MANAGEMENT'S DISCUSSION AND ANALYSIS

Federal Accounting StandardsAdvisory Board_________________________________________________________________

Statement of Recommended Accounting Concepts Number 3

MANAGEMENT'S DISCUSSIONAND ANALYSIS

April 1999

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THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

The Secretary of the Treasury, the Director of theOffice of Management and Budget, and the Comptroller Generalestablished the Federal Accounting Standards Advisory Board (theFASAB or "the Board") in October 1990 to consider and recommendaccounting principles for the United States Government.

The Board communicates its recommendations by publishingrecommended accounting concepts and standards after consideringthe financial and budgetary information needs of Congress,executive branch agencies, and other users of federal financialinformation. The Board also considers comments from the publicon its proposed recommendations, which are published for commentas "exposure drafts." The three officials who established theBoard then decide whether to adopt the recommendations. If theydo, the standard is published by the OMB and the GAO and becomeseffective.

Additional background information is available from the FASAB,including: (1) the "Memorandum of Understanding among theGeneral Accounting Office, the Department of the Treasury, andthe Office of Management and Budget on Federal GovernmentAccounting Standards and a Federal Accounting Standards AdvisoryBoard" and (2) the "Mission Statement of the Federal AccountingStandards Advisory Board."

Federal Accounting Standards Advisory BoardWendy M. Comes, Executive Director

441 G Street, NW -- Room 3B18Washington, DC 20548

Telephone (202) 512-7350Fax (202) 512-7366

www.financenet.gov/fasab.htm

STATEMENT OF FEDERAL FINANCIAL ACCOUNTING CONCEPTSMANAGEMENT'S DISCUSSION AND ANALYSIS

STATEMENT OF CONCEPTS ........................................ 1Basic Concept ........................................... 1Discussion and rationale ............................... 1Background ............................................. 2Relationship to other reports .......................... 9Authoritative status of accounting concepts ............ 11

TOPICS FOR MD&A .............................................. 11Mission and Organizational Structure .................... 12Discussion and Analysis of the Financial Statements ..... 12

Financial Results, Position and Condition (12);Budgetary Integrity (13); Use of Estimates (13);Current Demands, Risks, Uncertainties, Events,Conditions, and Trends (14); Future Effects ofCurrent Demands, Risks, Uncertainties, Events,Conditions and Trends (14); Future Effects ofAnticipated Future Events, Conditions, and Trends(14); Understanding Financial Reporting (16)

Discussion and Analysis of Systems, Controls and LegalCompliance ......................................... 17

Discussion and Analysis of Performance .................. 18Performance Measurement (18); UnderstandingPerformance Reporting (21)

APPENDIX A: BASIS FOR CONCLUSIONS ............................ 22Background and Project History .......................... 22Concepts and Standards .................................. 22Responses to Second Exposure Draft ...................... 23Incorporation of Guidance in OMB Bulletin 97-01 ........ 24Management's Assertions ................................. 25Accountability Reports .................................. 26Incorporation by Reference .............................. 26

APPENDIX B: GLOSSARY ......................................... 28

___________________________________________Federal Accounting Standards Advisory Board

Concepts for Management's Discussion and AnalysisApril 1999

EXECUTIVE SUMMARY

This document describes the concepts on which the Board relied inrecommending standards for Management's Discussion and Analysis(MD&A) to be included in general purpose federal financialreports (GPFFR).1 Concepts Statements are not authoritative inthe sense that they do not establish standards or principles.Preparers may find them useful, but these concepts are not"prescribed guidelines" for required supplementary information asdiscussed in section 558 of the Codification of Statements onAuditing Standards published by the American Institute ofCertified Public Accountants. No standards or prescribedguidelines for MD&A are presented in this statement of concepts.

MD&A is an important vehicle for (1) communicating managers'insights about the reporting entity, (2) increasing theunderstandability and usefulness of the GPFFR, and (3) providingaccessible information about the entity and its operations,service levels, successes, challenges, and future. Some federalagencies also refer to MD&A as the "overview."

The basic concept that underlies the standards for MD&A is:

Each general purpose federal financial report (GPFFR)should include a section devoted to management'sdiscussion and analysis (MD&A). It should address thereporting entity's performance measures, financialstatements, systems and controls, compliance with lawsand regulations, and actions taken or planned toaddress problems. The discussion and analysis of thesesubjects may be based partly on information containedin reports other than the GPFFR. MD&A also shouldaddress significant events, conditions, trends andcontingencies that may affect future operations.

A separate document titled Standards for Management's Discussionand Analysis presents the standards for MD&A. The standards forMD&A say that MD&A should address:

-- the entity's mission and organizational structure;

-- the entity's performance goals and results;

-- the entity's financial statements;

-- the entity's systems, controls, and legal compliance; and

1The term general purpose federal financial report, abbreviated "GPFFR," isused as a generic term to refer to the report that contains the entity'sfinancial statements that are prepared pursuant to federal accountingprinciples.

EXECUTIVE SUMMARY_______________________________________________________________



-- the possible future effects on the entity of existing,currently-known demands, risks, uncertainties, events,conditions and trends.

The discussion and analysis of these subjects may be based oninformation in other discrete sections of the GPFFR or it may bebased on reports separate from the GPFFR. The standards requireMD&A to be included in each GPFFR as required supplementaryinformation (RSI).



MANAGEMENT'S DISCUSSION ANDANALYSISSTATEMENT OF CONCEPTS

Basic Concept

1. Each general purpose federal financialreport (GPFFR, see figure 1 on page 4) shouldinclude a section devoted to management'sdiscussion and analysis (MD&A).2 MD&A shouldaddress the reporting entity's program andfinancial performance measures, financialstatements, systems and controls, compliancewith laws and regulations, and actions taken orplanned to address problems. The discussion andanalysis of these subjects may be based partlyon information contained in reports other thanthe GPFFR. MD&A also should address significantevents, conditions, trends and contingenciesthat may affect future operations.

Discussion and rationale

2. A typical GPFFR is a highly summarizedprofile of a complex entity. It is based onconditions that exist at the reporting date andevents that occurred in the preceding period.It shows what has happened, but it does notexplain why it happened or what may reasonablybe expected to happen in the future.

