operations and are held accountable for the use

of the financial resources.

93. The Board has decided not to use the term financial resources in this document. However, a

definition of the term financial resources and its usefulness will be further considered by the

Board in its conceptual framework project. In the absence of the term, the items that would

provide future economic benefits to the government and its entities are referred to as

assets. The term asset as used in this document means an item that embodies a probable

future economic benefit that can be obtained or controlled by the federal government or a

reporting entity as a result of past transactions or events. (The definition of assets will be

considered by the Board in the future.)

94. Funded liabilities. The Exposure Draft proposed the definition of “funded liabilities” as

“liabilities for which the federal entity has received budget authority to cover the related

expenditure or expense.”

95. The term “funded liabilities” would limit the recognition of liabilities to the extent that they are

funded. The Board believes that the liabilities addressed in this document should be

recognized when they are incurred, regardless of whether they are funded. The Board

therefore decided not to use the term “funded liabilities” in this document. However, the

Board recommends that disclosure be made for liabilities that are not covered by budgetary

resources.

96. The word “liability” used in this document means a probable and measurable future outflow

of resources arising from past transactions or events.

A comprehensive definition of

liabilities is being considered by the Board in its project concerning liabilities in general.

However, this document addresses only those selected liabilities that routinely recur in

normal operations and that are due within a fiscal year. These liabilities are accounts

payable, interest payable, and other current liabilities. The category of other current

A comprehensive definition of “liabilities” is being considered by the Board in its project concerning liabilities in

general. [See SFFASs 5 and 12 for more on liabilities.]

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liabilities includes salary and entitlement benefit expenses that are accrued and would be

paid within a fiscal year.

General Standards

97. The recommended standards apply to reporting by the federal government and its entities

for both governmental assets and liabilities and intragovernmental assets and liabilities

reported at the entity level.

98. An entity may have two categories of assets and liabilities intragovernmental and

governmental assets and liabilities. The difference between intragovernmental and

governmental assets and liabilities is explained below:

(1) Intragovernmental assets and liabilities. These assets and liabilities arise from

intragovernmental transactions. For example, investments held by a federal entity in

Treasury securities are reported by the entity as an asset. However, the Treasury

securities also are liabilities of the Department of the Treasury. Thus, the securities

represent intragovernmental assets and liabilities. Another example is fund balance

with Treasury. An entity’s fund balance with Treasury of an entity will be reported as an

asset by the entity. However, it is not an asset of the federal government; rather, it is a

commitment of the U.S. government to provide funds to a federal entity. (See

discussion, which follows, on Fund balance with Treasury.)

(2) Governmental assets and liabilities. These are assets and liabilities that arise from

transactions of the federal government with nonfederal entities (persons and

organizations outside the U.S. government, either foreign or domestic). For example,

income taxes to be collected from the public are reported on IRS financial statements

as receivables. These receivables are assets of the federal government.

99. The recommended standards require that intragovernmental assets and liabilities be

reported separately from governmental assets and liabilities.

100. Assets reported by an entity also are distinguished between entity and non-entity assets.

(1) Entity assets. Entity assets are assets that are available to an entity for its use. Entity

assets include both intragovernmental and governmental assets. Supplies inventory

held by an entity for consumption in its operations is an entity asset as well as a

governmental asset. A receivable of a federal entity from another federal entity is an

entity asset if the receiving entity has authority to use the amount collected.

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(2) Non-entity assets. An entity may have assets under its custody and management that

the entity is not authorized to use. In this Statement, these assets are called non-entity

assets, as distinguished from entity assets that the entity is authorized to use in its

operations. For example, customs duty receivables to be collected by the Customs

Service is a non-entity asset that would be reported by the Customs Service.

101. The Board recommends that both entity assets and non-entity assets under an entity’s

custody or management be recognized in the entity’s financial statements. Non-entity

assets should be separately reported in an entity’s financial statements.

