2014 Fasab Handbook

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FEDERAL ACCOUNTING

STANDARDS ADVISORY BOARD

FASAB

FASAB Handbook of FederalAccounting Standards andOther Pronouncements, asAmended

as of June 30, 2014

SFFAC 1-7

SFFAS 1-45

Interpretations 1-7

Technical Bulletins

Technical Releases1-15Staff Implementation Guidance


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Page i FASAB Handbook, Version 13 (06/14

Contents

Foreword

Preamble toStatements of FederalFinancial AccountingConcepts

Statement of FederalFinancial AccountingConcepts

Statement of Federal Financial Accounting Concepts 1: Objectives ofFederal Financial ReportingStatement of Federal Financial Accounting Concepts 2: Entity and

DisplayStatement of Federal Financial Accounting Concepts 3: Managements

Discussion and AnalysisStatement of Federal Financial Accounting Concepts 4: Intended

Audience and Qualitative Characteristics for the ConsolidatedFinancial Report of the United States Government

Statement of Federal Financial Accounting Concepts 5: Definitions ofElements and Basic Recognition Criteria for Accrual-Basis FinancialStatements

Statement of Federal Financial Accounting Concepts 6: DistinguishingBasic Information, Required Supplementary Information, and OtherAccompanying Information

Statement of Federal Financial Accounting Concepts 7: Measurement of theElements of Accrual-Basis Financial Statements in Periods After InitialRecording

Statement of FederalFinancial AccountingStandards

Statement of Federal Financial Accounting Standards 1: Accountingfor Selected Assets and Liabilities

Statement of Federal Financial Accounting Standards 2: Accountingfor Direct Loans and Loan Guarantees

Statement of Federal Financial Accounting Standards 3: Accountingfor Inventory and Related PropertyStatement of Federal Financial Accounting Standards 4: Managerial

Cost Accounting Standards and ConceptsStatement of Federal Financial Accounting Standards 5: Accounting

for Liabilities of The Federal GovernmentStatement of Federal Financial Accounting Standards 6: Accounting

for Property, Plant, and Equipment
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Statement of Federal Financial Accounting Standards 7: Accountingfor Revenue and Other Financing Sources and Concepts forReconciling Budgetary and Financial Accounting

Statement of Federal Financial Accounting Standards 8: SupplementaryStewardship Reporting

Statement of Federal Financial Accounting Standards 9: Deferral of theEffective Date of Managerial Cost Accounting Standards for theFederal Government in SFFAS No. 4

Statement of Federal Financial Accounting Standards 10: Accounting forInternal Use Software

Statement of Federal Financial Accounting Standards 11: Amendments to

Accounting for Property, Plant, and Equipment - Definitional Changes -Amending SFFAS 6 and SFFAS 8 Accounting for Property, Plant, andEquipment and Supplementary Stewardship Reporting

Statement of Federal Financial Accounting Standards 12: Recognitionof Contingent Liabilities Arising from Litigation: An Amendment ofSFFAS 5, Accounting for Liabilities of the Federal Government

Statement of Federal Financial Accounting Standards 13: Deferral ofParagraph 65.2Material Revenue-Related Transactions Disclosures

Statement of Federal Financial Accounting Standards 14: Amendmentsto Deferred Maintenance Reporting AmendingSFFAS 6, Accounting for Property, Plant and Equipment and SFFAS 8,Supplementary Stewardship Reporting

Statement of Federal Financial Accounting Standards 15: ManagementsDiscussions and Analysis

Statement of Federal Financial Accounting Standards 16: Amendments toAccounting For Property, Plant, and Equipment Measurement andReporting for Multi-Use Heritage Assets: Amending SFFAS 6 andSFFAS 8 Accounting for Property, Plant, and Equipment andSupplementary Stewardship Reporting

Statement of Federal Financial Accounting Standards 17: Accounting forSocial Insurance

Statement of Federal Financial Accounting Standards 18: Amendmentsto Accounting Standards For Direct Loans and Loan Guarantees in

Statement of Federal Financial Accounting Standards No. 2Statement of Federal Financial Accounting Standards 19: TechnicalAmendments to Accounting Standards For Direct Loans and LoanGuarantees in Statement of Federal Financial Accounting StandardsNo. 2
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Statement of Federal Financial Accounting Standards 20: Elimination ofCertain Disclosures Related to Tax Revenue Transactions by theInternal Revenue Service, Customs, and Others, Amending SFFAS 7,Accounting for Revenue and Other Financing Sources

Statement of Federal Financial Accounting Standards 21: ReportingCorrection of Errors and Changes in Accounting Principles,Amendment of SFFAS 7, Accounting for Revenue and Other FinancingSources

Statement of Federal Financial Accounting Standards 22: Change inCertain Requirements for Reconciling Obligations and Net Cost ofOperations, Amendment of SFFAS 7, Accounting for Revenue and

Other Financing SourcesStatement of Federal Financial Accounting Standards 23: Eliminating the

Category National Defense Property, Plant, and EquipmentStatement of Federal Financial Accounting Standards 24: Selected

Standards for the Consolidated Financial Report of the United StatesGovernment

Statement of Federal Financial Accounting Standards 25:Reclassification of Stewardship Responsibilities and Eliminating theCurrent Services Assessment

Statement of Federal Financial Accounting Standards 26: Presentationof Significant Assumptions for the Statement of Social Insurance:Amending SFFAS 25

Statement of Federal Financial Accounting Standards 27: Identifyingand Reporting Earmarked Funds

Statement of Federal Financial Accounting Standards 28: Deferral of theEffective Date of Reclassification of the Statement of SocialInsurance: Amending SFFAS 25 and 26

Statement of Federal Financial Accounting Standards 29: HeritageAssets and Stewardship Land

Statement of Federal Financial Accounting Standards 30: Inter-EntityCost Implementation: Amending SFFAS 4, Managerial Cost AccountingStandards and Concepts

Statement of Federal Financial Accounting Standards 31: Accounting for

Fiduciary ActivitiesStatement of Federal Financial Accounting Standards 32: ConsolidatedFinancial Report of the United States Government Requirements:Implementing Statement of Federal Financial Accounting Concepts 4Intended Audience and Qualitative Characteristics for theConsolidated Financial Report of the United States Government
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Statement of Federal Financial Accounting Standards 33: Pensions, OtherRetirement Benefits, and Other Postemployment Benefits: Reportingthe Gains and Losses from Changes in Assumptions and SelectingDiscount Rates and Valuation Dates

Statement of Federal Financial Accounting Standards 34: TheHierarchy of Generally Accepted Accounting Principles, Including theApplication of Standards Issued by the Financial Accounting StandardsBoard

Statement of Federal Financial Accounting Standards 35: Estimating theHistorical Cost of General Property, Plant, and Equipment: AmendingStatements of Federal Financial Accounting Standards 6 and 23

Statement of Federal Financial Accounting Standards 36: ComprehensiveLong-Term Projections for the U.S. Government

Statement of Federal Financial Accounting Standards 37: SocialInsurance: Additional Requirements for Managements Discussion andAnalysis and Basic Financial Statements

Statement of Federal Financial Accounting Standards 38: Accounting forFederal Oil and Gas Resources

Statement of Federal Financial Accounting Standards 39: SubsequentEvents: Codification of Accounting and Financial Reporting StandardsContained in the AICPA Statements on Auditing Standards

Statement of Federal Financial Accounting Standards 40: DefinitionalChanges Related to Deferred Maintenance and Repairs: AmendingStatement of Federal Financial Accounting Standards 6, Accountingfor Property, Plant, and Equipment

Statement of Federal Financial Accounting Standards 41: Deferral of theEffective Date of SFFAS 38, Accounting for Federal Oil and GasResources

Statement of Federal Financial Accounting Standards 42: DeferredMaintenance and Repairs: Amending Statements of Federal FinancialAccounting Standards 6, 14, 29 and 32