2The term general purpose federal financial report, abbreviated "GPFFR," isused as a generic term to refer to the report that contains the entity'sfinancial statements that are prepared and audited pursuant to the CFO Act of1990, as amended. Entities may refer to these reports using different terms,such as "Annual Report," "Accountability Report," "Financial ManagementReport," etc. Paragraphs 54-112 and Appendix 1 of Statement of FederalFinancial Accounting Concepts 2, Entity and Display, describe and illustratethe contents of the GPFFR. For more information on the "Accountability Report"see paragraph 0 and the glossary. (Other words defined in the glossary aremarked with an asterisk.) See also Toward a Report to Citizens on the State ofTheir Nation and the Performance of Their Government: proceedings of the AGATask Force on a Report to Citizens on the State of the Nation, Association ofGovernment Accountants, 1994.

2 MANAGEMENT'S DISCUSSION AND ANALYSIS_________________________________________________________________



3. Financial reports have two key roles. One isa feedback role to provide information used forevaluating past decisions, expectations, andtrends. Another is a predictive role to provideinformation used for formulating expectationsand making decisions about the future. Bothroles can be enhanced by insights andinterpretations from an entity's management.

4. The managers of an entity have detailedknowledge of the transactions, events, andconditions reflected in the entity's financialreport and of the policies that govern theentity's operations. The managers also haveinformed expectations regarding the futurebased on that knowledge. As a part of theirstewardship responsibility, managers shouldexplain the significance of key financial andnonfinancial information shown in the report,the strategies that led to the resultsreported, and the implications for futureoperations of events that have occurred or arelikely to occur. The distinction between"financial" and "nonfinancial" information isarbitrary and often tenuous, but in thiscontext "nonfinancial information" can includeinformation on systems, controls, compliancewith laws and regulations, and performance.

5. A Federal reporting entity's GPFFR should beunderstandable and useful to a wide audience,not just members of the entity's management andspecialized analysts working for specialinterest groups, corporations, and otherentities affected by the Government's actions.Therefore, the report should be accompanied bya concise narrative discussion and analysis.Even insiders and specialized analysts oftenneed such a discussion and analysis tounderstand the report. Communication with awide audience may require effective use ofcolors, graphs, photographs, and charts.Reporting understandable, accessibleinformation on the Government's actions and theeffects of its actions helps assureaccountability and provides a more "levelplaying field" on which the public interest canbest be served.

STATEMENT OF CONCEPTS_________________________________________________________________



Background

6. The Securities and Exchange Commission (SEC)has for many years recognized the importance ofsuch a narrative discussion of the financialstatements. To serve the interests of investorsand creditors, the SEC requires such anarrative discussion and analysis frommanagement of companies under its purview. TheSEC wants MD&A to help readers understand theentity's financial position and results ofoperations with the benefit of management'sunderstanding and perspective. The SEC alsowants MD&A to go beyond the basic financialstatements, to include relevant forward-lookinginformation. Research on MD&A for companiesregistered with the SEC shows that MD&A addsvalue to the financial statements. Forward-looking information, for example, can be animportant contribution.3

7. Several factors suggest that MD&A may beeven more important for Federal reportingentities than for those in the private sectorand may need to be more extensive in scope.These factors include the complexity of Federaloperations, the myriad objectives they pursue,and the diverse nature of the groups affectedby and interested in the Government'sactivities. Fundamentally, the Government'sobjective is to provide for the common defenseand to promote the general welfare, not to earna profit. Therefore, reporting on performanceand other matters in a way that isunderstandable to diverse audiences isimportant. For these reasons, both SFFAC 1,Objectives of Federal Financial Reporting, andSFFAC 2, Entity and Display, refer to MD&A inconcept as part of the general purpose federalfinancial report.

3Research on MD&A in private sector financial reporting suggests that forward-looking information in MD&A, in particular, is a significant source of addedvalue for financial analysts. See Stephen H. Bryan, "Incremental InformationContent of Required Disclosures Contained in Management Discussion andAnalysis," The Accounting Review Vol. 72 No. 2, (April 1997), pp. 285-301.




8. Page 4 presents a schematic diagram of asample GPFFR. It is schematic because theinformation called for by the statements offederal financial accounting standards shouldbe located in the report in a logical sequence,not necessarily in the order shown. MD&A forthe reporting entity as a whole normally willbe located immediately after the agency head'sletter. Reporting entities that organize theirGPFFR by responsibility segment may combineMD&A regarding each segment; alternatively,they may have MD&A for each responsibilitysegment located separately in each of therespective subsections of the report. Preparers

STATEMENT OF CONCEPTS 5_________________________________________________________________



page 4FIGURE 1: SCHEMATIC DIAGRAM OF A SAMPLE GENERAL PURPOSE FEDERAL FINANCIAL REPORT

Agency Head's Letter

Management's Discussion and Analysis (RSI)

<--------Other Elements of the General Purpose Federal Financial Report-------->

1. Basicfinancialstatementsand notes,withauditor'sreport ifaudited

2. RequiredSupplementaryStewardshipInformation(RSSI)

3. RequiredSupplement-ary Infor-mation(RSI)

4. PerformanceInformation

5. Other AccompanyingInformation (OAI)

6. Management'sassertions and reportson controls, compliance,& corrective actionsunder FMFIA and FFMIA(or portions of theseassertions and reports)

The GPFFR is represented by MD&A plus columns 1-6of the diagram. (The agency head's letter is partof the GPFFR by general practice, though it is notrequired by federal accounting principles.) This isnot a literal depiction of the organization of areport. Information should be presented in alogical arrangement. MD&A will address major issuesthat are typically reported in more detail in thediscrete sections of the GPFFR or in other publiclyavailable reports that the GPFFR incorporates byreference. Incorporating another report byreference does not, by itself, mean that theseparate report is subject to audit.

Unless law or managerial action requires moreextensive audit review or examination of thematerial incorporated by reference, the FASABexpects that the auditor of the financialstatements will treat the material incorporated byreference as other accompanying information,although it does not physically accompany theGPFFR. OMB has authority to provide specificguidance on the auditor's minimum responsibilityregarding this material. OMB may, for example,

direct auditors to treat the material incorporatedby reference as if it were other accompanyinginformation in an auditor-submitted document.

SFFAC 2 (paragraphs 106-111 and Appendix 1-F) callsfor a "Statement of Performance Measures" as partof the GPFFR, but FASAB has not yet recommendedstandards for it. Other titles may be used for thissection of the GPFFR. Performance indicators

included in the GPFFR will either be those in theentity's annual performance report under theGovernment Performance and Results Act of 1993(GPRA or the Results Act) or a subset of them.Alternatively, that report may be incorporated byreference. Until further guidance is available, theagency should select the indicators to report inconsultation with OMB.