102. The following exhibit, using receivables as an example, illustrates the relationship between

entity and non-entity assets on one hand and intragovernmental and governmental assets

on the other hand.

Accounts Receivable

Specific Standards

Cash

103. The Board has retained from the Exposure Draft the requirement for separate reporting of

restricted and unrestricted cash. However, after considering comments on the Exposure

Draft, the Board has modified the definition of restricted cash.

104. The Exposure Draft proposed that unrestricted cash include amounts in demand deposits.

However, whether an amount of cash is restricted does not depend on where the cash is

kept. For example, federal entities may hold cash in demand deposit accounts on behalf of

Treasury. Since the entities have no authority to spend the cash, from the entities’

perspective, these amounts of cash are restricted.

Entity Assets Non-Entity Assets

Intra-governmental

Assets

Amounts receivable from a

federal entity for goods or

services delivered that will be

available to the receiving entity

to spend.

Amounts to be collected from a

federal entity that will not be

available to the receiving entity

to spend.

Governmental Assets Amounts receivable from a

nonfederal entity for goods or

services that will be available to

the receiving entity to spend.

Amounts (such as taxes) to be

collected from a nonfederal

entity that will not be available

to the receiving entity to spend.

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105. The recommended standard in this document redefines restricted cash as (1) amounts of

cash that an entity holds on behalf of Treasury or other entities and does not have authority

to spend, and (2) amounts of cash that are legally restricted to specific purposes.

Fund Balance with Treasury

106. The recommended standard provides guidance on the composition of fund balance with

Treasury. Events that cause an entity’s fund balance to increase include receiving

appropriations, allocations, transfers, receipts that the entity is authorized to spend (or to

use to offset its expenditures) and borrowing from Treasury. An entity’s fund balance is

reduced by amounts disbursed to pay liabilities and expenditures, amounts invested in

securities, amounts of appropriations canceled or rescinded, and amounts transferred to

other agencies or to the Treasury.

107. With respect to fund balance with Treasury, the Board has considered the following issues:

(1) Is fund balance with Treasury an asset?

108. The Board believes that from the perspective of a federal entity (such as a bureau, a

program, or a fund), fund balance with Treasury is an asset. In fact, it is the most important

source against which an entity can make expenditures and incur liabilities.

109. However, the Board recognizes that a fund balance with Treasury is an intragovernmental

item. It represents a entity’s authorized claim to the federal government’s resources on one

hand, and the government’s commitment to supply resources to the entity on the other

hand. The claims and commitments would not be reported when financial reports of

individual entities are consolidated on a government-wide level. Thus, from the perspective

of the federal government as a whole, fund balances with Treasury are not assets of the

federal government.

(2) How does fund balance with Treasury relate to budgetary resources?

110. A fund balance is created by budget authority. An appropriation is the major form of budget

authority that creates a fund balance with Treasury for an entity. Thus, the relationship

between fund balance with Treasury and budget authority cannot be ignored.

111. However, an entity’s fund balance with Treasury does not necessarily equal its budgetary

resources. The difference between these two concepts may be clarified by examining their

definitions. A fund balance represents the sum of amounts that is actually available in an

entity’s accounts with Treasury. Budgetary resources on the other hand encompass all

authorities for an entity to incur obligations. Some of the authorities do not in themselves

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provide funds to the entity. Contract authority, for example, allows an entity to incur

obligations under a contract. However, it does not, in itself, provide funds to the entity’s

accounts with Treasury. An appropriation is necessary for the entity to have funds to

liquidate obligations incurred under contract authority.

112. Authority to borrow does not in itself place funds into an entity’s accounts with Treasury. In

order to increase its fund balance with Treasury, an entity must actually borrow under its

borrowing authority.

113. For these reasons, the recommended standard states that fund balance with Treasury does

not include contract authority and unused authority to borrow.

(3) Should the fund balance exclude funds designated for special purposes?

