Exam 2 . Section III . Chapter 5 Federal Financial Accounting Standards and Illustrations

AGA Montgomery Chapter CGFM Exam ReviewPresented By

Steven H. Emerson, CPA, CGFM, CGAP, CFE, CITP, CGMA

Exam 2 . Section III . Chapter 5

Federal Financial Accounting Standards and

Illustrations

Authorizing legislation that created the department authorizes the department to:Establish two agencies and lease space for

department and agency operationsCharge high speed internet and wireless

communications service providers a fee to offset operating costs

Hire 250 full-time equivalent staffContract for web support and telephone servicesEstablish advisory committee to advise staff on its

research and issue final reports on growth and regulation of the industry

Case Study – Department of Monitoring

For the first year of operations, appropriations are made for:Salaries and benefits of $22 millionLeasing office space at $4 millionTravel funds for advisory board members of

$25,000Equipment purchases of $375,000Furniture purchases of $500,000Supplies of $50,000Web support and telephone services of $1.7

million

Case Study – Department of Monitoring - continued

Exchange RevenueA government entity provides goods and

services to the public or another government entity for a price

Non-Exchange RevenueA government’s power to demand payment

from the public in the form of taxes, duties, fines and penalties

Donations are also classified as non-exchange revenues

Other Financing SourcesAppropriationsTransfers among entities without

reimbursement

Revenue and Other Financing Sources

StatementExchange Revenue

Reported on the Statement of Net Costs and where feasible, is offset against the related program costs

Non-Exchange RevenueReported on the Statement of Changes in Net

PositionAppropriations Used

Reported on the Statement of Changes in Net Position

RecognitionExchange Revenue

When goods and services are provided

Revenue and Other Financing Sources - continued

Recognition – continuedNon-Exchange Revenue

When a specifically identifiable, legally enforceable claim to resources arises and the amount is reasonably estimable

Appropriations UsedUntil used, appropriations are not a financing

source. When made available for apportionment, appropriations are recognized as an element of net position (unexpended appropriations) and an asset similar to cash (fund balance with Treasury). When used, appropriations are recognized as a financing source (appropriations used)


MeasurementExchange Revenue

Actual price paid or to be paid less and allowance for returns, allowances, price redeterminations or other reasons apart from credit losses

Non-Exchange RevenueCash collections less refunds and including the

accrual adjustment for net charges in accounts receivable (net of allowance for bad debts and refunds) during the period

Appropriations UsedActual amount expended


DisclosuresExchange Revenue

Among others, disclosure is required for pricing policies if full cost is not charged

Non-Exchange RevenueAmong others, the basis of accounting should be

described and changes in asset and liability balances shown

Appropriations UsedMost detailed information on appropriations and

their status is provided on the Statement of Budgetary Resources


What to Do if the Entity Does Not Retain the Revenue for its Own UseExchange Revenue

Because exchange revenue results from the entity’s operations, standards require that the full amount of exchange revenue be recognized without regard to requirements to transfer collections to other entities. Transfers out are then recognized as a negative financing source

Non-Exchange RevenueNon-exchange revenue is most often collected by one entity and

transferred to the Treasury. Collecting entities provide custodial reporting related to the collections and receivables BUT do not recognize non-exchange revenue. Non-exchange revenue is recognized by the entity for which resources were received

Appropriations UsedN/A


Our illustrative department has two sources of financing:Exchange revenuesAppropriations

Federal accounting standards provide that regulatory user fees are exchange revenueBecause the government may incur costs in order to

regulate the identifiable entityBecause the revenue charged is closely related to

the cost of operating the entityOur department is charged with monitoring

activity – which is an exchange revenue


Appropriations bills are passed for the fiscal year and our department receives a Treasury warrant for its appropriations in the amount of $28.65 million. OMB apportions $8 million to cover equipment and furniture purchases and about 25% of routine operating funds



Budgetary Entries

To record appropriations of funds by Congress

Accounts Debit CreditOther appropriations realized

$28,650,000

Unapportioned authority – available

$28,650,000

Budgetary Entries – continued

To record apportionment of funds by OMB


Accounts Debit CreditUnapportioned authority – available

$8,000,000

Apportionment $8,000,000

Proprietary Entries

To record receipt of an appropriation warrant


Accounts Debit CreditFund balance with Treasury

$28,650,000

Unexpended appropriations

$28,650,000

Department of MonitoringBalance Sheet

as of October 1, 200x(dollars in thousands)