The assertions and report on control called for bythe Federal Managers Financial Integrity Act (FMFIAor Integrity Act) would not be stated in full inMD&A. They would be reported in a discrete sectionof the GPFFR or incorporated in the GPFFR byreference. They are within the scope of MD&Abecause highly important aspects of systems,compliance, and internal controls should bediscussed in MD&A. "Highly important" in thiscontext may imply a higher threshold than"materiality" for the financial statements.

If the report also includes financial statementsfor component entities (bureaus, responsibilitysegments, etc.), management should use its judgmentin organizing the report. The component entities'financial statements may be discussed in separatesections of the report or as subsections of MD&A ofthe consolidated entity.




have flexibility to structure their report inthe manner most appropriate under thecircumstances. This diagram, the entirestatement of concepts, and the accompanyingstandards for MD&A are intentionally written ingeneral terms, in light of the evolvingpractice of performance reporting andaccountability reporting in the federalgovernment. The standards for MD&A define ingeneral terms required supplementaryinformation that should accompany financialstatements prepared in conformance with federalaccounting principles.

9. MD&A should address:

o the entity's structure, mission, goals,and objectives, with indicators4 of itsperformance;

o actions taken or planned to improveperformance, when appropriate;

o the financial statements;

o systems, internal controls*,5 and legalcompliance, including corrective actiontaken or planned; and

o the future effects of existing, currently-known demands, risks, uncertainties,events, conditions and trends. MD&A mayalso address the possible future effectsof anticipated* future demands, events,conditions, trends, etc. that managementbelieves would be important to the readerof the report.

10. MD&A should address these subjects even if,as will be true for many Federal reporting

4This document uses the terms "performance measure" and "performanceindicator" synonymously. Some people use the term "performance indicator"instead of "performance measure" because the performance of governmentprograms typically involves several factors or dimensions, and many of thesedimensions of performance cannot be measured precisely.

5Words marked with * are defined in the glossary.




entities, separate documents report much of theinformation in more detail. Information aboutthese subjects is essential to address theobjectives of federal financial reportingregarding performance, stewardship, budgetaryintegrity, and systems and controls.The following paragraphs explain theimplications of this.

11. Regarding the entity's mission andperformance, MD&A should inform the reader howwell the reporting entity is doing. This meansthat it should tell the reader what thereporting entity and its programs haveaccomplished, and how well the entity ismanaging its programs. To do this, MD&A shouldanswer such questions as:

o What do we need to know to gauge operatingsuccess?

o How do we measure what we accomplished?

o What do the measurements show?

12. To understand the information onperformance, systems, controls, and legalcompliance, it typically is necessary tounderstand something about the reportingentity's organizational structure, mission, andstrategic plan. Accordingly, MD&A shouldconcisely inform the reader about these topics.

13. Reporting information that helps peopleassess the performance of the Government'sprograms and organizations is an importantobjective of Federal financial reporting. Forgovernmental entities, in contrast to profit-seeking entities, the financial result of governmental-type activities is rarely anadequate indicator of performance. (For a fewgovernmental entities, mainly those thatconduct primarily business-type instead ofgovernmental-type activities, the financialresults of operations may be an important,albeit rarely sufficient, performanceindicator.) To assess performance, people needadditional information on the consequences ofthe Government's activities. For a competitive,profit-seeking entity, the value of its




products or services is measured by the amountof money customers are willing voluntarily topay for them. In such a situation, thetraditional income statement reports on boththe efforts (measured by expenses incurred) andthe accomplishments (measured by revenueearned) of the entity. For government, expensereflects efforts, as it does in the privatesector, but indicators other than revenue mustbe used to report on accomplishments. Adiscrete section of the GPFFR thereforepresents indicators of accomplishments (such asindicators of outputs and outcomes) and otherindicators of performance. Alternatively, theGPFFR incorporates performance indicators byreference to a separate report such as theAnnual Performance Report required by theResults Act. Either way, performanceinformation is an integral part of the GPFFRand should be discussed in MD&A. Management'sdiscussion and analysis should thereforeaddress the most important facets ofperformance as well as the financial statementsand supplementary information.

14. Regarding the financial statements, MD&Ashould answer questions such as the following,to the extent that they are relevant andimportant for the entity:

o What is the entity's financial position?What is its financial condition?6 How didthis come about?

o What were the significant variations:

--from prior years?

--from the budget?

--from performance plans, long-term plans, or other relevant plans in addition to

6The traditional concepts of "financial position" and "financial condition"are typically applicable to revolving funds, Government corporations, andother reporting entities that are intended to be self-financing. The conceptsmay be less relevant, or may require some qualification or modification, forother kinds of Federal reporting entities.




the budget?7

o What is the potential effect of thesefactors, of changed circumstances, and ofexpected future trends? In other words, tothe extent that it is feasible to projectthe effects of these factors, will futurefinancial position, condition, andresults, as reflected in future financialstatements, probably be different fromthis year's and, if yes, why? (Any suchdiscussion should acknowledge that thefuture is unpredictable and will beinfluenced by factors outside thereporting entity's control, includingactions by Congress.)

15. Regarding systems and controls, MD&A shouldtell the reader whether internal accounting andadministrative controls (some authoritiesprefer the term "management controls") areadequate to ensure that:

o transactions are executed in accordancewith budgetary and financial laws andother requirements, consistent with thepurposes authorized, and are recorded inaccordance with Federal accountingstandards;

o assets are properly acquired and used, safeguarded to deter theft, accidentalloss or unauthorized disposition, andfraud; and

o performance measurement information isadequately supported.

7Management should use its judgment to decide what variances are relevant forMD&A. It will not always be essential or appropriate to discuss all variances.




16. Reporting information that helps peopleassess the condition of the entity's managementsystems and of the relevant internal controlsis an important objective of Federal financialreporting. The relevant internal controls forthis purpose are those that support reportingon financial and operating performance andreporting on compliance with applicable laws.8

The great diversity of people (often withcompeting interests) affected by governmentalaction, and the fact that governments functionwithin and by means of a framework of laws,mean that more attention to these matters isnecessary than in financial reports for profit-seeking entities.

17. An entity's ability to prepare auditablefinancial statements and other reliable reportsfor management from the entity's books andrecords is a positive signal about the finance-related systems and controls of that entity. Bythemselves, however, the financial statementsof a governmental entity do not provideadequate information about the status of theentity's management systems and internalcontrols that support reporting on financialand operating performance and reporting oncompliance with applicable laws. For thesereasons, the GPFFR of a Federal reportingentity should include information aboutsystems, internal controls, and legalcompliance, in addition to the basic financialstatements. This information--like theinformation on performance--is presented in adiscrete section of the GPFFR; alternatively itmay be incorporated in the GPFFR by referenceto separate reports such as those required bythe Integrity Act. MD&A should thereforeaddress the most important facets of thisinformation on systems, controls and legalcompliance, as well as the financialstatements, supplementary information, andperformance information.