Statement of Federal Financial Accounting Standards 43: Funds fromDedicated Collections: Amending Statement of Federal FinancialAccounting Standards 27, Identifying and Reporting Earmarked Funds

Statement of Federal Financial Accounting Standards 44: Accountingfor Impairment of General Property, Plant, and Equipment Remainingin Use

Statement of Federal Financial Accounting Standards 45: Deferral of theTransition to Basic Information for Long-Term Projections

Interpretations Interpretation of Federal Financial Accounting Standards 1: Reportingon Indian Trust Funds in General Purpose Financial Reports of the


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Department of the Interior and in the Consolidated FinancialStatements of the United States Government: An Interpretationof SFFAS 7

Interpretation of Federal Financial Accounting Standards 2: Accountingfor Treasury Judgment Fund Transactions: An Interpretation ofSFFAS 4 and SFFAS 5

Interpretation of Federal Financial Accounting Standards 3:Measurement Date for Pension and Retirement Health Care Liabilities

Interpretation of Federal Financial Accounting Standards 4: Accountingfor Pension Payments in Excess of Pension Expense

Interpretation of Federal Financial Accounting Standards 5: Recognition

by Recipient Entities of Receivable Nonexchange Revenue: AnInterpretation of SFFAS 7

Interpretation of Federal Financial Accounting Standards 6: Accountingfor Imputed Intra-departmental Costs:An Interpretation of SFFAS

No. 4

Interpretation of Federal Financial Accounting Standards 7: ItemsHeld for Remanufacture

Technical Bulletins Technical Bulletin 2000-1: Purpose and Scope of FASAB TechnicalBulletins and Procedures for Issuance

Technical Bulletin 2002-1: Assigning to Component Entities Costs and

Liabilities that Result from Legal Claims Against the FederalGovernment

Technical Bulletin 2002-2: Disclosures Required by Paragraph 79(g) ofSFFAS 7Accounting for Revenue and Other Financing Sources andConcepts for Reconciling Budgetary and Financial Accounting

Technical Bulletin 2003-1: Certain Questions and Answers Related to theHomeland Security Act of 2002

Technical Bulletin 2006-1: Recognition and Measurement ofAsbestos-Related Cleanup Costs

Technical Bulletin 2009-1: Deferral of the Effective Date of TechnicalBulletin 2006-1, Recognition and Measurement of Asbestos-RelatedCleanup Costs

Technical Bulletin 2011-1: Accounting for Federal Natural Resources Otherthan Oil and Gas

Technical Bulletin 2011-2: Extended Deferral of the Effective Date ofTechnical Bulletin 2006-1, Recognition and Measurement ofAsbestos-Related Cleanup Costs

Technical Releases Federal Financial Accounting and Auditing Technical Release 1: Audit
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Legal Representation Letter GuidanceFederal Financial Accounting And Auditing Technical Release 2:

Determining Probable and Reasonably Estimable for EnvironmentalLiabilities in the Federal Government

Federal Financial Accounting And Auditing Technical Release 3(Rescinded): Preparing and Auditing Direct Loan and Loan GuaranteeSubsidies under the Federal Credit Reform Act

Federal Financial Accounting and Auditing Technical Release 3(Revised): Auditing Estimates for Direct Loan and Loan GuaranteeSubsidies under the Federal Credit Reform Act Amendments toTechnical Release No. 3 Preparing and Auditing Direct Loan and Loan

Guarantee Subsidies under the Federal Credit Reform ActFederal Financial Accounting And Auditing Technical Release 4:

Reporting on Non-Valued Seized and Forfeited PropertyFederal Financial Accounting and Auditing Technical Release 5:

Implementation Guidance on Statement of Federal FinancialAccounting Standards 10: Accounting for Internal Use Software

Federal Financial Accounting and Auditing Technical Release 6:Preparing Estimates for Direct Loan and Loan Guarantee Subsidiesunder the Federal Credit Reform Act Amendments to TechnicalRelease No. 3 Preparing and Auditing Direct Loan and Loan GuaranteeSubsidies under the Federal Credit Reform Act

Federal Financial Accounting and Auditing Technical Release 7:Clarification of Standards Relating to the National Aeronautics andSpace Administrations Space Exploration Equipment

Technical Release 8: Clarification of Standards Relating to Inter EntityCosts

Technical Release 9: Implementation Guide for Statement of FederalFinancial Accounting Standards 29: Heritage Assets and StewardshipLand

Technical Release 10: Implementation Guidance on Asbestos CleanupCosts Associated with Facilities and Installed Equipment

Technical Release 11: Implementation Guidance on Cleanup CostsAssociated with Equipment

Technical Release 12: Accrual Estimates for Grant ProgramsTechnical Release 13: Implementation Guide for Estimating theHistorical Cost of General Property, Plant, and Equipment

Technical Release 14: Implementation Guidance on the Accounting for theDisposal of General Property, Plant, & Equipment

Technical Release 15: Implementation Guidance for General Property, Plantand Equipment Cost Accumulation, Assignment and Allocation


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Staff ImplementationGuidances

Staff Implementation Guidance 23.1: Guidance for Implementation ofSFFAS 23, Eliminating the Category National Defense Property, Plant,and Equipment: Classification of Items Formerly Considered NationalDefense PP&E

Staff Implementation Guidance 31.1: Guidance for Implementation ofSFFAS 31, Accounting for Fiduciary Activities

Appendices Appendix A: Topical IndexAppendix B: Effective Dates of Statements, Interpretations, and Technical

Releases

Appendix C: Memorandum of Understanding Among The GovernmentAccountability Office, The Department of The Treasury, and TheOffice of Management and Budget on Federal Government AccountingStandards and A Federal Accounting Standards Advisory Board

Appendix D: Federal Accounting and Auditing ResourcesAppendix E: Consolidated GlossaryAppendix F: Consolidated List of Abbreviations


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Page 1 FASAB Handbook, Version 13 (06/14)

Foreword Foreword

TheFASAB Handbook of Federal Accounting Standards and Other Pronouncements, asAmended (FASAB Handbook)contains the body of accounting concepts and standards for theU.S. government.1Specifically, theFASAB Handbook incorporates the following documentspublished through June 30, 2014.

Statements of Federal Financial Accounting Concepts 1-7, Statements of Federal Financial Accounting Standards 1-45, Interpretations 1-7, Technical Bulletin 2000-1 through 2011-2, Technical Releases 1-15, and all Staff Implementation Guidance.

Origins of the Documents

The concepts, standards, interpretations, technical bulletins, technical releases, and staffimplementation guidance presented in theFASAB Handbook were issued in accordance withpolicies and procedures approved by the Department of the Treasury (Treasury), the Office ofManagement and Budget (OMB), and the Government Accountability Office (GAO) at the time oftheir issuance. These three central agencies, referred to collectively as the sponsors, establishedthe Federal Accounting Standards Advisory Board (FASAB) in 1990. The mission of the FASAB isto serve the public interest by improving federal financial reporting through issuing federal

financial accounting standards and providing guidance after considering the needs of external andinternal users of federal financial information.2

Concepts Statements

Statements on concepts differ from statements of accounting standards. Statements on conceptsare more general than statements on standards and do not contain specific authoritativerequirements for federal agencies. After approval by the Board, concepts statements providegeneral guidance to the Board itself as it deliberates on specific issues. They also are useful to the

1Versions of theFASAB Handbook issued prior to June 30, 2011, were referred to asPronouncements as Amended,Statements of Federal Financial Accounting Concepts and Standards(2008-2010), Original Pronouncements,Statements of Federal Financial Accounting Concepts and Standards(2007), or Volume I, Original Pronouncements,Statements of Federal Federal Financial Accounting Concepts and Standards(2004-2006).

2Mission Statement, Federal Accounting Standards Advisory Board. For a more extensive description of FASABs role,refer to Statement of Federal Financial Accounting Concepts No. 1, Objectives of Federal Financial Reporting, Paras.23-29.


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OMB in carrying out its statutory responsibilities, and others in understanding federal accountingand financial reports.