Fund balance Net Position:with Treasury$28,650 Unexpended

appropriations$28,650

TOTAL NETTOTAL ASSETS $28,650 POSITION

$28,650


Department of MonitoringStatement of Budgetary Resources

as of October 1, 200x(dollars in thousands)

Budgetary Resources:Budget Authority:

Appropriations Received $28,650Total Budgetary Resources $28,650

Status of Budgetary Resources:Unobligated balance – apportioned $8,000Unobligated balance not available 20,650Total Status of Budgetary Resources $28,650


The department has a fund balance with Treasury at the outset. This fund balance with Treasury represents the aggregate amount of funds the department is able to use to make expenditures and pay liabilities. The fund balance with Treasury is an intragovenmental asset from the department’s prospective because it represents a claim to federal resources. On the U.S. Department of Treasury’s financial statements it represents a commitment to make resources available to federal departments and is recognized as an intragovernmental liability in the Treasury’s financial statements. Both of these intragovernmental amounts are eliminated in the government-wide consolidated financial statements.

Fund Balance with Treasury

Fund Balance with Treasury is increased by:Receiving appropriations, reappropriations,

continuing resolutions, appropriation restorations and allocations

Receiving transfers and reimbursements from other federal entities

Borrowings from TreasuryOffsetting collections the entity is authorized

to spend

Fund Balance with Treasury - continued

Fund Balance with Treasury is decreased by:Disbursements to pay liabilities or to

purchase assets, goods and servicesInvestments in U.S. securitiesCancellation of expired appropriationsTransfers and reimbursements to other

entities of to the TreasurySequestration or rescission of appropriations

Fund Balance with Treasury - continued

Accounts receivable is established when a federal entity has a claim to cash or other assets from other entities. An allowance for estimated losses should be established is credit losses are “more likely than not” and a bad debt expense should be recognized. If individual accounts represent a significant portion of the total receivable, the entity should estimate the loss for the individual accounts. Factors to consider includeThe debtor’s ability to payThe debtor’s payment record and willingness to payThe probable recovery of amounts from secondary

sources such as liens

Accounts Receivable

Federal entities are required to separate entity and nonentity assets for reporting purposesEntity assets

Those assets available for use by the entityNonentity assets

Those assets the entity is holding in a custodial capacityAny receivables arising from fees at the Department of Monitoring (our case study entity) would be considered nonentity accounts receivable. Our department would recognize exchange revenue when it has established its fee structure and billed companies in the industry. Bad debts would be estimated periodically and an allowance established.

Accounts Receivable - continued

AdvancesCash outlays made my a federal entity to its employees,

contractors, grantees or others to cover all or part of the recipients’ anticipated expenses or as advance payments for the costs of goods or services the entity acquires

PrepaymentsPayments made by a federal entity to cover certain

periodic expenses before those expenses are incurredAdvances and prepayments are recorded as assets and are held as assets until the conditions of the advance or prepayment are satisfied. Once the conditions are met, an expense is recognized and the asset is reduced or eliminated.

Advances and Prepayments

Federal agencies provide financial support to certain activities through direct loans or loan guarantees. The cost to the government arises primarily from:Differences in the interest rates paid by the

government and charged to the borrowerDefaults on scheduled paymentsSFFAS 2 as amended by SFFAS 18 and 19 requires that financial statements present assets, liabilities and costs for these financial instruments in a manner consistent with the Credit Reform Act of 1990.

Direct Loans and Guarantees

Cost of Direct LoansSome direct loans are made at an interest

rate that is less than the rate incurred by the government to provide the fundsDepartment of the Treasury borrows fund on

the open market at 4% and the Department of Education borrows these funds from Treasury and loans them to a student at 3%. The interest subsidy is the present value of the difference

Direct Loans and Guarantees - continued

Cost of Loan GuaranteesA loan guarantee is a pledge to pay a commercial

enterprise all or part of the principal or interest on an obligation of a third party to that enterpriseThe Department of Education guarantees to a bank that

make a loan to a student that it will pay the difference between the interest the bank pays to obtain the money and the interest it can charge the student

When a third-party disburses a loan that is guaranteed by a federal agency, a liability and related cost must be recognized. Liabilities for loan guarantees are valued at the present value of the cash outflows less the present value of related inflows.