8Internal controls are also relevant to other objectives. For example,controls help management assure efficient and effective use of resources forthe purpose intended. They also support preparation of performance reportspursuant to GPRA. See, for example, paragraph 0.




Relationship to other reports

18. The information in the GPFFR about systems,internal controls, and legal compliance (column6 in figure 1) may include the assertions and asummary of the reports on controls, legalcompliance, and corrective actions pursuant tothe Integrity Act and the Federal FinancialManagement Improvement Act (FFMIA), or thosereports may be incorporated by reference. Thisinformation should be presented in conformancewith guidelines published by OMB. MD&A, inturn, should discuss the most important aspectsof the information on these topics. Referringto separately-issued reports on systems andcontrols does not eliminate the need to discussthese topics in MD&A.9

19. The performance information (column 4 infigure 1) may include the indicators in anentity's performance report pursuant to theResults Act or a selection of the mostimportant performance indicators.Alternatively, a separate performance reportmay be incorporated by reference. Thisinformation should be presented in conformancewith guidelines published by OMB. MD&A, inturn, will discuss the most important aspectsof the performance information. Reference to aseparately-issued performance report does noteliminate the need to discuss performance inMD&A.

9Note that the purpose of the pilot Accountability Reports is to eliminate theneed for numerous separate reports and to include the information required bythose reports in a single report. For example, the Integrity Act requires anassertion on controls by the agency head. Pilot agencies are including thisassertion in the Accountability Report.




20. The performance reports required by theResults Act may be voluminous for someagencies. In such cases, it may not bedesirable to include all this information inthe GPFFR. It is necessary to include at leastsome information about performance with thefinancial statements, however, so that peoplewho use the GPFFR can understand why the costsreported in the financial statements wereincurred and the consequences of doing so.

21. In the same way, the GPFFR by itself maynot provide a comprehensive report on systems,controls and legal compliance. There may bevoluminous reports from management and auditorson these topics. It is necessary to include atleast some information about these topics,however, so that users of the GPFFR canunderstand whether the resources on which itreports were properly safeguarded and used forthe purposes intended, whether reliable reportscan be prepared, and whether the otherobjectives of internal controls are being met.This information is important both to provide abasis for understanding the financialstatements themselves and to address theobjectives of federal financial reporting.

22. Combining information on these topics addsvalue by putting the information aboutperformance, internal controls, and systems inthe context of audited financial statements.For example, the quality of information on thecost of outputs and outcomes of programs isenhanced by linking these indicators to theaudited Statement of Net Cost. This is trueeven though the Statement of Net Cost may betoo highly aggregated to identify separatelyall the programs reported on for the ResultsAct. Similarly, the auditor's tests oftransactions and controls in connection withthe audit of the financial statements provideinformation about the condition of the systemsand controls used to safeguard resources and toassure that they are used for the intendedpurposes, in conformance with law. (Paragraphs0 and 0-0 say more about the discussion andanalysis of systems, controls, andperformance.)




Authoritative status of accounting concepts

23. This Statement of Federal FinancialAccounting Concepts describes ideas and goalsto guide the Board in its work. Concepts arenot authoritative in the sense that they do notconstitute accounting standards or principlesfor federal reporting entities. In particular,they are not "prescribed guidelines" forrequired supplementary information as discussedin section 558 of the Codification ofStatements on Auditing Standards published bythe American Institute of Certified PublicAccountants.

TOPICS FOR MD&A

24. This section provides specific suggestionsfor the content of MD&A. Like the othersections of this document, this material doesnot constitute accounting standards orprinciples for federal reporting entities.Except to the extent that OMB may issuesupplementary mandatory guidance regarding thecontent of MD&A, the following items should beread as suggestions to be considered, not asprescriptive rules that must be followed.

Mission and Organizational Structure

25. MD&A should contain a brief description ofthe mission(s) of the entity and describe itsrelated organizational structure.

TOPICS FOR MD&A 15_________________________________________________________________



Discussion and Analysis of the Financial Statements10

26. Financial Results, Position and Condition--MD&A should help those who read it tounderstand the entity's financial results andfinancial position and the entity's effect onthe financial position and condition of theGovernment.11 It should give readers the benefitof management's understanding of thesignificance and potential effect from both ashort- and a long-term perspective of:

o the variations discussed in paragraph 0 interms of major changes in types or amountsof assets, liabilities, costs, revenues,obligations and outlays;

o particular balances and amounts shown in thebasic financial statements, including thenotes, such as those dealing withdedicated collections or trust funds, ifrelevant to important financial managementissues and concerns; and

o the entity's required supplementarystewardship information (because RSSIdescribes economic conditions that cannotbe expressed in the basic financialstatements).

27. Only those variations, balances andamounts, and stewardship matters of potentialinterest to readers who are not part of agencymanagement should be discussed. Not all changesthat are material to the GPFFR are sufficientlyimportant to be included in MD&A. A line-by-line analysis of the financial statements isnot generally appropriate. Instead, MD&A shouldsummarize the most important items, explain therelevant causes and effects, and place them incontext.

10For many readers program performance information is more important than thefinancial statements. The order in which topics are discussed in this documentdoes not imply that performance information is of secondary importance. Seeparagraphs 43 and following.

11Materiality of effects to be discussed should be evaluated in the context ofthe specific reporting entity, not the Government as a whole.




28. Budgetary Integrity--MD&A should conciselyexplain how budgetary resources have beenobtained and used, instances in which theiracquisition and use were not in accordance withlegal authorization, the status of budgetaryresources, and how information on the use ofbudgetary resources relates to information onthe cost of program operations. MD&A shouldexplain when major support for cost of aprogram or activity is provided outside thereporting entity's budget and when the entity'sbudget supports a program primarily reported byanother entity. The discussion should describemajor financing arrangements, guarantees, andlines of credit, including those not recognizedin the basic financial statements.

29. MD&A should explain major changes duringthe period to the budget originally approved,major failures to comply with finance-relatedlaws, and other matters management believesnecessary. These could include:

o unfunded liabilities that may requireappropriations;

o assets that could be sold to augment futurebudgetary resources;

o amounts of payments that have not beenmatched with obligations;

o anticipated increases in the cost to completelong-term projects in progress that mayrequire additional obligations orappropriations.