Standards

Using a due process and a consensus building approach, the Board promulgates accountingstandards after considering the financial and budgetary information needs of Congress, executiveagencies, other users of federal financial information, and comments from the public. TheMemorandum of Understanding dated December 3, 2009, is included in Appendix C and describesthe Boards authorities and processes.

Interpretations

Interpretations clarify original meaning, add definitions, and provide other guidance for existingSFFAS. They are narrow in scope. FASAB will respond to requests for guidance by providingtechnical assistance, including, in some cases, interpretations. When drafting an interpretation theFASAB staff submits the request to the Board and reviews applicable literature and consults withknowledgeable persons, as appropriate. FASAB will consider the draft interpretation at an openmeeting. Proposed interpretations are exposed for public comment for at least 30 days.Interpretations approved by a majority of the Board and not objected to by a Board member

representing a principal within 45 days are published by FASAB.

Technical Bulletins

Technical bulletins provide guidance for applying statements and interpretations and resolvingissues not directly addressed by them. Technical bulletins are used when the nature of an issuedoes not warrant more extensive due process. They are generally in question and answer format.

Technical Releases

The Accounting and Auditing Policy Committee (AAPC) provides implementation guidancethrough technical releases that are reviewed and published by the FASAB.


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Staff Implementation Guidance

The staff provides implementation guidance. Such guidance is issued if a majority of the Boarddoes not object.

GAAP Documents

When adopted and issued, these documents become federal accounting standards and

implementation guidance. It is expected that FASAB will continue to issue guidance through thedocuments described above. As new documents are adopted, theFASAB Handbook will beupdated. Individual documents issued between updates are available through a variety of sources.

Purpose of theFASAB Handbook

TheFASAB Handbookcompiles and codifies the documents produced by the FASAB. It isdesigned to meet the needs of users for an authoritative reference to concepts, standards,interpretations, technical bulletins, technical releases, and other issuances. It contains extensivecross-referencing and indexing.

Organization of theFASAB Handbook

This volume presents each concepts statement, standards statement, technical bulletin, technicalrelease and staff implementation guide as a separate chapter (refered to as statement). Theissue date and effective date of each statement are presented first. Next, any interpretations,technical bulletins, and technical releases that relate to the statement are identified. A summaryprecedes presentation of each statement.

In some cases the statements have been affected by later statements or affect earlier statements.

References are provided on the title page of each statement to direct the reader to the affectedparagraphs and indicate the source and nature of the change. Within the text of the statements,ellipses alert the reader that provisions have been deleted as a result of other statements. Originalprovisions modified or affected by a subsequent statement but not deleted are modified in thetext. New provisions added by a subsequent statement are inserted in the original statements.When paragraphs are inserted they are numbered with the number of the preceding paragraphfollowed by a capital letter (5A). When footnotes are inserted, they are numbered with number of


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the previous footnote followed by a lower case letter (1a). The reader can review the basis forconclusions of the amending statement for the rationale for the change.

Some statements contain illustrations. These illustrations are general in nature and may not applyto specific cases that appear similar but have unique circumstances. For specific cases, theobjective should be to arrive at the specific answer that applies the body of accounting standardsin that specific case.

The glossaries originally published with each statement have been codified in a single glossaryAppendix E.

TheFASAB Handbook also presents the following appendices:

Appendix A: Topical IndexAppendix B: Effective Dates of Statements, Interpretations, Technical Bulletins,

and Technical ReleasesAppendix C: Memorandum of UnderstandingAppendix D: Federal Accounting and Auditing ResourcesAppendix E: Consolidated GlossaryAppendix F: Consolidated List of Acronyms

Materiality

The Board intends that application of authoritative guidance be limited to items that are material.Materiality has not been strictly defined in the accounting community; rather, it has been amatter of judgment on the part of preparers of financial statements and the auditors who attest tothem. Presented below is the Boards position on the issue of materiality at this time.

The accounting and reporting provisions of the Boards accounting standards need not beapplied to immaterial items. The determination of whether an item is immaterial requires theexercise of considerable judgment, based on consideration of specific facts andcircumstances.

Hierarchy of Generally Accepted Accounting Principles

The term generally accepted accounting principles has a specific meaning for accountants andauditors. The AICPA Code of Professional Conductprohibits members from expressing anopinion or stating affirmatively that financial statements or other financial data present fairly... in


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conformity with generally accepted accounting principles, if such information contains anydepartures from accounting principles promulgated by a body designated by the AICPA Council toestablish such principles. The AICPA Council has designated FASAB as the body that establishesaccounting principles for federal entities. See SFFAS 34 for information on the GAAP hierarchy.

Copyright

This is a work of the U. S. government and is not subject to copyright protection in the UnitedStates. It may be reproduced and distributed in its entirety without further permission from

FASAB. However, because this work may contain copyrighted images or other material,permission from the copyright holder may be necessary if you wish to reproduce this materialseparately.


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StatementofFederalFinancialAccountingConcepts Preamble to Statements of Federal Financial AccountingConcepts

Each Statement of Federal Financial Accounting Concepts (SFFAC) is part of a series of conceptsstatements intended to set forth objectives and fundamentals on which financial accounting andreporting standards will be based. The objectives identify the goals and purposes of financialreporting. The fundamentals are the underlying concepts of financial accounting-concepts thatguide the selection of transactions, events, and circumstances to be accounted for; theirrecognition and measurement; and the means of summarizing and communicating them tointerested parties.

The Federal Accounting Standards Advisory Boards (FASAB or the Board) conceptualframework enhances the consistency of standards and serves the public interest by providingstructure and direction to federal financial accounting and reporting. The most direct

beneficiaries of the FASAB's concepts statements are the Board itself and preparers and auditorsof federal financial reports. The statements guide the Board's development of accounting andreporting standards by providing the Board with a common foundation and basic reasoning onwhich to consider the merits of alternatives.

Knowledge of the objectives and concepts the Board considers should help users and others whoare affected by or interested in federal financial accounting and reporting standards to understandbetter the purposes, content, and qualitative characteristics of information provided by federalfinancial accounting and reporting. That knowledge should enhance the usefulness of, andconfidence in, federal financial accounting and reporting.

Concepts statements enhance preparers and auditors understanding of the common foundationand reasoning employed in considering alternatives. The GAAP hierarchy provides thatstatements of federal financial accounting standards constitute level A (the highest level)guidance. Statements of federal financial accounting concepts are not GAAP. Instead, conceptsstatements constitute "other literature" and may only be relied upon by financial statementpreparers and auditors to resolve specific accounting issues in the absence of GAAP literature. Indeveloping and amending accounting standards, the Board looks to concepts statements forguiding principles and also considers relevant existing standards and guidance issued by theBoard and other standard setting bodies. Until the Board amends existing standards, the Boardexpects practice to be governed by the accounting principles embodied in the four levels of theGAAP hierarchy. Thus, the Board distinguishes between material presented in concepts which areused to guide Board deliberations on future GAAP and accounting principles presented in

standards which constitute current GAAP. (Appendix C presents the sources of generallyaccepted accounting principles.)

For federal entities, in the absence of specific authoritative literature applicable to a transactionor event, it should be possible to report the event or transaction by selecting an establishedaccounting principle for an analogous transaction or event that appears appropriate when appliedin a similar manner. In the unusual case where an analogy cannot be drawn to establishedauthoritative literature, the GAAP hierarchy permits consideration of other literature including


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Preamble to SFFAC


concepts statements. Consideration of individual concepts statements will be helpful but oftenmay not provide sufficient guidance in resolving emerging issues. Therefore, the Boardencourages careful study of the conceptual framework and established practice in resolving suchissues.