114. Some respondents to the Exposure Draft believe that the standard should identify funds

held with Treasury that are not available to the entity’s operations. For example, the

Department of Energy collects fines levied under the Emergency Petroleum Allocation Act

of 1973, deposits those funds in an escrow account with Treasury, and ultimately disburses

those funds to injured parties or for other uses as directed by court decisions.

115. It is not unusual that funds in certain accounts are held and restricted to specific purposes.

Amounts of trust funds, for example, are held for the specific purpose of making benefit

payments to eligible recipients. The restriction on funds held for the Department of Energy to

pay persons injured by oil pricing and allocation violations is another example. The Board

believes that the fund balance of a reporting entity should include funds held in all accounts

of the entity regardless of whether they are designated for specific purposes.

Accounts Receivable

116. Respondents raised issues related to the recognition and measurement of losses due to

uncollectible amounts. Before addressing the Board’s actions in relation to respondents’

comments, however, the terms recognition and measurement as used in this Statement are

explained below:

117. Recognition means formally recording or incorporating an item into the records and

financial statements as an asset, liability, expense, revenue, or similar element. For assets

or liabilities, recognition encompasses subsequent changes to the amounts of assets and

liabilities.

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118. Measurement is the process of expressing an asset or liability in monetary units. Measuring

an item requires selecting an appropriate measurement attribute such as historical cost,

current market value, net realizable value, or present value of future cash flows.

119. In the proposed standard and the discussion of accounts receivable, the term recognition

concerns the timing of recording an asset or the impairment of an asset in the financial

records. The term measurement concerns the valuation basis and the dollar amount of the

asset that should be reported.

120. Detailed discussions of respondents’ comments and the Board’s actions are provided in the

following paragraphs.

121. Timing of receivable recognition. The Exposure Draft states that a receivable should be

recorded when events (e.g., payment due dates) or transactions occur that entitle an entity

to accrue revenue or receive a reimbursement or fund transfer. Some respondents

questioned the use of payment due dates as a criterion for recognizing receivables. These

respondents stated a receivable should be recognized when an entity is owed an amount or

earns a revenue, and that due dates are irrelevant.

122. Some receivables result from exchange transactions. For example, receivables may result

from goods and services provided to other entities. However, claims to cash or other assets

also result from the federal government’s legal authority to levy taxes and impose duties,

fees and fines. These receivables are not related to revenue-earning functions or exchange

transactions, but are based on the federal government’s authority to collect the payments

and a party’s liability to pay cash or provide other assets to cover the claims. For the accrual

of taxes, the tax due date represents the date that the government demands payment. The

payment due date is a definitive criterion for accruing taxes.

123. The Board, therefore, recommends that a receivable be recognized when a claim to cash or

other assets is established based either on goods or services provided or the government’s

legal authority to levy and collect. The Board is not recommending a revenue recognition

standard at this time.

124. Loss recognition. In the Exposure Draft, it was proposed that a loss be recognized when it

is more likely than not that a receivable has been impaired. The phrase more likely than not

means a greater than 50 percent probability of occurrence.

125. Several respondents questioned why the Board used the more likely than not criterion for

loss recognition instead of the probable criterion used in the private sector under generally

accepted accounting principles (GAAP).

126. The Board may refer to the pronouncements and statements issued by other standard

setting bodies in deliberating accounting standards for the federal government. However,

FASB Statement of Standards No. 5, Accounting for Contingencies.

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the Board is not bound by these pronouncements and statements, especially when

accounting standards promulgated for other sectors are not relevant to the federal

government.

127. In the case of loss recognition on receivables, the Board believes that there should be a

definitive guideline for recognizing government credit losses. The word probable is subject

to broad interpretation (often being interpreted as meaning a virtual certainty of occurrence)

and could allow for belated recognition of losses.