TOPICS FOR MD&A 17_________________________________________________________________



30. Use of Estimates--MD&A should conciselyexplain the use of estimates where that isimportant to understand issues discussed inMD&A, such as the major risks and uncertaintiesmentioned in paragraph 0 or the key forward-looking information discussed in paragraph 0.For example, the future expenses and the longterm obligations12 associated with major socialinsurance programs such as Social Security andMedicare should be discussed in MD&A of thefinancial report of the relevant reportingentities. These estimates are inherentlyimprecise and sensitive to several assumptions.Such factors would, therefore, be worthy ofdiscussion in MD&A.

31. Current Demands, Risks, Uncertainties,Events, Conditions, and Trends--MD&A shoulddescribe important existing, currently-knowndemands, risks, uncertainties, events,conditions and trends--both favorable andunfavorable--that affect the amounts reportedin the financial statements and supplementaryinformation. The information called for by thisparagraph and paragraph 0 is closely related.Preparers should combine the presentation ofthis information in whatever fashion isappropriate under the circumstances that applyto the reporting entity.

32. Future Effects of Current Demands, Risks,Uncertainties, Events, Conditions and Trends--The discussion of these current factors shouldgo beyond a mere description of existingconditions, such as demographiccharacteristics, claims, deferred maintenance,commitments13 undertaken, and major unfundedliabilities, to include a discussion of thepossible future effect of those factors. (Thisdiscussion of possible future effects ofexisting, currently-known factors is requiredpursuant to the standards in Standards forManagement's Discussion and Analysis.)

12The term "obligations" is used here in the customary sense, not as it isused in budgetary accounting.

13The term "commitments" is used here in its customary sense, not as it isused in budgetary accounting.




33. Future Effects of Anticipated FutureEvents, Conditions, and Trends--To the extentfeasible and appropriate, the discussion shouldalso encompass the possible future effects ofanticipated future events, conditions, andtrends, although this additional information isnot required by the standards for MD&A.14 Forexample, MD&A might discuss the possible futureeffect of anticipated trends in the cost ofinputs that may significantly affect futureoutput costs. Other examples include the futureeffect of anticipated demographic trends, suchas declining mortality rates, and the futureeffects of potential changes in behavior thatmay be caused by changes in Governmentprograms. Such behavioral changes can greatlyaffect the future cost of some Governmentalprograms. For example, such effects can ariseif subsidized insurance encourages the peopleor entities most at risk to participate ininsurance programs ("adverse selection") orencourages risky behavior ("moral hazard").

34. An anticipated condition such as aprospective demographic trend or potentialbehavioral change may not, in itself,constitute a contingency or assumed risk thatmust be recognized, disclosed, or reportedpursuant to SFFAS 5. Likewise, it may not besomething that must be discussed in MD&Apursuant to the Standards for Management'sDiscussion and Analysis. Even so, if there is areasonable prospect of a major effect on thereporting entity due to the anticipatedcondition, then MD&A should include thisinformation to the extent feasible.

14Some projections that could involve consideration of anticipated factorswould be presented as required supplementary stewardship information pursuantto the standards exposed for comment in FASAB's exposure draft Accounting forSocial Insurance, February, 1998.

TOPICS FOR MD&A 19_________________________________________________________________



35. Where appropriate, the description ofpossible future effects of both existing andanticipated factors should include quantitativeforecasts* or projections*. Such forecasts orprojections can show the implications ofexisting policies and conditions in light ofanticipated or reasonably possible futureconditions. For example, for MD&A of theGovernment-wide financial statements, long-termprojections of the deficit or surplus may beimportant indicators of financial condition andsustainability. For insurance programs, thiskind of projection--which actuaries sometimescall "dynamic analysis"--would considerpossible interactions among current assets,reserves, policies in force, expected futurebusiness or populations covered by theinsurance, and potential behavioral changessuch as adverse selection and moral hazard, ifappropriate. Some programs are inter-relatedamong themselves and/or with conditions in theprivate sector. For example, flood insuranceprograms and disaster assistance programs maybe related to such an extent that analysis ofprograms individually would not provide a goodidea of their potential impact on the Government. To the extent feasible, projectionsshould consider the potential implications ofsuch relationships.

36. The future implications of current oranticipated factors often can better beexpressed as a range of possible outcomes andassociated probabilities than as a single pointestimate. Sometimes the implications may bestbe discussed in nonfinancial as well asfinancial terms. Forward-looking informationcan be highly useful, but management shouldavoid turning this part of MD&A into mere"lobbying" for more budgetary authority.

37. Understanding Financial Reporting--MD&Ashould make federal financial statementsunderstandable to a wide audience, not just tousers who are specialized analysts or membersof the entity's management. There may be manypotential sources of misunderstanding.Management should try to identify those sourcesof misunderstanding that may be important anddeal with them in MD&A. Some of these aregeneral and pervasive, such as those that may




arise in the minds of new users of federalfinancial statements. New users may have beenbudget-oriented rather than accrual-accountingoriented, or may be accustomed to seeingfinancial statements prepared on the basis ofprivate sector accounting standards. A generaldiscussion and reference to the Statement ofFinancing and the basis of accounting footnotemay be sufficient for such users, although morespecific treatment may be appropriate where theresulting differences in the reported amountsmay be important to the understanding of users.

38. Emphasis that may be given in the financialstatements to the costs of suborganizations andprograms may require cautionary discussion ofthe relevance and utility of cost information.When MD&A itself discusses the cost of programoutcomes, the problems of associating costswith outcomes may need to be discussed. Inaddition, the possible imprecision of costinformation should be mentioned when it couldbe relevant to users' understanding. Similarly,any account-level discussion in MD&A ofvariations, balances, and amounts in the basicand stewardship information made in response toparagraphs 0 and 0 may require mention of theimprecision of amounts cited.

39. Exceptions and disclaimers in the auditor'sreport should be mentioned in MD&A, andmanagement should respect the auditor'sprofessional judgment if management expressesdisagreement with auditor's findings. (Thisdoes not mean that management must refrain fromstating views that differ from the auditor's;e.g., different views as to whether a weaknessin control is material.) There may be othersources of misunderstanding. Management shouldbe sensitive to them and guide the user to abetter understanding when the problem couldsignificantly affect the conclusions andjudgments of substantial numbers of users.

TOPICS FOR MD&A 21_________________________________________________________________



Discussion and Analysis of Systems, Controls and LegalCompliance

40. The schematic diagram of a sample GPFFR onpage 4 includes a discrete section that reportson the status of the entity's managementsystems and internal controls that support (1) preparation of financial statements andperformance information in accordance withFederal Accounting Standards and management'scriteria, respectively, and (2) the entity'scompliance with applicable laws.15 That sectionalso describes material problems revealed byaudits or otherwise known to management, andthe corrective actions taken or plannedregarding material problems.