Statements in this series describe concepts and relations that will underlie future federal financialaccounting standards and practices and in due course will serve as a basis for evaluating existingstandards and practices. With issuance of this statement, the series of concepts statementscomprises:

SFFAC 1, Objectives of Federal Financial Reporting (includes the qualitative characteristics

of information in financial reports)

SFFAC 2, Entity and Display

SFFAC 3, Management's Discussion and Analysis

SFFAC 4, Intended Audience and Qualitative Characteristics for the Consolidated FinancialReport of the United States Government

SFFAC 5, Elements of Accrual-Basis Financial Statements and Basic Recognition Criteria

SFFAC 6, Distinguishing Basic Information, Required Supplementary Information, and OtherAccompanying Information

SFFAC 7, Measurement of the Elements of Accrual-Basis Financial Statements in PeriodsAfter Initial Recording

Like other pronouncements of the FASAB, Statements of Federal Financial Accounting Conceptsremain in effect until amended, superseded, or withdrawn by appropriate action under theBoard's Rules of Procedure.


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SFFAC 1 - Page 1 FASAB Handbook, Version 13 (06/14)

Statement of Federal Financial Accounting Concepts 1:Objectives of Federal Financial Reporting

Status

Summary

This document is a conceptual statement on the objectives of financial reporting by the federalgovernment. It focuses on the uses, user needs, and objectives of such reporting. The objectivesare designed to guide the Board in developing accounting standards to enhance the financialinformation reported by the federal government to (1) demonstrate its accountability, (2) provideuseful information, and (3) help internal users of financial information improve the governmentsmanagement. In addition to guiding the Board, the objectives may serve as useful guidance toothers involved in federal financial reporting. For example, the objectives may be useful indeveloping accounting policy, designing reports, and writing narratives and notes to financialreports.

The objectives reflect the federal environment. They also consider many of the needs expressedby current and potential users of federal financial information. They provide a framework forassessing the existing financial reporting systems of the federal government and for consideringhow new accounting standards might help to enhance accountability and decision-making in acost-effective manner.

The four objectives of Federal Financial Reporting are:

Budgetary IntegrityFederal financial reporting should assist in fulfilling the governmentsduty to be publicly accountable for monies raised through taxes and other means and fortheir expenditure in accordance with the appropriations laws that establish the governmentsbudget for a particular fiscal year and related laws and regulations. Federal financial

reporting should provide information that helps the reader to determine

how budgetary resources have been obtained and used and whether theiracquisition and use were in accordance with the legal authorization,

the status of budgetary resources, and how information on the use of budgetary resources relates to information on the

costs of program operations and whether information on the status of budgetaryresources is consistent with other accounting information on assets and liabilities.

Issued September 2, 1993

Interpretations and Technical Releases

Affects None.

Affected by SFFAC 3 affects paragraph 181 by providing guidance on MD&A.


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Concepts 1


Operating PerformanceFederal financial reporting should assist report users in evaluatingthe service efforts, costs, and accomplishments of the reporting entity; the manner in whichthese efforts and accomplishments have been financed; and the management of the entitysassets and liabilities. Federal financial reporting should provide information that helps thereader to determine

the costs of providing specific programs and activities and the composition of, andchanges in, these costs;

the efforts and accomplishments associated with federal programs and thechanges over time and in relation to costs; and

the efficiency and effectiveness of the governments management of its assets and

liabilities.

StewardshipFederal financial reporting should assist report users in assessing the impacton the country of the governments operations and investments for the period and how, as aresult, the governments and the nations financial condition has changed and may change inthe future. Federal financial reporting should provide information that helps the reader todetermine whether

the governments financial position improved or deteriorated over the period, future budgetary resources will likely be sufficient to sustain public services and to

meet obligations as they come due, and government operations have contributed to the nations current and future

well-being.

Systems and ControlFederal financial reporting should assist report users inunderstanding whether financial management systems and internal accounting andadministrative controls are adequate to ensure that

transactions are executed in accordance with budgetary and financial laws andother requirements, consistent with the purposes authorized, and are recorded inaccordance with federal accounting standards;

assets are properly safeguarded to deter fraud, waste, and abuse; and performance measurement information is adequately supported.


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Concepts 1


Table of Contents

Page

Summary 1

Executive Summary 4

Federal Financial Reporting and the Role of the Federal Accounting Standards Advisory Board 9

The Federal Accounting and Financial Reporting Environment 14

Accountability and Users Information Needsthe Foundation of Governmental FinancialReporting 19

Objectives of Federal Financial Reporting 25

Balancing Costs and Benefits in Recommending Standards 34

Qualitative Characteristics of Information in Financial Reports 35

How Accounting Supports Federal Financial Reporting 37

How Financial Reporting Supports Reporting on Operating Performance 45

Appendix A: Basis for Conclusions 50

Appendix B: Users Information Needs Addressed by Federal Financial Reporting 57

Appendix C: Selected Federal Reports Prepared on a Recurring Basis 61


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Concepts 1


Executive Summary

Introduction

1. This document is a conceptual statement on the objectives of financial reporting by thefederal government. It focuses on the uses, user needs, and objectives of such reporting.Statements on concepts, such as this document, differ from statements of recommendedaccounting standards. Statements on concepts are more general than statements of

standards and do not contain specific recommendations that would, when issued by theBoards sponsors, become authoritative requirements for federal agencies and auditors.

2. Instead, statements on concepts, after approval by the Boards sponsors, provide generalguidance to the Board itself as it deliberates on specific issues. They also help others tounderstand federal accounting and financial reports.

3. The objectives are designed to guide the Board in developing accounting standards toenhance the financial information reported by the federal government to (1) demonstrate itsaccountability to internal and external users of federal financial reports, (2) provide usefulinformation to internal and external users of federal financial reports, and (3) help internalusers of financial information improve the governments management.

4. The objectives reflect the federal environment. They also reflect many of the needsexpressed by current and potential users of federal financial information. They provide aframework for assessing the existing financial reporting systems of the federal governmentand for considering how new accounting standards might help to enhance accountability anddecision-making in a cost-effective manner.

5. The FASAB notes that many information sources other than financial statements help toattain these objectives. The objectives relate to the management and financial reportingsystems in the federal government in their entirety.

6. Listing the objectives does not imply a judgment about the extent to which they are now

being attained. Indeed, it is presumed that the objectives are being met to some degree now.However, the federal government does not have an integrated mechanism for reportingwithin the context of these objectives. The FASAB will consider where new accountingstandards could make a useful and cost-effective contribution to improving the extent towhich these objectives are attained.


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Concepts 1


7. The Department of the Treasury, the Office of Management and Budget, and the GovernmentAccountability Office expect that, to the extent possible, their reporting requirements will bealigned with the Boards objectives and standards.

Background and Rationale

8. The federal government derives its just powers from the consent of the governed. It thereforehas a special responsibility to report on its actions and the results of those actions. Thesereports must accurately reflect the distinctive nature of the federal government and mustprovide information useful to the citizens, their elected representatives, federal executives,and program managers. Providing this information to the public, the news media, and electedofficials is an essential part of accountability in government. Providing this information toprogram managers, executives, and members of Congress is essential to planning andconducting government functions economically, efficiently, and effectively for the benefit ofsociety.

9. Financial reporting is not the only source of information to support decision-making andaccountability. Neither can financial reporting, by itself, ensure that the government operatesas it should. Financial reporting can, however, make a useful contribution toward fulfillingthose goals.

10. The objectives apply to both internal and external financial reports. They are intended toimprove the relevance,consistency, and quality of accounting and other data available for awide variety of applications.

11. The FASAB and its sponsors believe that any statement of objectives of federal financialreporting must be based on the needs of those who use the reports. Those users includecitizens, Congress, federal executives, and federal program managers. Current and potentialusers of federal financial information want information to help them assess how well thegovernment is doing by answering questions regarding such topics as:

Budgetary integrity:What legal authority was provided for financing governmentactivities and for spending the monies? Were the financing and spending in accordance

with these authorities? Operating performance:How much do various programs cost, and how were they

financed? What outputs and outcomes were achieved? What and where are theimportant assets, and how effectively are they managed? What liabilities arose fromoperating the program, and how will they be liquidated or provided for?

Stewardship:Did the governments financial condition improve or deteriorate? Whatprovision was made for the future?