128. The Board proposed the more stringent criterion of more likely than not, which requires the

recognition of losses when there is more than a 50 percent chance that some receivables

will not be collected. In recommending the more likely than not criterion, the Board’s intent is

to achieve unbiased, consistent, and reliable loss recognition in federal government

accounting.

129. The more likely than not criterion can be applied to both individual accounts and groups of

accounts. Both significant individual accounts receivable (e.g., unusually large refunds due

from contractors, medicaid reimbursements from third parties, substantial tax delinquencies,

or other large claims) and groups of small accounts should be analyzed and losses

recognized if it is more likely than not that some or all of the amounts owed will not be

collected.

130. When applying the loss recognition criterion, the Board believes it is appropriate to

recognize the nature of federal receivables. Many of the federal government’s receivables,

unlike trade accounts of private firms or loans made by banks, are not created through

credit screening procedures. These receivables arise because of activities such as fines

from regulatory violations, refunds from erroneous benefit payments, reimbursements, and

overdue taxes and duties. In these circumstances, historical experience and economic

factors indicate that the receivables frequently are not fully collectible. These receivables

meet the loss recognition test because of their inherent risk. Therefore, an appropriate

amount of allowance for losses should be recognized at their inception.

131. Loss measurement. Because of the large volume of federal transactions, accounts

receivable generally exist in large groups. Some groups may consist of several hundred

thousand accounts. In such cases, losses on uncollectible amounts should be assessed on

a group basis using statistical sampling techniques. Statistical sampling should be

supplemented by historical trend experience, adjusted for current conditions.

132. On the other hand, some government receivables arise from transactions of significant

amounts. These receivables should be individually analyzed to assess losses due to risks

specifically attributable to the individual accounts. The assessment of impairment of

individual accounts may not always provide a valid basis to estimate the impairment of the

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entire group. Often, losses may exist for the group that are not currently identifiable on an

individual basis. The Board believes that the federal government’s receivables are generally

subject to losses due to inherent risks. Therefore, allowances for receivables should be

viewed in the context of the overall risk of the receivables being assessed.

133. Based on the above considerations, the recommended standard provides that, for reporting

purposes, losses on accounts receivable should be determined by evaluating accounts on

both a group and an individual basis.

Interest Receivable

134. In the Exposure Draft, the proposed standard requires that interest be recognized on a

receivable until the receivable is repaid or written off. At the same time, the proposed

standard requires that an allowance for uncollectible interest be provided. The intent of the

proposed standard is to establish the debtor’s liability for the accrued interest.

135. Some respondents expressed concern that there is usually a lengthy period from the time a

receivable is determined to be uncollectible until it is written off. It would be burdensome to

recognize interest on the uncollectible receivable and, at the same time, offset the amount

of interest recognized by an allowance for uncollectible interest.

136. The initial intent of this procedure was to maintain a correct amount of the debtor’s liability.

This purpose can be achieved by record-keeping procedures rather than financial reporting.

Therefore, for financial reporting, the Board has concurred that (a) interest receivable

should be recognized only on collectible accounts, and

(b) interest receivable on uncollectible accounts should be recognized only when it is

actually received.

Advances and Prepayments

137. There were no comments on the substance of the recommended accounting standard for

advances and prepayments since the standard does not contain significant changes from

the current accounting practice within federal government agencies. Some respondents

requested that the Board clarify that prepayments do not include progress payments made

on long-term contracts. Since progress payments are made based upon percentage of

completion of a contract, the Board concluded that progress payments are not advances or

prepayments.

138. Comments were also received questioning whether advances and prepayments should be

included within the definition of financial resources (as proposed in the Exposure Draft)

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since advances and prepayments are not usually converted to cash or budget authority

available for use by the entity.

139. The Board recognizes that, as in the case of inventories held for consumption, advances

and prepayments convert into goods and services, but do not convert into cash. However,

since the term financial resources is not used in this Statement, the issue is now moot.