41. Where relevant, management should discussthe results of audits of non-Federal entitiessuch as those pursuant to the Single Audit Actas amended and OMB Circular A-133. MD&A shouldalso discuss actions taken, in progress, orplanned to address systemic problems in programdesign that contributed to the audit findings.Where relevant, management should describe themethods used to limit, detect, and recoverimproper payments; to assure that grantees andother nonfederal recipients of Federal fundsuse the funds as intended; and to assure thatFederal and nonfederal entities comply withfinance-related laws and regulations. MD&Ashould include a concise description of anymajor problems in these areas and of thecorrective action taken or planned.

Discussion and Analysis of Performance

15These responsibilities are defined in numerous laws and administrativerequirements, including the Federal Financial Management Improvement Act, OMBCirculars A-123 and A-127, and OMB Bulletin 98-08. A law of special importancein this connection is the Federal Managers' Financial Integrity Act of 1982(FMFIA or the Integrity Act). The Integrity Act requires, in part, that"internal accounting and administrative controls of each executive agencyshall be established . . . and shall provide reasonable assurances that--(i) obligations and costs are in compliance with applicable law;(ii) funds, property, and other assets are safeguarded against waste, loss,

unauthorized use, or misappropriation; and(iii) revenues and expenditures applicable to agency operations are properly

recorded and accounted for to permit the preparation of accounts andreliable financial and statistical reports and to maintainaccountability over the assets."




42. Performance Measurement--The objectives andneeds of the Federal Government are markedlydifferent from the objectives and needs of non-governmental organizations. This differenceextends to the needs of those who use financialstatements of governmental organizations. Theirneeds are different in many ways from the needsof investors, which the SEC's requirementsaddress. In particular, reporting on theperformance of governmental programs,organizations, and activities requiresinformation that goes beyond the change in netassets and, indeed, beyond financialinformation.

43. The actual outcomes, accomplishments, ordegree to which predetermined objectives aremet provide indicators or measures of someaspects of effectiveness.16 MD&A shouldobjectively discuss the entity's programresults and indicate the extent to which itsprograms are achieving their intendedobjectives.17 Efficiency and effectiveness areimportant elements of performance measurement,and measuring cost is an integral part ofassessing the efficiency and effectiveness ofprograms. Relating outputs (the quantity ofservices provided) to inputs (the cost incurredto provide the services) provides an indicatoror measure of one aspect of efficiency.Information about effectiveness is oftencombined with cost information to help assess"cost effectiveness."

16SFFAC 1, paragraph 206 notes that, to the extent feasible and practical,effectiveness evaluation should focus on program results or effects in thesense of "impacts*," i.e., the difference between what actually occurred andwhat would have occurred in the absence of the program. Assessing impacts ofGovernmental action in this sense typically requires program evaluations orother techniques that transcend annual performance reporting, although thesetechniques often will avail of information in the annual performance reports.Valid and reliable evaluations of program impacts are not feasible for someprograms. When they are conducted, they often require several years of data,are expensive, and typically are not performed on an annual basis for a givenprogram.

17Paragraphs 106-111 and Appendix 1-F of Statement of Federal FinancialAccounting Concepts 2, Entity and Display, discuss and illustrate reporting onperformance in the GPFFR.

TOPICS FOR MD&A 23_________________________________________________________________



44. The entity's financial performance shouldbe summarized to provide significant indicatorsof its financial operations for the reportingperiod. Indicators of financial performance arepresented in notes and supplementaryinformation as well as on the face of theprincipal financial statements, e.g.,information about management of loans andaccounts receivable. Financial performance isonly one aspect of performance for governmentalentities. Financial performance should bediscussed to the extent relevant for theentity, in a way that appropriately balancesthe discussion of financial and nonfinancialperformance relevant to the program or otherreporting entity.

45. The discussion of performance should relateto major goals and objectives from the agency'sstrategic plan and to the indicators reportedpursuant to the Results Act. It should explainwhat key performance indicators say aboutprogram performance. The summary discussion ofperformance in MD&A should:

o discuss the strategies and resources theagency uses to achieve its performancegoals;

o provide a clear picture of actual and plannedperformance across the agency; and

o explain the procedures that management hasdesigned and followed to providereasonable assurance that the reportedperformance information is relevant andreliable.

46. The discussion of performance should:

o include both positive and negative results;

o present historical and future trends, ifrelevant (see paragraphs 0-0 regardingprojections of the financial effects ofknown and anticipated demands,commitments, events, risks, uncertaintiesor trends for which a material financialeffect is reasonably possible);

o be illustrated with charts and graphs,




whenever helpful, for easy identificationof trends;

o explain the significance of the trends;

o provide comparison of actual results to goalsor benchmarks;

o explain variations from goals and plans; and

o provide other explanatory information thatmanagement believes readers will need tounderstand the significance of theindicators, the results, and anyvariations from goals or plans.

47. To further enhance the usefulness of theinformation, agencies should include anexplanation of what needs to be done and whatthey plan to do to improve program performance.

48. Understanding Performance Reporting--Important limitations and difficultiesassociated with performance measurement andreporting should be noted to the extentrelevant to the vital performance indicatorsdiscussed in MD&A. The relevant limitationswill vary from program to program, but somecommon factors that may need to be discussedinclude the following:

o performance usually cannot be fully describedby a single indicator;

o indicators of performance do not, bythemselves, say why performance is at thelevel reported; and

o focusing exclusively on quantifiableindicators can sometimes have unintendedconsequences.

TOPICS FOR MD&A 25_________________________________________________________________



49. For these and other reasons, performanceindicators generally need to be accompanied bysuitable explanatory information. Explanatoryinformation helps report users understandreported indicators, assess the reportingentity's performance, and evaluate thesignificance of underlying factors that mayhave affected the reported performance.Explanatory information may include, forexample, information about factorssubstantially outside the entity's control, aswell as information about factors over whichthe entity has significant control.

This Statement of Recommended Concepts wasadoptedunanimously bytheeightmembersof theFederalAccountingStandardsAdvisory Boardservingon theBoardinApril1999.