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Concepts 1


Systems and Control:Does the government have cost-effective systems and controlsto safeguard its assets? Is it able to detect likely problems? Is it correcting deficiencieswhen detected?

12. Concerns like these define the following objectives of federal financial reporting.

Objectives of Federal Financial Reporting

Budgetary Integrity

13. Federal financial reporting should assist in fulfilling the governments duty to be publiclyaccountable for monies raised through taxes and other means and for their expenditure inaccordance with the appropriations laws that establish the governments budget for aparticular fiscal year and related laws and regulations. Federal financial reporting shouldprovide information that helps the reader to determine

how budgetary resources have been obtained and used and whether their acquisitionand use were in accordance with the legal authorization,

the status of budgetary resources, and how information on the use of budgetary resources relates to information on the costs

of programs operations and whether information on the status of budgetary resources is

consistent with other accounting information on assets and liabilities.

Operating Performance

14. Federal financial reporting should assist report users in evaluating the service efforts, costs,and accomplishments of the reporting entity;1the manner in which these efforts andaccomplishments have been financed; and the management of the entitys assets andliabilities. Federal financial reporting should provide information that helps the reader todetermine

the costs of providing specific programs and activities and the composition of, andchanges in, these costs;

the efforts and accomplishments associated with federal programs and the changesover time and in relation to costs; and

1The FASAB has not yet considered criteria for defining, and terminology for describing, federal financial reportingcomponents or units. In this document, therefore, the term entity is used in a generic way to refer, depending on thecontext, to the U. S. government as a whole; to organizational component units of the government, such as an agency;and to other kinds of potential reporting units, such as programs.


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the efficiency and effectiveness of the governments management of its assets andliabilities.

Stewardship

15. Federal financial reporting should assist report users in assessing the impact on the countryof the governments operations and investments for the period and how, as a result, thegovernments and the nations financial conditions have changed and may change in thefuture.

16. Federal financial reporting should provide information that helps the reader to determinewhether

the governments financial position improved or deteriorated over the period, future budgetary resources will likely be sufficient to sustain public services and to

meet obligations as they come due, and government operations have contributed to the nations current and future well-being.

Systems and Controls

17. Federal financial reporting should assist report users in understanding whether financialmanagement systems and internal accounting and administrative controls are adequate to

ensure that

transactions are executed in accordance with budgetary and financial laws and otherrequirements, consistent with the purpose authorized, and are recorded in accordancewith federal accounting standards;

assets are properly safeguarded to deter fraud, waste, and abuse; and performance measurement information is adequately supported.

Organization of the Statement

18. The first two chapters of this statement present background information on the Board andthe federal environment. Chapter 3 identifies the four groups of current and potential usersof federal financial reports and gives examples of some of their information needs. Chapter 4states and explains the objectives of federal financial reporting in more detail than does thisexecutive summary.

19. Chapter 5 explains some limitations of the standard-setting process within the context ofuser needs. Chapter 6 discusses the desirable qualitative characteristics of financial


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information. Chapter 7 explains how accounting supports federal financial reporting.Chapter 8 explains how financial reporting supports reporting on operating performance.

20. Appendix A sets forth the basis for the Boards conclusions. Appendix B presents acategorization of user needs according to types of information identified by the users ratherthan according to objectives. Appendix C lists some major federal reports that are regularlyproduced.


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Chapter 1: Federal Financial Reporting And The Role Of TheFederal Accounting Standards Advisory Board

21. Financial reporting by the federal government provides information for formulating policy,planning actions, evaluating performance, and other purposes. In addition, the processes ofpreparing and auditing financial reports can enhance the governments overall accountabilitystructure by providing greater assurance that transactions are recorded and reportedaccurately, that consistent definitions are used to describe the transactions, etc. Thus,federal financial reporting helps to fulfill the governments duty to manage programs

economically, efficiently, and effectively and to be publicly accountable.

22. Financial reporting is supported and made possible by accounting and accounting systems.Financial reporting may be defined as the process of recording, reporting, and interpreting,in terms of money, an entitys financial transactions and events with economic consequencesfor the entity. Reporting in the federal government also deals with nonfinancial informationabout service efforts and accomplishments of the government, i.e., the inputs of resourcesused by the government, the outputs of goods and services provided by the government, theoutcomes and impacts of governmental programs, and the relationships among theseelements.2

Role Of The FASAB In Federal Accounting And Financial Reporting

The mission of the FASAB is to recommend accounting standards [for the federal government]

after ... considering the financial and budgetary information needs of congressional oversight

groups, executive agencies, and the needs of other users of federal financial information.3

23. The FASAB and its sponsors believe that any description of federal financial reportingobjectives should consider the needs of both internal and external report users and thedecisions they make. This implies a different role for the FASAB than for the FinancialAccounting Standards Board (FASB) and the Governmental Accounting Standards Board(GASB). The FASB sets financial reporting standards for privately owned entities in theUnited States. The GASB sets financial reporting standards for state and local governments.

2Except where the context indicates otherwise, the term government in this document refers both to the U.S.government as a whole and to its component reporting entities, such as agencies and programs.

3From the FASAB Mission Statement, approved by the Board and by the Secretary of the Treasury, the Director of OMB,and the Comptroller General of the United States in l991.


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24. Those Boards exist primarily to set standards for general purpose financial reporting toexternal users of financial reports. This is because those users, by definition, have limitedability to control the nature of the information made available to them. The FASB and theGASB do not need to weigh heavily managers information needs because those individuals,by definition, are assumed to have ready access to the information they need about thefinancial transactions and events that affect the financial position, operations, and financialcondition of the entities they manage.

25. The FASAB, on the other hand, considers the information needs of both internal and externalusers. In part, this is because the distinction between internal and external users is in manyways less significant for the federal government than for other entities. Officials who in

theory should have ready access to information often find in practice that it is not available.Factors that contribute to this problem include the size and complexity of the government,the rapid turnover among senior political executives compared with the time required toinstall information systems in large bureaucracies, and the division of authority in the federalgovernment.

26. The FASABs dual concern, with both internal and external reporting, is the result of suchfactors and of the Boards mandate. The FASAB was created to advise OMB and Treasury(agents of the President) and the GAO (an agent of the Congress) on accounting standardsfor federal agencies and programs in order to improve financial reporting practices.

27. The Boards sponsors have separate constitutional and statutory authorities for settingaccounting policy for the government. The division of powers in the U.S. government meansthat different policymakers with independent authority find it useful to have a mechanism tocoordinate their accounting policy activities. The Board and its public deliberative processalso provide a new arena for the participants to deliberate and to discover how federalaccounting and financial reporting can be improved.

28. Just as the traditional distinction between internal and external report users is less useful inthe federal context, some of the traditional ways of classifying financialreportsare lessrelevant. Reports can be intended primarily for a designated special purpose or for generalpurpose use. In the federal government, as in most entities, internal financial reporting isdesigned for special purposes. Internal financial reporting helps managers to plan, conduct,

and coordinate their activities and to evaluate the economy, efficiency, and effectiveness oftheir programs.


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29. Much external federal financial reporting also is for special purposes, but some is for generalpurpose use; that is, it attempts to meet the common needs of many different users who havelimited power to demand information directly. These reports are known as general purposereports.4

Limitations Of Financial Reporting

30. The FASB and the GASB focus primarily on general purpose financial reporting because thatis their mandate and reason for being. Even so, those Boards recognize that general purposefinancial reporting is not the only source of financial information about such entities. Inmany cases, users of general purpose financial reports need to consult other sources tosatisfy their information needs. This is no less true for the federal government.

31. While certain information is provided by general purpose financial reports, other informationis better provided by, or can be provided only by, financial reporting outside such reports.Still other information is provided by nonfinancial reports or by financial reports aboutsegments of the national society other than the federal government and its componententities (e.g., economic reporting).