Direct Loans and Guarantees - continued

Nonmarketable Par Value Treasury SecuritiesSpecial series debt securities that the U.S. Treasury issues

to federal entities at face value. The securities are redeemed at face value on demand. The investing entity recovers the full amounts invested

Market Based Treasury SecuritiesDebt securities that the U.S. Treasury issues to federal

entities without statutorily determined interest rates. Their terms mirror the terms of marketable Treasury securities, however they are not marketable

Marketable Treasury SecuritiesTreasury bills, notes and bonds initially offered by Treasury

to the marketplace and can then be bought and sold on securities exchange markets

Investments in Treasury Securities

InventoryTangible personal property that is held for sale, used in the

production of other goods to be sold or in the process of being developed for sale

Operating Materials and Supplies (OM&S)Goods that have been acquired for use in normal operationsConsumption methodRecognition of the historical cost including all costs to bring

the item to its current condition and location as an asset when received

Use of flow assumptions to assign costs to the items consumed FIFO Weighted and Moving Average LIFO is not permitted for federal entities

Inventory and Operating Materials and Supplies

Disclosures of inventory and OM&S are requiredRegular or normal inventory levelsHeld in reserve for future use or saleExcess, obsolete or unserviceableHeld for repairValue of Inventory and OM&SAt cost

Regular or normal inventory & OM&S held & OM&S held in reserve for future use or sale

At net realizable value Excess, obsolete and unserviceable inventory & OM&S

Historical cost less an allowance for cost to repair Inventory held for repair

There is no classification for OM&S held for repair

Inventory and Operating Materials and Supplies - continued

OM&S may be accounted for under the purchases method instead of the consumption method if any of the following criteria are met:OM&S are not significant amountsThe end user controls the OM&S

i.e. the OM&S are stored in a program office closetIt is not cost-beneficial to apply the consumption

methodThe purchases method allows the entity to expense OM&S upon receipt of the OM&S rather than consumption of the OM&S


StockpilesStrategic and critical materials held due to statutory

requirements for use in national defense, conservation or national emergencies

Are to be recognized as an asset upon receipt of title of goods and expensed upon disposal, use or sale

Valued at historical cost or other valuation methods that approximate historical cost unless they have suffered a permanent decline in value to an amount less than cost. They would then be reduced to net realizable value


Seized and Forfeited PropertySeized Property

Monetary instruments, real property and tangible personal property Valued at its market value when seized

Forfeited Property Monetary instruments, intangible property, real property and

tangible personal property acquired through forfeiture proceedings Property acquired by the government to satisfy a tax liability Unclaimed and abandoned merchandise Revenue should be recognized when the property is sold Property not held for sale may be:

Placed into official use Transferred to another federal government agency Distributed to a state or local law enforcement agency Distributed to a foreign government


CommoditiesItems acquired, held, sold or otherwise

disposed of to stabilize or support market prices

Upon receipt, they are recognized as an asset and valued at the lower of cost or net realizable value

If the net realizable value is less than cost, a loss is recognized upon receipt of the commodities

An expense is recognized upon disposal or use


Property, Plant and Equipment (PP&E)Tangible assets, including land, that meeting

the following characteristicsEstimated useful live of two years or moreNot intended for sale in the ordinary course of

operationsHave been acquired or constructed with the

intention of being used or being available for use by the entity

Property, Plant and Equipment and Internal Use Software

Capital LeasesLeases that transfer substantially all of the

benefits and risks of ownership to the lesseeCapital Lease Criteria (One of the following is

met)Ownership is transferred at the end of the

leaseOption to purchases the PP&E at the end of the

lease at a bargain priceLease term is equal to or greater than 75% of

the estimated economic life of the lease property

Present value of lease payments is equal to or exceeds 90% of the fair value of the leased property

Property, Plant and Equipment and Internal Use Software - continued

Three Categories of PP&EHeritage AssetsStewardship LandGeneral PP&E

Could be used for alternative purposes, but is used in government operations to produce goods and services