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APPENDIX A: BASIS FOR CONCLUSIONS

Background and Project History

50. The Board identified MD&A as a topic forits agenda shortly after the Board's inception.The Board deferred work on this topic, however,until it completed recommendations for aninitial set of basic accounting standards.FASAB published an initial exposure draft onMD&A in January, 1997. The Board receivedcomment letters on the initial exposure draftfrom the following sources:

FEDERAL NONFEDERALTOTAL

(internal) (external)

USERS, ACADEMICS AND OTHERS18 4 4

AUDITORS 7 3 10

PREPARERS AND FINANCIALMANAGERS

16 16

TOTALS 23 7 30

51. The basic rationale for MD&A has notchanged since the initial exposure draft. As aresult of its deliberations after receivingcomments on the 1997 exposure draft, however,the Board made certain changes. The moresignificant changes are discussed below.

18This category includes representational organizations, retired federalemployees, federal employees responding as individuals, and federalcontractors, as well as academics and other GPFFR users.

BASIS FOR CONCLUSIONS 27_________________________________________________________________



Concepts and Standards

52. The initial exposure draft was presented asa statement of recommended concepts. The Boardproposed that it would deal with MD&Aconceptually, with the understanding that OMBwould provide authoritative guidance on MD&A toimplement the concepts. This approach wouldhave been similar to the one used to deal withthe topics of entity and display. The Boarddealt with those topics conceptually in SFFAC2. OMB then provided authoritative guidance inits Bulletin on Form and Content. The 1997exposure draft asked respondents whether all orpart of its provisions should be issued asrecommended standards rather than recommendedconcepts. Responses were mixed; most of thosewho commented on this question favoredconcepts, but a significant number expressedthe view that standards would be appropriate.

53. The Board concluded that, given theimportance of MD&A as an integral part of theGPFFR, it would be appropriate to recommendstandards for MD&A. At the same time, however,the Board concluded that for now thisinformation should be treated as requiredsupplementary information. The Board alsoagreed that no detailed requirements orguidelines for MD&A should be incorporated infederal accounting standards at this timebeyond those proposed in the subsequentexposure draft (discussed below) titledStandards for Management's Discussion andAnalysis. In other words, the Board agreed, adiscussion and analysis that addresses thetopics listed in the proposed standards shouldbe an essential part of a complete GPFFR. Atthe same time, management should have greatdiscretion about what to say regarding thosetopics, subject only to the criteria proposedin the exposure draft Standards forManagement's Discussion and Analysis and thepervasive requirement that MD&A not bemisleading. Because of this change, the Boarddecided to expose separately for furthercomment the proposed new standards andconcepts. The exposure drafts were issued inOctober 1998; responses were requested byJanuary 1999.




Responses to Second Exposure Draft

54. The Board received comment letters on thesecond exposure draft from the followingsources:

FEDERAL NONFEDERALTOTAL

(internal) (external)

CITIZENS, USERS, ACADEMICSAND OTHERS

3 3

AUDITORS19 3 3 6

PREPARERS AND FINANCIALMANAGERS

11 11

TOTALS 14 6 20

55. Most comments were generally favorable, butcomments were mixed regarding some points. Afew auditors and preparers expressed someconcern about requiring forward-lookinginformation as RSI. Others expressed supportfor doing so. After considering theseresponses, the Board agreed to defer therecommended implementation date of the standardby one year and to make minor editorial changesto the standards and concepts that were exposedfor comment.

19Includes the AICPA's Federal Accounting and Auditing Subcommittee and theComptroller General's Advisory Council on Government Audit Standards.




Incorporation of Guidance in OMB Bulletin 97-01

56. This document, like both exposure drafts,integrates some of the guidance in OMB Bulletin97-01 for preparing the "Overview" of thefinancial report with some of the guidanceproposed in FASAB's initial exposure draft forMD&A. Some portions of the guidance regardingperformance measurement in 97-01's discussionof the "Overview" have been omitted. As aninterim step prior to implementation of theResults Act, OMB and many agencies used theOverview as a major vehicle for reporting onperformance, not just as a summary andanalysis. With the full implementation of theResults Act in FY 1999, however, it will beappropriate to implement the financialreporting model contemplated in SFFAC 2. Thiscontemplates a discrete section of the GPFFRfocused on performance. Alternatively,performance information may be incorporated inthe GPFFR by reference to another report orreports.

Management's Assertions

57. Senior management of the reporting unit isresponsible for the content of the GPFFR,including MD&A. Consistent with that, theinitial exposure draft included the followingparagraph:

MD&A should include a discrete section withmanagement's explicit assertions that it isresponsible for maintaining internal accounting andadministrative controls that are adequate to ensurethat

o transactions are executed in accordance withbudgetary and financial laws and otherrequirements, consistent with the purposesauthorized, and are recorded in accordancewith Federal accounting standards;

o assets are properly safeguarded to deterfraud, waste, and abuse; and

o performance measurement information isadequately supported. [footnote omitted]

58. This paragraph, which was based on thelanguage of objective four in SFFAC 1, wasmodified after the first exposure. The Board




concluded that such assertions should bepresented in a separate section of the GPFFR,not in MD&A. Alternatively, management'sassertions about internal control and relatedinformation about systems, controls, andcompliance may be incorporated in the GPFFR byreference to another report or reports. (Asnoted previously, pilot agencies are includingthese assertions in their accountabilityreports.) FASAB expects to consider whether anew statement of standards is needed to assurethat Federal financial reports adequatelyaddress objective four of Federal financialreporting, "Systems and Controls." As noted inparagraph 0, MD&A should include a descriptionof any major deficiencies in the managementsystems and internal controls designed toprovide reasonable assurance that managementresponsibilities are satisfactorily carriedout. It also should describe the correctiveaction planned.

Accountability Reports

59. The Board notes that the concept andpractice of the "Accountability Report"continue to evolve through the pilot projectvoluntarily undertaken by several agencies. TheBoard supports this evolution and encouragesagencies to participate in the pilot project.The concepts and standards FASAB recommends areintended to be applicable to the GPFFR ofFederal entities, whether those reports areprepared pursuant to the Chief FinancialOfficers Act, the Government Management ReformAct, or some future law that might establish astatutory basis for Accountability Reports. Inthe event of such future legislation, OMB willneed to resolve any questions about how toapply existing Federal accounting standards inthe context of new legislative requirements.

Incorporation by Reference

60. Some respondents were disturbed by thenotion of providing program performanceinformation through reference. Some wereconcerned that, if readers are merely directedto other reports for this information, theGPFFR will become irrelevant. They believe that




the GPFFR should contain information aboutprogram performance, systems, and controls, notonly in MD&A but also in discrete sections,such as the Statement of Program Performancediscussed and illustrated in SFFAC 2,paragraphs 106-111 and Appendix 1-F.