32. Often, to satisfy the information needs of various individuals, it is necessary to combine andreport financial and nonfinancial information. Often, combining information about the

government with information about aspects of the national society is necessary to assesspast or planned governmental actions. For example, information about the number of peoplegainfully employed after participating in a vocational education program would be importantboth in assessing past governmental expenditures for training and in evaluating plans forsimilar new expenditures.

33. Some questions arise with special force regarding the nature of general purpose reportsbecause, by definition, no user or potential user is able unilaterally to define therequirements for these reports. The FASAB is, by design, well constituted to consider theissues involved with such reports.

34. Federal accounting also must support special purpose reporting to the Congress, executives,

and others that the FASAB represents. Indeed, most federal financial reporting is specialpurpose reporting. Also, the Board notes that traditional general purpose financial reports

4In state and local governmental accounting, the term general-purpose financial statements (GPFS) has a quitespecific meaning. Standards published by the GASB define in detail the form and content of such reports. The termgeneral-purpose reports is used in a more generic sense in this document to refer to a variety of federal financialreports.


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may serve a larger and more useful purpose for a variety of audiences if traditional designsfor such reports are expanded to include a variety of reports addressing budgetary integrity,operating performance, stewardship, and control of federal activities.

Evolutionary Approach

35. The FASAB recognizes that developing and implementing standards that will contribute toachieving certain objectives may take considerable time. Time will be needed to establishinformation-gathering systems and to gain experience by experimenting with alternativeapproaches.

36. The FASAB expects that some of these objectives may best be accomplished through meansof reporting outside general purpose financial reports. Indeed, the FASAB recognizes thatinformation sources other than financial reporting, sources over which the FASAB may havelittle or no influence, also are important to achieving the goals implied by these objectives.

37. In developing specific standards, the FASAB will consider the needs of financial informationusers, the usefulness of the information in relation to the cost of developing and providing it,and the ability of accounting standards to address those needs compared with otherinformation sources.

Background Information On Federal Financial Reporting

38. Different people are likely to talk about very different things when asked to describe federalfinancial reporting or federal accounting. A few examples will illustrate this point

39. An economist, when asked this question, is likely to refer to reports about the nationalsociety as a whole. Among the most important of such financial reports are the nationalincome and product accounts (NIPA) that measure the nations aggregate expenditures oncurrently produced output. Federal government expenditures, of course, constitute asignificant fraction of the total expenditures in the economy. The NIPAs, as a system,emerged in the 1940s and were built on work done in the U.S. Department of Commerce

beginning in the 1930s and earlier by private organizations.

40. The NIPAs provide a picture of the economic transactions that occur in an accountingperiod, such as a year. The approach is to provide such a picture through a set of accountsthat aggregate the accounts belonging to the individual transactors in the economyworkers, businesses, and consumers, among otherswhether or not formal accountingstatements exist explicitly for all of them.


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41. The NIPAs provide vital information to policymakers and others who are planning futureactions and to individuals who would like to assess the effects of past actions. The NIPAs arerecognized as an essential part of economic reporting by national governments. For thisreason, the United Nations has developed the System of National Accounts (SNA). The SNAis a comprehensive, integrated, and internationally comparable statistical base for analysis inkey policy-making areas, such as economic growth, inflation, and productivity.

42. This Statement does not deal directly with such accounts of the economic activity of thenational society. The focus of this Statement is on accounting systems and financial reportsthat deal with the budgetary integrity, operating performance, and stewardship of thegovernment as such; that is, of the government as a legal and organizational entity within the

national society. However, to report on some aspects of the governments performance andstewardship, economic and other information about the national society is essential. Thus,the FASAB may consider whether such economic information should be included in certainfinancial reports, such as general purpose financial reports for the U.S. government as awhole.

43. A financial analyston Wall Street, when asked about federal financial reporting, is likely tothink of the Daily Treasury Statement and the Monthly Treasury Statement of Receipts andOutlays of the United States Government. Some financial analysts study these Treasuryreports regularly to assess the effect of cash flows on bank reserves and the size of thegovernments borrowing requirements. The federal governments borrowing is viewed as freeof default risk because of the governments ability to tax and to create money. The power totax depends on the governments willingness to tax and the strength of the economy.

44. From a longer-term perspective, it is true, however, that borrowers expectations about suchfactors as future inflation and the relative value of the dollar compared with other currenciescan influence the borrowing costs of the United States. Those expectations, in turn, may beinfluenced by the deficit reported or projected by the government, the current inflation rate,and other factors.

45. Someone concerned with formulating or executing the U.S. budget, when asked aboutthe federal accounting model, is likely to think of the budgetary accounting system. This isthe system used to keep track of spending authority at various stages of budget execution

from appropriation through apportionment and allotment to obligation and eventual outlay.This system is used by Congress and the executive branch for such purposes as scoring thebudget and for assessing the economic implications of federal financial activity at anaggregate level. It also is used for planning and controlling government operations at moredetailed, disaggregated levels. Of course, people involved with the budget also are informedby, and rely on, sources of information other than the budgetary accounting system, e.g.,program evaluation and performance measures.


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46. Although the FASAB does not recommend standards for the budget or budget concepts, partof its mission is to recommend accounting principles that will help provide relevant andreliable financial information to support the budgetary process. Furthermore, informationabout budget execution is essential to assessing budgetary integrity.

47. Accountants working for the federal government, individuals auditing governmentprograms, or students in a governmental accounting courseare likely to think first ofwhat are known within the federal government as the proprietary accounts and the reportsprepared, in part, from information in them. These accounts are used to record assets andliabilities that are not accounted for in the budgetary accounts. These reports are said topresent financial position and results of operations in accordance with some set of

accounting standards. The FASAB is most directly concerned with these accounts and withthe reports that are prepared, in large part, with information from them.

48. Attention to this and other aspects of federal accounting and financial reporting has beengreatly increased by the Chief Financial Officers Act of 1990 (CFO Act). This act mandatesimproved financial management by requiring, among other things, (1) new financialorganizations, (2) enhanced systems, and (3) audited financial reporting. However, theFASABs area of concern is not limited to the reports required by the CFO Act.

Chapter 2: The Federal Accounting And Financial ReportingEnvironment

49. Financial reporting is an important, basic tool in the management and oversight of mostorganizations. It is particularly important for the federal government because of thegovernments fundamental nature and responsibilities and because the federal governmentoperates with fewer external restraints than other entities. Federal accounting and financialreporting are shaped by, and need to respond to, the unique characteristics and environmentof the federal government, as discussed below.


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Sovereignty

50. The federal government is unique, when compared with any other entity in the country,because it is the vehicle through which the citizens of the United States exercise theirsovereign power.5The federal government has the power through law, regulation, andtaxation to exercise ultimate control over many facets of the national economy and society.All other entities within the nation, both public and private, operate within the context oflaws, oversight, and accountability established by the national government. The federalgovernment is accountable only to its citizens. It is politically accountable to the electorate,but no higher agency has the power to demand an accounting from the government.

Separation Of Powers

51. Because of their concern about potential abuse of the national governments power, thefounders designed a government characterized by the separation of powers. Each branch ofgovernmentlegislative, executive, and judicialis checked and constrained by the others.Paradoxically, this same separation of power can obscure responsibility and reduceaccountability. The interrelated responsibilities of the legislative and executive branches, forexample, can make it difficult to assign responsibility for the policies that are adopted.

Federal System Of Government

52. The federal system of government comprising federal, state, and local levels ofgovernmentalso makes it difficult to pinpoint accountability for many programs. Thefederal governments responsibility relative to that of the states has gradually expanded. Thefederal government has undertaken responsibilities in areas such as income redistribution,education, and health care. Often, however, the expansion has come without direct federalcontrol over related operations. Responsibilities and financial resources of the three levels ofgovernment have become intermingled. Citizens are not clear about who is in charge, whereto press for performance, and whom they should blame for bad results.