Used in a business-type activityUsed by entities in activities whose costs can

be compared to those of other entities performing similar activities


Internal Use SoftwareSoftware that is internally developed,

contractor developed or purchased off-the-shelf

Accounted for in a manner similar to general PP&E

Full cost incurred to develop the software is capitalized and depreciated

Data conversion costs are an expense not a capitalizable cost amortized in a systematic and rational manner over the expected useful live of the software


LiabilityProbable future outflow or other sacrifice of

resources resulting from past transactions or eventsFederal financial included liabilities as a result of:

Past exchange transactionsAccounts payable, salaries payable

Non-exchange transactionsWelfare benefits payable

Government-related eventsCleanup costs related to operation of government programs

Government-acknowledged eventsCommitment to restore nonfederal property damaged in a

hurricane

Liability Recognition

Amounts owed by a federal entity for goods and services received from other entities

Other liability accounts are established for large ongoing continuous expenses such as employee’s salaries and benefits

Federal entities must report intragovernmental liabilities separately from liabilities to nonfederal entities

Accounts Payable

ContingencyAn existing condition, situation or set of circumstances

involving uncertainty as to the possible gain or loss to the entityWhen a loss contingency exists, the likelihood that the future event or events will confirm the loss or the incurrence of a liability can range from probable to remoteProbable

Future confirming event or events are more likely than not to occur

Reasonably Possible The chance of the future confirming event or events occurring is

more than remote but less than probableRemote

Chance of future event or events occurring is slight

Contingent Liabilities

Pensions and post-employment and retirement benefits other than pensions are a cost of the agency for which the employee works but are administered by the Office of Personnel Management (OPM).Actuarial methods are applied to determine the accrued liability retirement benefitsThe amount paid to OPM is on average less than the annual costs. Accounting standards require recognition of the actuarially determined cost of benefitsImputed cost

The difference between the actual resources transferred to OPM and the actuarially determined cost

Pensions and Other Benefits

Federal accounting standards require: Entities to accumulate and report the cost of activities on a regular

basis Cost information to be collected by responsibility segments identified

by management Recognition of the full cost of outputs including the cost of resources

consumed by the responsibility segment that directly or indirectly contribute to the output and cost of identifiable support services provided by other responsibility segments within the reporting entity or by other reporting entities

Recognition of costs of goods and services it receives from other entities (inter-entity costs)

A costing methodology that makes cost assignments – in the following order of preference – by directly tracing costs whenever feasible and economically practical, assigns costs on a cause-and-effect basis, or allocates costs on a reasonable and consistent basis

Cost Accounting

An allotment is issued making the full apportionment available for central operations

A team of 20 detailed employees is working out of another agency’s offices. The estimated rental cost of the space is $25,000 per quarter. The quarterly salary of the detailed staff is $400,000. Staff members are detailed without reimbursement for the first quarter

The federal benefit rate is 22%. This rate includes current benefits and post-retirement benefits. Employing entities are required to reimburse OPM for benefits at the rate of 17.33%

Supplies are ordered in the amount of $12,000. The supplies are received and only cost $10,000 due to a pricing error by the ordering clerk. Payment is made during the quarter

Case Study – Department of Monitoring – First Quarter

Budgetary Entries for the Allotment

To record allotment of funds to finance first quarter activities at headquarters

Case Study – Department of Monitoring – First Quarter - continued

Accounts Debit CreditApportionment $8,000,000Allotment – realized resources

$8,000,000

Budgetary Entries for the Supplies Order

To obligate funds for supplies ordered but not delivered


Accounts Debit CreditAllotment – realized resources

$12,000

Undelivered orders – unpaid

$12,000

Budgetary Entries for the Supplies Received

To record expenditure of a portion of allotment and restore unused funds to allotments (de-obligate funds)


Accounts Debit CreditUndelivered orders – unpaid

$10,000

Delivered orders – unpaid

$10,000

Proprietary entries for the Supplies Received

To record receipt of supplies accounted for under the purchases method

To record use of appropriations to finance purchases of supplies


Accounts Debit CreditSupply expense $10,000Accounts payable

$10,000

Accounts Debit CreditUnexpended appropriations

$10,000

Appropriations used

$10,000

Budgetary Entries to De-obligate Funds

To de-obligate the portion of the original estimated obligation that was not needed to fund the final invoice