61. The Board agrees that, as is stated inparagraph 0, "it is necessary to include atleast some information about performance withthe financial statements . . . so that peoplewho use the GPFFR can understand why the costsreported in the financial statements wereincurred and the consequences of doing so."

62. The Board acknowledges that SFFAC 2 callsfor and illustrates a Statement of ProgramPerformance Measures. (Footnote 13 in SFFAC 2explains that this statement is not "basic"information as that term is used in auditstandards: "The Statement of programperformance measures is not a basic financialstatement. Nevertheless, it is an importantcomponent of the financial reports.") The Boardcontinues to believe that performanceinformation is a vital, integral part ofgeneral purpose financial reporting. It shouldbe noted, however, that SFFAC 1 and SFFAC 2were issued before the performance planning andreporting requirements of GPRA becameeffective. The Results Act creates an elaboratenew planning and reporting environment that isstill evolving. Some details of the reportingmodel that were envisioned conceptually inSFFAC 2 may accordingly need to be revisedslightly.

63. This statement of concepts is intended tobe consistent with the previously stated goalsand concepts of the Board, while recognizingthat some details of how best to achieve thosegoals in the new context still need to bedefined. OMB will play a key role in thisprocess; FASAB may also provide furtherguidance in future projects. FASAB agrees thatthe GPFFR should not address performance,systems, and controls only by means ofreference to other reports. The standards forMD&A require that MD&A do more than refer toother documents.




64. Others expressed concern that, if MD&A isto be regarded as RSI, audit problems mightarise from "incorporation by reference" in MD&Aof information drawn from other sources thatmight not be subject to audit or review asbasic or required supplementary information,and for which authoritative guidance had notbeen provided by a standard setter. The Boardnoted that most of those who commented,including most auditors, did not appear to begreatly concerned about this potential problem.The Board concluded, therefore, that any suchproblems were not likely to be insurmountable.The Board did, however, agree to defer by oneyear the implementation date of the standard toallow OMB and GAO time to resolve any auditissues that may arise.



33

APPENDIX B: GLOSSARY

Accountability Reports--These reports arebroader in scope than traditional generalpurpose financial reports. As explained by OMB:"Six pilot agencies volunteered to produce an'Accountability Report' for FY 1995 to providemore useful information to decision makers bylinking together information required byseveral management statutes. . . .Accountability Reports integrate the followinginformation: the FMFIA report, the CFOs ActAnnual Report (including audited financialstatements); management's Report on FinalAction as required by the IG Act; CivilMonetary Penalty and Prompt Payment Actreports; and available information on agencyperformance compared with its stated goals andobjectives, in preparation for implementationof GPRA." Federal Financial Management StatusReport and Five Year Plan, June 1996, pages 33-34. Twelve agencies produced accountabilityreports for FY 1997; eighteen plan to do so forFY 1998; the number will increase to 23 for FY2000. (The requirement to include CivilMonetary Penalty and Prompt Payment Act reportshas been deleted.)

Anticipated--The word "anticipated" is used ina broad, generic sense in this document. Inthis context the term may encompass both"probable" losses arising from events that haveoccurred, which should be recognized on theface of the basic or "principal" financialstatements, as well as "reasonably possible"losses arising from events that have occurred,which should be disclosed in notes to thosestatements. "Anticipated" may include theeffects of future events that are deemedprobable, for which a financial forecast wouldbe appropriate. The term may also encompasshypothetical future trends or events that arenot necessarily deemed probable, for whichfinancial projections may be appropriate. (Seebelow for definitions of "forecast" and"projection.")




Forecast--The term "forecast" in this documentrefers to prospective financial information,including but not limited to prospectivefinancial statements, based on management'sassumptions about future conditions and actionsthat are deemed probable during the periodcovered. Forecasts are distinguished from"projections," which provide prospectivefinancial information based on one or morehypothetical assumptions or sets ofassumptions. The hypothetical assumptions usedin projections relate to future conditions andactions that may occur, but which are notnecessarily deemed probable to occur. Bothforecasts and projections may contain a range.

Impacts--In the context of discussingperformance measurement, SFFAC 1 defines"impacts" as the difference between whatactually occurred and what would have occurredin the absence of a Government program. SFFAC1, paragraph 206 notes that, to the extentfeasible and practical, effectivenessevaluation should focus on program results oreffects in the sense of "impacts." Assessingimpacts of Governmental action in this sensetypically requires program evaluations or othertechniques that transcend annual performancereporting, though these techniques often willavail of information in the annual performancereports. These evaluations often requireseveral years of data, are expensive toconduct, and typically are not performed on anannual basis for a given program.

Internal control--"Internal control is definedas a process, effected by an agency'smanagement and other personnel, designed toprovide reasonable assurance that theobjectives of the agency are being achieved inthe following categories:

o Effectiveness and efficiency of operationsincluding the use of the entity'sresources.

o Reliability of financial reporting,including reports on budget execution,financial statements, and other reportsfor internal and external use.

GLOSSARY 35_________________________________________________________________



o Compliance with applicable laws andregulations.

A necessary implication or subset of theseobjectives is the safeguarding of agency assetsagainst unauthorized acquisition, use, ordisposition. Consequently, the definition ofinternal control, as it relates to safeguardingassets can be extended to include processes,effected by an agency's management and otherpersonnel, designed to provide reasonableassurance regarding prevention of or promptdetection of unauthorized acquisition, use, ordisposition of the agency's assets." (FromStandards for Internal Control in the FederalGovernment, Exposure Draft, U.S. GAO, December1997.)

Projection--The term "projection" refers toprospective financial information, includingbut not limited to prospective financialstatements, based on one or more hypotheticalassumptions or sets of assumptions. Thehypothetical assumptions relate to futureconditions and actions that may occur, butwhich are not necessarily deemed probable(unlike the case with forecasts). Bothforecasts and projections may contain a range.

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FASAB Board Members

David Mosso, ChairmanLinda Blessing (ending 2/26/99)James L Blum (ending 2/24/99)

Barry B. Anderson (beginning 2/25/99)Philip T. Calder

Donald H. ChapinNorwood JacksonDonald Hammond

James E. Reid (ending 12/31/98)Kenneth J. Winter (beginning 1/1/99)

Nelson Toye��

Wendy M. Comes, Executive DirectorFederal Accounting Standards Advisory Board

441 G Street NWSuite 3B18

Washington, DC 20548

Telephone (202) 512-7350FAX (202) 512-7366

www.financenet.gov/fasab.htm

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MANAGEMENT'S DISCUSSION AND ANALYSIS

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