5The word sovereign, much discussed by legal and political philosophers, is used here in its broad, popular sense toimply (1) internally that the people are the ultimate (if indirect) overseer or authority in the decision-making process ofa democratic state and (2) externally that the state is autonomous or independent. As noted by one authority on thesubject, either type of sovereignty, internal or external, implies that there is no higher agency. In a more limited sense,sovereignty is the power to make or change the law, a power exercised collectively by individuals and institutionsoperating in a complex system of relationships. See Sovereignty, W. J. Stankiewicz, The New Encyclopedia Britannica,15th. ed. (l976), vol. 17, pp. 309-313.


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Responsibility For The Common Defense And General Welfare

53. The federal government is unique in that it has continuing responsibility for the nationscommon defense and general welfare. As a result, the governments financial condition isnecessarily a secondary consideration in many cases. For example, the nation would enterinto military conflict to protect its vital national interests despite the fact that doing so wouldworsen an already large deficit. (Similarly, the governments greatest resource is one that itdoes not own but can tax: the national economy.)

54. Further, providing for the nations general welfare is a broad responsibility that involves

multiple goals. There is no single measure of success (like return on investment orearnings per share). Goals often are not explicitly defined in quantifiable terms andsometimes conflict with each other. Relevant measures of performance are usuallynonfinancial. For example, many federal loan programs are charged with two conflictinggoals: (1) to operate as a fiscally prudent lender and (2) to provide high-risk lenders withcredit.

Power To Tax, Borrow, And Create Money

55. As stated, the federal government has unique access to financial resources and financing. Ithas the power to tax, to borrow, and to create money. These powers give the government acall on the underlying wealth of the United Statesa vast but finite pool of resources.

56. There is no constitutional requirement to provide sufficient revenues to fund expenditures ofthe federal government. There is a statutory limit on the amount of U.S. debt. This limit isroutinely increased by Congress and the President. The federal governments ability tofinance its debt has not been constrained by capital market assessments of itscreditworthiness. It is true, however, that the cost of servicing the U.S. debt now constrainsthe range of feasible fiscal and monetary policies more than was formerly the case.

57. The federal governmentthrough the Federal Reservealso has the power to create moneyand to control its supply.6This ensures that creditors will be repaid, at least in nominal terms.

When the governments debt is large, it also provides a temptation to create money, as well asinflation.

6The Federal Reserve Board functions as a largely independent entity but is, of course, a government agency created bycongressional action.


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Influence Of Organized Interests

58. Because of the size and nature of government programs, it is difficult for individuals toevaluate or to influence policies and actions of the federal government. Typically, individualsmust organize to exercise influence. Small groups whose members are significantly affectedby a common factor or concern can be organized relatively easily, but they may find itdifficult to wield much influence. Large groups may be influential, but organizing them isdifficult if the members have common but diffuse interests. Once organized, interest groupstend to perpetuate themselves.

59. As a result, most elected and appointed federal officials, and the groups to which they areresponsive, have been interested primarily in information about individual governmentprograms, functions, or activities. They have been less interested in information about thegovernment as a whole and even less concerned about intermediate levels of reporting, suchas individual departments.

Political System Versus Private Markets

60. The federal government is not subject to the discipline of competitive markets for privategoods, services, and capital. Generally, transactions between citizens and the government arenot individual exchanges between willing buyers and willing sellers. Taxpayers provideresources involuntarily, based on their consumption, wealth, or income rather than on theirdesire for particular government services. Even when user fees are charged, they often arenot intended to represent market clearing pricesprices that would, in markets for privategoods, balance supply and demand.

61. Thus, citizens as individuals have little say in selecting the public services they pay for.Decisions on what public services will be provided are collective decisions made through thepolitical process. Politically influential recipients of benefits can force less influential non-recipients to bear the cost of the benefits.

62. Further, because most governmental revenues are not earned in individual, voluntary,

exchange transactions, no private market directly measures the value of output.Consequently, the value added to societys well-being by government programs cannot begauged by conventional measures of net income, nor is there much competitive marketconstraint on the quantity or quality of services provided. Instead, decisions about thequantity, quality, and value of public services are collective decisions made by the politicalprocess.


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Assets

63. The government makes significant investments in assets, including public domain assets andlarge investments intended to produce growth (educational programs and research anddevelopment, for example).

64. In government, as in the private sector, assets are expected to provide benefits that outweighcosts. In the private sector, the notion of benefits is relatively straightforward: benefits aremeasured in terms of cash inflows. Assets are not acquired unless the value of expected cashflows exceeds acquisition costs.

65. In the government, this discipline does not usually exist. Expected benefits often are notcash inflows but rather are the services provided by the asset. Sometimes those services areprovided to the government itself (e.g., government office buildings or motor pools). Moreoften, the services are provided to the public (e.g., education and research anddevelopment).

Responsibility To The News Media

66. The federal government is subjected to, and should encourage, scrutiny by the news media.Because of the lack of external restraints and because the governments power ultimatelyresides in the citizens, it has a special responsibility to citizens and taxpayers to disclose itsactivities.

Importance Of The Budget

67. The budget is the most widely recognized and used financial report of the federalgovernment. It is a principal surrogate for the missing external restraints discussed above. Itis a vehicle for the political process to reach agreement on goals and to allocate resourcesamong competing priorities. It provides a system for controlling expenditures. And itsupplies information necessary for assessing the effect on the economy of the governments

fiscal policies. The role of budgeting in financial reporting is discussed further in Chapter 7under Relationship of Financial Reporting to Budgeting.

Need For Special Control Mechanisms

68. The lack of external restraints noted above creates a need for special control mechanisms.Some mechanisms exist today. The most important, of course, are the political constraints


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and accountability imposed by regular elections and the separation of powers and the otherconstitutional constraints and accountabilities, such as the federal system and freedom ofspeech.

69. Accounting and financial reporting also play a role. Budgetary obligation accounting is usedto control activities, primarily at the budget account level. Audited financial reports canprovide users with assurance that accounting systems are providing consistent and reliabledata.

70. However, the need for improvement in financial reporting is widely recognized, as is the factthat financial information alone often is insufficient for decision-making. For example,

financial information on costs often must be combined with nonfinancial information onperformance to provide a basis for assessing the efficiency and effectiveness of governmentprograms.

Chapter 3: Accountability And Users Information NeedstheFoundation Of Governmental Financial Reporting

71. It may be said that accountability and its corollary, decision usefulness, comprise the twofundamental values of governmental accounting and financial reporting. They provide the

foundation for the objectives of federal financial reporting. Because a democraticgovernment should be accountable for its integrity, performance, and stewardship, it followsthat the government must provide information useful to assess that accountability. Similarly,because a democratic government is accountable for operating economically, efficiently, andeffectively, for the purposes intended by citizens and their elected officials, certain otherconclusions logically follow. Specifically, those who formulate, select, and implementgovernment policies and programs need information useful for planning, controlling, andconducting government functions.

72. The assertion of accountability therefore leads to identifying, first, those to whomgovernment is accountable and, second, the information needed to maintain anddemonstrate that accountability. Accordingly, this Chapter first discusses the concept of

accountability, then identifies the four groups of users of federal financial reports. Itconcludes by providing some examples of the information needs that may be addressed tosome extent by federal financial reports.


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Accountability

73. Several different kinds of accountability can be distinguished, and a given piece ofinformation may be relevant in different ways to judgments about accountability. Forexample, one authority suggests that there are five levels or types of public accountability:

Level 1 is policy accountabilityselection of policies pursued and rejected (value). Level 2 is program accountabilityestablishment and achievement of goals

(outcomes). Level 3 is performance accountabilityefficient operation (efficiency and economy).

Level 4 is process accountabilityusing adequate processes, procedures, or measuresin performing the actions called for (planning, allocating, and managing).