Advances and prepayments normally benefit current operations and, therefore, are normally

considered current assets.

Investments in Treasury Securities

140. The recommended standard applies to investments in Treasury securities, including (1)

nonmarketable par value Treasury securities, (2) market-based Treasury securities held to

maturity, and (3) marketable Treasury securities held to maturity.

141. In the future, the Board will address investments that are not covered by this standard. In

the interim, federal entities should continue their current accounting practices for those

investments not covered by this standard.

142. Federal entities, particularly the Social Security and the retirement trust funds, invest

available funds in excess of their current needs in special Treasury securities issued in the

government account series. The terms of the Treasury securities are usually designed to

meet the cash needs of government accounts. The vast majority of the investments are in

nonmarketable Treasury securities issued exclusively to federal agencies. Most of them are

par value securities, and some are market-based securities whose prices and interest rates

reflect market terms. Thus, although the scope of the recommended standard is limited, it

covers more than 90 percent of federal entities’ investments.

143. A few federal entities are permitted to buy and sell marketable Treasury securities on the

open market. Some federal entities which conduct business with the public or provide

insurance to the private sector may acquire marketable Treasury securities as a part of a

rescue and takeover transaction. This standard applies to marketable Treasury securities

only to the extent that they are expected to be held to maturity.

144. In the Exposure Draft, the Board proposed that investments in par value nonmarketable

Treasury securities be reported at cost. The Board also proposed that marketable securities

and market-based Treasury securities be reported at market value as of the reporting date.

145. A number of respondents, however, expressed concern with the recognition of increases

and decreases in assets based on market value, and the recognition of associated gains or

losses. These respondents believe these are unrealized gains and losses which do not

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represent actual increases or decreases in assets. Some respondents also indicated that

market value fluctuations generally do not affect an entity’s investments in securities

intended to be held to their maturity.

146. In this Statement, the Board continues to use the cost based valuation for nonmarketable

par value Treasury securities. The cost basis is appropriate for this type of security because

the invested amounts will be fully recovered at redemption.

147. The Board also recommends the cost or amortized cost basis for the valuation of

market-based Treasury securities and marketable Treasury securities that are to be held to

maturity. The Board believes that the cost basis is appropriate because the invested

amounts can be fully recovered when the Treasury securities mature. During the time

periods when the securities are outstanding, the market prices of the securities may

fluctuate due to interest rate changes or other temporary causes. However, so long as the

securities are not to be sold to the market, the investing entity would not be affected by such

market price fluctuations. For this reason, the Board decided to recommend the cost based

approach rather than market value approach for marketable Treasury securities expected to

be held to maturity.

148. The Board considered the valuation issues related to securities not covered by this

standard. The Board has concluded that the use of a fair value approach pertains to a broad

conceptual issue that needs to be addressed in its conceptual framework. Until the Board

reaches decisions on the conceptual framework, it is premature to recommend a valuation

basis for securities beyond those covered by this standard.

149. The Board believes that the criteria for classifying an investment as expected to be held to

maturity should be based on the intent and ability of the investing entity to hold the security

to its maturity. Intent and ability differ from a mere absence of an intent to sell the security.

An evaluation of whether an entity has the intent and ability to hold its investments should

be based on the entity’s current and projected financial condition and its recent pattern in

buying, selling, and managing Treasury securities. A security should not be classified as

expected to be held to maturity if for cash needs or other investment management reasons

the investing entity is not able to hold the security to its maturity.

150. At each financial reporting date, the appropriateness of this classification should be

reassessed. In rare instances, an entity’s originally stated intent or ability to hold a security

to maturity may change due to significant unforeseen changes in the entity’s cash needs or

in other circumstances. When this occurs, securities initially classified as expected to be

held to maturity should be reclassified to securities available for sale or early redemption.

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Accounts Payable

151. Accounts payable are set up to record an entity’s liability for goods and services received or

work progress made by a contractor for which payment has not been made.