Accounts Debit CreditUndelivered orders – unpaid

$2,000

Allotments – Realized resources

$2,000

Budgetary Entries when the Disbursement Schedule is Sent to Treasury to Pay for the Supplies

To reflect the obligation as paid


Accounts Debit CreditDelivered orders – unpaid

$10,000

Delivered orders – paid

$10,000

Proprietary Entries when the Disbursement Schedule is Sent to Treasury to Pay for the Supplies

To record request to Treasury to pay an accounts payable


Accounts Debit CreditAccounts payable

$10,000

Disbursements in transit

$10,000

Proprietary Entries when Treasury Notifies the Department that Payment has been Made to Pay for the Supplies

To reduce fund balance with Treasury for outlays made


Accounts Debit CreditDisbursements in transit

$10,000

Fund balance with Treasury

$10,000

Proprietary Entries at the End of the Quarter to Recognize Costs Financed by other Entities on Behalf of the Department

To recognize the cost of resources provided by other entities for salaries, benefits and rent


Accounts Debit CreditSalaries expense

$400,000

Benefits expense

$88,000

Rent expense $25,000Imputed financing source

$513,000


as of December 31, 200x(dollars in thousands)

Fund balance Net Position:with Treasury$28,640 Unexpended

appropriations$28,640

TOTAL NETTOTAL ASSETS $28,640 POSITION

$28,640


Department of MonitoringStatement of Net Costs

for the period ending of December 31, 200x(dollars in thousands)

Costs not Attributable to Programs $523Net Cost $523


Department of MonitoringStatement of Changes in Net Position


Net Cost $523Budgetary Financing Sources:Appropriations used 10Nonbudgetary Financing Sources:Imputed financing from costs absorbed by others 513Net results of operations $0




Budgetary Resources:Budget Authority:Appropriations Received $28,650Total Budgetary Resources $28,650Status of Budgetary Resources:Obligations incurred $10Unobligated balance – apportioned 7,990Unobligated balance not available 20,650Total Status of Budgetary Resources $28,650Relationship of Obligations to Outlays:Obligations incurred $10Total Outlays $10


Activities for the Remaining Three Quarters Remaining funds are apportioned An allotment is issued making the full apportionment available for central

operations All detailed staff members return to their home agencies on the morning of

the first day of the second quarter. Staff members hired during the first quarter begin work on the first day of the second quarter. Salary expense is $18 million for the remainder of the year

The federal benefit rate is 22%. This rate includes current benefits and post-retirement benefits. Employing entities are required to reimburse OPM for benefits at the rate of 17.33%. OPM is paid $3.12 million for benefits

Office space is acquired by leasing space on a month-to-month basis to carry the department through until a headquarters is built. Rent is due at the beginning of each quarter in the amount of $1 million

Supplies are ordered in the amount of $40,000. The supplies are received shortly before the end of the year and cost $40,000. Payment is made during the year.

Case Study – Department of Monitoring – Balance of Year

Activities for the Remaining Three Quarters – continued Equipment is purchased for $375,000 and the expected useful life is five years

with no residual value. Delivery and payment occur during the year Furniture is purchased for $400,000 and the expected useful life is eight years

with no residual value. Delivery occurs during the year but not payment A fee schedule is established and invoices for $32 million are submitted to

companies. During the year, the industry experienced negative growth and management believes some companies will declare bankruptcy and invoices for about 10% of billings will not be paid

One of the detailed employees files a grievance against the department because he was not hired for a permanent position that would have been a promotion for him. General counsel for the department believes it is probable that the department will lose the case and estimates the award to be $250,000

Cost-finding techniques were used to make cost assignments to the two agencies. Each agency identified two programs – collecting revenue and monitoring industry