Level 5 is probity and legality accountabilityspending the funds in accordance withapproved budget and/or approved items (compliance).7

74. In a democracy, appointed officials are accountable to their superiors, and elected officialsare accountable to the citizens for each of these kinds of accountability. Accounting andfinancial reporting can help elected and appointed officials to maintain and to demonstratetheir accountability. The last kind of accountability listed, for probity and legality, probablyis the kind most often associated by the public with accounting. However, the accountingprofession has long recognized that accounting can and should contribute to achieving anddemonstrating several kinds of accountability, such as

accountability for financial resources; accountability for faithful compliance or adherence to legal requirements and

administrative policies; accountability for efficiency and economy in operations; and accountability for the results of government programs and activities, as reflected in

accomplishments, benefits, and effectiveness.8

7J. D. Stewart, The Role of Information in Public Accountability, eds. Tony Hopwood and Cyril R. Tompkins, Issues inPublic Sector Accounting (Oxford, Great Britain: Philip Allan, l984), pp. 14-15, as cited by the GASB in its Preliminary

Views on Service Efforts and Accomplishments Reporting (Dec. l992).

8Report of the Committee on Concepts of Accounting Applicable to the Public Sector, American Accounting Association(l970-71), pp. 80-81, as cited by the GASB in Preliminary Views on Service Efforts and Accomplishments Reporting (Dec.l992).


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Users Of Federal Financial Reports

75. The Board believes that users of financial information about the federal government can beclassified in four major groups: citizens, Congress, executives, and program managers.

Citizens

76. This group includes individual citizens (without regard to whether they are taxpayers, voters,or service recipients). Citizens include the general news media and more specialized users,such as trade journals; public interest and other advocacy groups; state and local legislators

and executives; and analysts from corporations, academe, and elsewhere.

77. Citizens are interested in many aspects of the federal government. They are concerned aboutindividual programs, candidates for office, the services the government provides, and thefiscal responsibility of their elected and appointed representatives. Citizens receive and payfor government services and therefore are concerned with the outputs and outcomes ofthose services and the efficiency with which they are provided. Citizens are concerned abouttheir families and, in particular, with the financial burden their children and grandchildrenwill inherit. As individuals, citizens typically have limited time and ability to analyze reportsabout their government; they want and rely on assurances that the government is functioningeconomically, efficiently, and effectively. As they are organized and represented by analystsworking for interest groups and the news media, citizens want more information about the

governments activities.

78. Citizens express their interest in the government by discussing issues, by voting, and bywriting to their representatives about the quality and quantity of the services they receive. Insome cases, citizens may decide whether and when to use services and products provided bythe government. They may contribute to political campaigns, demonstrate support oropposition for individuals responsible for past and proposed government actions, and evenrun for office.

Congress

79. This group includes elected members of Congress and their staffs, including staff of theCongressional Budget Office (CBO) and the GAO. Congress is concerned with broadpolicies, priorities, and the programs that implement those priorities. It decides what taxes toimpose, what funds should be spent, and for what purpose. Thus, Congress is concernedboth with how to finance programs and with how they are executed.

80. Congress participatesalong with the administrationin the basic decisions that describethe intent of government. Such decisions include passing laws in response to public demand,


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allocating resources among competing programs, and establishing policy that affects variousaspects of the countrys economic and social life. These decisions often are influenced byassessing costs and benefits and by considering the effect of the governments aggregatefinancial requirements on the economy.

81. Congress also participates in monitoring government programs. It assesses the managementperformance of the executive branch and the efficiency and effectiveness of programs.

Executives

82. This group includes the President and those acting as his agents, i.e., program agency headsand their deputy, under, and assistant agency heads; heads of bureaus, administrations,services, and agencies; and the central agency officials in OMB and the Department of theTreasury.

83. Executives, like Congress, are concerned with the governments goals, objectives, andpolicies. Executives focus on the strategic plans and programs that are intended to achievepresidential and congressional goals and to implement their policies. In particular, they payattention to budgets that, from the perspective of each agency, are the source of theresources needed to achieve goals and to implement policies. Executives are, of course,directly concerned about the management of programs, that is, with the actual delivery ofservices and with the efficiency and effectiveness of the delivery process.

84. Executives develop legislative proposals, recommend the necessary level of programfunding, and formulate financing and revenue-raising strategies. They help select the methodfor delivering services. They determine whether program managers have been accountablefor the resources entrusted to them and whether programs are operating efficiently andeffectively. Executives also provide information that will enable the President and Congressto monitor programs.

Program Managers

85. This group includes individuals who manage government programs. Their concerns includeoperating plans, program operations, and budget execution.

86. Program managers assist in the design of programs and organize the method selected fordelivering services. They recommend program budgets based on detailed plans that set forthneeds for money, staffing, facilities, and inventory.

87. Program managers establish operating procedures for their programs and manage themwithin the limits of the spending authority granted by Congress. They select, supervise, andevaluate personnel. They also make sure that program inventory and facilities are acquired


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economically, maintained adequately, and used efficiently. Program managers need toprovide information to enable executives and Congress to monitor the programs.

The Needs Of Users Of Federal Financial Reports

88. While the financial information needs of these groups is more diverse than their membership,those needs can be categorized under four broad headings.

Budgetary Integrity

89. All user groups need information about the budget. For citizens, information about budgetexecution provides assurance that their elected and appointed representatives have fulfilledtheir most basic fiduciary responsibility: to raise and spend money in accordance with thelaw.

90. For the Presidents economic team and for congressional budget committees, information isneeded on budget aggregates (total budget authority, total receipts and collections, and totaloutlays) to establish fiscal policy, including governmental financing needs. These officialsneed to know that prior-year actuals have been accurately recorded in accordance with thesame budgetary principles used to prepare estimates.

91. To avoid violations of the Anti-Deficiency Act and the Impoundment Control Act, programmanagers need information about obligations incurred on their programs. They needperiodic information about the status of budgetary resources, that is, the extent to which theresources have been used or remain available. They also want to know whether budgetaryresources are available to be used for other purposes through reprogramming.

Operating Performance

92. Citizens want information about programs that affect them. Veterans, for example, want toknow about new hospitals, and defense workers want information about contract awards(and cancellations). Retirees and people planning retirementand their representatives inCongresswant to know that the Social Security Administration provides reliable servicesto the public.

93. Congress and executives want information about the comparative costs of programs (suchas the per student cost of the Job Corps Program versus that of other job training programs).For comparisons to be valid, costs must be defined and measured alike.


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94. Of course, information on the effectiveness of programs is also needed to make validcomparisons among programs. Information is needed about outputs (e.g., number ofstudents who graduated) and outcomes (e.g., number of students who got and held jobs forwhich they were trained).

95. Executives and program managers need to know the cost of performing work reimbursed byother government entities or by nonfederal customers. Costs, in this case, would measure theresources (personnel, material, and equipment) used to accomplish the work.

96. Congress and executives often want cost information that would help to compare alternativecourses of action. How much more or less would it cost if the Census Bureau used a new

approach to taking the census? How much would be saved if an Army division were based inthe United States rather than in Europe?

97. Program managers need information on the assets and liabilities related to operations.Managers of loan programs need information on the quality of their loan portfolios. Managersof repair depots want information on inventories, such as their value, quantity, location, age,and condition. Managers of government facilities need to know the facilities condition andan estimate of future outlays made necessary by deferring needed maintenance.

98. Congress and executives need information about the market value of assets that could besold, such as precious metals or other commodities.

Stewardship

99. Citizens, Congress, executives, and program managers need information to assess the effectof the governments activities on its financial condition and that of the nation. Information isneeded about the financial outlook for both the short and the long term.

100. Information is needed on the governments exposure and risks associated with depositinsurance, pension insurance, and flood insurance. People need to know about likely futureexpenditures for cleaning up nuclear weapons sites and military bases. They wantinformation that will help them assess the likelihood and amount of future claims that mightarise from government-sponsored enterprises.

101. All users need information on earmarked revenues recorded in trust funds. They want toknow, for example, whether the Social Security Trust funds are likely, in the foreseeablefuture, to need infusions of new taxes to pay benefits. Citizens need to know the implicationsof investing trust fund revenues in government securities.

102. Users also need trend information on spending on investments in physical and human capitalversus spending on consumption.

2014 Fasab Handbook

Documents

Transcript of 2014 Fasab Handbook