152. Some respondents questioned the timing of recognizing a liability in accounts payable. A

federal entity, under budgetary accounting, records an obligation when the entity places a

purchase order or signs a contract. An obligation, once incurred, reduces an entity’s

resources available for obligation. Budgetary accounting entries are required to record the

amounts obligated and to reduce the available budget authority. For financial reporting

purposes, liabilities are recognized when goods and services are received or are recognized

based on an estimate of work completed under a contract or agreement.

153. Some federal entities believe it is appropriate to recognize a liability in accounts payable

when a purchase order is placed. The theory of this practice is that the purchase order

represents a use of the entity’s budgetary resources and that recognizing the liability would

correctly reduce the entity’s available budgetary resources.

154. Proponents for this practice also argue that, in many cases, goods produced under

government contracts bear unique specifications for government needs and, as a result,

cannot be sold to other customers. Thus, they argue that it is virtually certain that the

government has incurred a liability toward the contractor.

155. The Board recognizes that there is a need to reconcile budget execution results and

financial effects. In budgetary accounting, when a purchase order is placed, an obligation is

recorded to ensure budgetary control. However, recognition of the claim from a financial

accounting standpoint does not occur until goods are delivered, work progress is actually

made by a contractor, or services are performed since these events generally trigger a cash

outlay that liquidates the obligation. The Board does not believe that recognizing a liability

prior to a actual receipt or constructive receipt of goods or services should be adopted as a

financial accounting standard. It also does not believe that it is appropriate to erase the

distinction between recording obligations for budget purposes and recognizing a liability for

financial accounting purposes.

156. Some respondents question whether a liability should be recognized for multi-year contracts

that are to be financed through appropriations over a number of years. As has been

discussed earlier, when a contract is entered, an obligation is recognized in budgetary

accounting. However, until goods or services are received or work progress is made, the

Board does not believe that an obligation should be recognized as a liability. When goods or

services are received or work progress is made under either a short or long-term contract, a

liability for unpaid amounts should be recognized.

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Interest Payable

157. There were no substantial comments on the recommended accounting standard for interest

payable. The recommended standard does not differ from the current accounting practice

within federal government agencies.

Other Current Liabilities

158. The recommended standard covers the current liabilities that are not specifically defined in

other standards. Current liabilities specifically defined in this Statement are accounts

payable and interest payable. Accounts payable and interest payable represent liabilities

arising from discrete transactions. The Board also plans to issue statements to define other

specific liabilities such as liabilities incurred under a loan guarantee contract and borrowings

from other entities.

159. Other current liabilities generally are related to on-going and continuous expenses, which

are typically recognized throughout each accounting period rather than on an individual

transaction basis. A typical example is the liability for employees salary that is accrued at

the end of a fiscal year but is not paid.

160. The Exposure Draft indicated that a liability was considered funded if the related expense

was incurred under budget authority. Some respondents suggested that the term budget

authority be changed to budgetary resources . They argued that budgetary resources

encompass not only new budget authority, but also other resources available to incur

liabilities for specified purposes in a given year.

161. The Board agrees that a liability (or a portion of the liability) should be considered funded

from the reporting entity’s perspective if it is covered by available budgetary resources.

However, the recommended standard takes the position that a liability should be recognized

when it is incurred, regardless of whether it is covered by available budgetary resources.

The recommended standard also requires that disclosure should be made for liabilities that

are not covered by available budgetary resources.

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Appendix B: Illustration Of The Interest Method For Investment

Discount And Premium

This Appendix provides an illustration of the interest method for amortizing a discount or

premium of an investment in a marketable or a market-based Treasury security, such as a

Treasury bond. The interest method is required in the recommended standard for investments.

Before explaining the interest method itself, the concept of discount and premium will be

explained.