Case Study – Department of Monitoring – Balance of Year - continued

Budgetary Entries for the Apportionment

To record appropriations apportioned by OMB


Accounts Debit CreditUn-apportioned Authority

$20,650,000

Apportionment Available

$20,650,000

Budgetary Entries for the Allotment

To record allotment of funds for the remainder of the year


Accounts Debit CreditApportionment Available

$20,650,000

Allotment – realized resources

$20,650,000

Budgetary Entries for All Activity

To record expenditure of a portion of allotment


Accounts Debit CreditAllotment – realized resources

$24,935,000

Delivered orders – unpaid

$400,000

Delivered orders – paid

$24,535,000

Proprietary Entries for All Activities


Accounts Debit CreditUnexpended appropriations

$24,935,000

Appropriations used

$24,935,000

Proprietary Entries for All Activities – continued

To record expenses for the remainder of the period


Accounts Debit CreditSalaries expense

$18,000,000

Benefits expense

$3,120,000

Rent expense $3,000,000Supply expense $40,000Equipment $375,000Furniture $400,000Fund balance with Treasury

$24,535,000

Accounts payable

$400,000

Proprietary Entries to Recognize Exchange Revenues Billed to Companies

To recognize exchange revenue earned not yet collected and a receivable that is nonentity since the department does not retain the revenue


Accounts Debit CreditNonentity Accounts receivable

$32,000,000

Exchange Revenue

$32,000,000

Proprietary Entries to Recognize Expected Bad Debt Expense on Exchange Revenues Billed to Companies

To recognize losses that are probable due to bad debt


Accounts Debit CreditBad debt expense

$3,200,000

Allowance for bad debt

$3,200,000

Proprietary Entries at the End of the Quarter to Recognize Costs Financed by Other Entities on Behalf of the Department

To recognize the cost of resources provided by other entities for benefits – this is the difference between the actual benefits cost rate of 22% and the reimbursement to OPM at 17.33%


Accounts Debit CreditBenefits expense

$840,000

Imputed financing source

$840,000

Proprietary Entries at the End of the Quarter to Recognize Depreciation Expense

To recognize depreciation expense on furniture and equipment


Accounts Debit CreditDepreciation expense

$125,000

Accumulated depreciation – equipment

$75,000

Accumulated depreciation – furniture

$50,000

Proprietary Entries at the End of the Quarter to Recognize Contingent Liabilities Related to Litigation

To recognize a contingent liability for litigation losses that are probable and measurable


Accounts Debit CreditMiscellaneous expense

$250,000

Liability for litigation

$250,000


as of September 30, 200y(dollars in thousands)

Assets LiabilitiesFund balance with Treasury $4,105 Accounts payable $400Accounts receivable, net 28,800 Liability for litigation 250Equipment, net of accum. depr.300 Total liabilities 650Furniture, net of accum. depr. 350 Net position Cumulative results29,200

Unexpendedappropriations 3,705Total liabilities and

Total assets $33,555 net position $33,555


Department of MonitoringStatement of Net Costs

for the year ending of September 30, 200y(dollars in thousands)

High Speed WirelessHQ Agency Agency Total

Collecting ProgramCosts $4,287 $4,288 $8,575Earned Revenue 16,000 16,000 (32,000)Net costs (11,713) (11,712)(23,425)Monitoring ProgramCosts 10,000 10,000 20,000Costs not Attributable toPrograms $523 523Net Cost $523 $(1,713) $(1,712) $2,902


Department of MonitoringStatement of Changes in Net Position


Net Cost $2,902Budgetary Financing Sources:Appropriations used

24,945Nonbudgetary Financing Sources:Imputed financing from costs absorbed by others

1,353Net results of operations$29,200




Budgetary Resources:Budget Authority:Appropriations Received $28,650Total Budgetary Resources $28,650Status of Budgetary Resources:Obligations incurred $24,945Unobligated balance – apportioned 3,705Total Status of Budgetary Resources $28,650Relationship of Obligations to Outlays:Obligations incurred $24,945Accounts payable (400)Net Outlays $24,545


This presentation along with all of my presentations

can be found atwww.shecpa.com

The End

http://www.shecpa.com/

Steven H. Emerson, CPA, CGFM, CGAP, CFE, CITP, CGMA

P.O. Box 834Helena, AL 35080

(205) 807-4466(205) 449-8666 (Fax)[email protected]

mailto:[email protected]

http://www.shecpa.com/

Exam 2 . Section III . Chapter 5 Federal Financial Accounting Standards and Illustrations

Documents

Transcript of Exam 2 . Section III . Chapter 5 Federal Financial Accounting Standards and Illustrations