Bond Discount And Premium

The price of a bond equals the present value of the bond’s net future cash flows, including

principal and interest payments, discounted to the time of its issuance. The discount rate is

referred to as the effective interest rate. Since the effective interest rate usually equals the

market interest rate, it may differ from the stated interest rate (the coupon rate) of the bond. The

difference between the effective interest rate of a bond and its stated interest rate causes the

bond price to be different from its face amount.

A Treasury bond may be purchased at a price higher or lower than the bond’s face amount (par

amount). The difference between the purchase price and the face amount is a discount if the

price is lower than the face amount; or a premium if the price is higher than the face amount. The

investor initially records the bond at its face amount and records the discount or the premium in a

valuation allowance account. Thus, the carrying amount of the bond equals its face amount

minus or plus the discount or the premium. The discount or the premium is amortized over the life

of the bond, so that the bond would be redeemed at its face amount at its maturity.

The Interest Method

Under the interest method of amortization,

an amount of interest equal to the carrying amount

of the investment times the effective interest rate, is calculated for each accounting period. This

calculated interest is the effective interest of the investment (referred to as effective yield in some

literature). The amount of effective interest is compared with the stated interest of the investment.

(The stated interest is the interest that is payable to the investor according to the stated interest

The interest method of amortization is described in several FASB statements and APB Opinions. For example, see

paragraph 18, FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or

Acquiring Loans and Initial Direct Costs of Leases, and paragraph 16 of APB Opinion No. 12, Omnibus Opinion.

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rate.) The difference between the effective interest and the stated interest is the amount by which

the discount or the premium should be amortized (i.e., reduced) for the accounting period.

Examples

In the first example,

which shows the amortization of a discount, Treasury bonds with the face

amount of $100,000 were purchased by a federal entity on the bonds’ issuance date, January 1,

1992. The bonds’ stated interest rate is 7 percent, and interest is payable at the end of each year.

The bonds will mature in 5 years, on December 31, 1996. The cost of the investment is $96,007,

with a discount of $3,993, which reflects an effective interest rate of 8 percent.

In Table 1 below, the annual discount amortization is in column 4, which equals column 3 minus

column 2.

Table 1: Discount Amortization

In the second example, which is the amortization of a premium, Treasury bonds with the face

amount of $100,000 were purchased by a federal entity on the bonds’ issuance date January 1,

1992. The bonds’ stated interest rate is 7 percent, and interest is payable at the end of each year.

The bonds will mature in 5 years, on December 31, 1996. The cost of the investment is

$104,212, with a premium of $4,212, which reflects an effective interest rate of 6 percent.

In Table 2 below, the annual premium amortization is in column 4, which equals column 2 minus

column 3.

The examples are adapted from Glenn A. Welsch and Charles T. Zlatkovich, Intermediate Accounting, 8th ed.

(Boston: Richard D. Irwin, Inc., 1989), p. 656.

Date

Stated

Interest

Effective

Interest

Discount

Amortization

Unamortized

Balance

Bonds

Carrying

Amount

1/1/92 $3,993 $ 96,007

12/31/92 7,000 $7,681 $681 3,312 96,688

12/31/93 7,000 7,735 735 2,577 97,423

12/31/94 7,000 7,794 794 1,783 98,217

12/31/95 7,000 7,857 857 926 99,074

12/31/96 7,000 7,926 926 0 100,000

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Table 2: Premium Amortization

Date

Stated

Interest 7%

Effective

Interest 6%

Premium

Amortization

Unamortized

Balance

Bonds

Carrying

Amount

1/1/92 $4,212 $104,212

12/31/92 7,000 $6,253 $747 3,465 103,465

12/31/93 7,000 6,208 792 2,673 102,673

12/31/94 7,000 6,160 840 1,833 101,833

12/31/95 7,000 6,110 890 943 100,943

12/31/96 7,000 6,057 943 0 100,000

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Appendix C: Glossary

See Consolidated Glossary in “Appendix E: Consolidated Glossary”.