ACCOUNTING AND AUDITING POLICY COMMITTEE
MEETING
SEPTEMBER
14, 2000
The
meeting was convened at 1:32 p.m. in room 4N30 of the GAO Building, 441 G St.,
N.W., Washington, D.C.
Administrative Matters
· Attendance
Present: Ms. Payne, Messrs. Dacey, Fred Doggett (for
Mr. Friedman), Lane, Pugh, Ritchie, Stout, and Zavada
Absent: Messrs. Eisenhart and Friedman, and Ms.
Jordan.
· Minutes
The
minutes of Ju1y 13, 2000 were previously approved as final, having been
circulated by
e-mail
to members.
· AAPC Member Vacancy
Ms. Payne noted that the CFO Council is continuing in its plans for naming a
replacement for Mr. Sullivan. She expects that one will be named in the
near future.
· AACP Revised Charter and Operating
Procedures
Ms. Payne noted that the AAPC Charter and Operating Procedures were being revised
due to the AICPA Rule 203 status gained by the FASAB. The FASAB Steering Committee is currently reviewing the revisions
to the AAPC Charter. OMB will be providing
additional language to the Charter as it relates to the issuance of auditing
guidance. A final vote by the FASAB on the revised Charter is expected in
October. Ms. Payne asked the members to
review the proposed revisions to the AAPC Operating Procedures so that a final
vote could take place at the next AAPC meeting.
Agenda Status
· Open Project Updates
Issue #21 Liabilities Covered and Not
Covered by Budgetary Resources
Mr.
Zavada noted that OMB plans to address this issue in the new Form & Content
Bulletin, which will be applicable for Fiscal Years (FY) beginning 2001. This ongoing project of the AAPC deals with
the disclosure of liabilities as either “liabilities covered by budgetary
resources” or “liabilities not
covered by budgetary resources,” in accordance with SFFAS 1, Accounting for Selected Assets and
Liabilities. Mr. Zavada also noted OMB is currently reviewing the issue of
appropriated entitlements as it relates to liabilities covered/not covered by
budgetary resources.
Issue #11 Inter-entity Costs
The
Inter-Entity Costs survey was mailed to the members of the CFO community in
July and comments are due back by October 30, 2000. The survey is made up of a series of questions directed to
inter-entity costs that are not fully reimbursed by the receiving entity or are
not reimbursed at all. The survey will assist the AAPC in identifying specific
inter-entity costs that are being incurred by agencies, study their nature, and
determine whether they meet the recognition criteria specified in SFFAS 4. Mr. Pugh asked if the survey could also be sent
out to the Inspector General community.
The committee agreed.
Issue
#24 Supplemental Guidance to SFFAS 10, “Accounting for Internal Use Software”
In
June 2000 the Chief Financial Officers Council (CFOC) requested that the AAPC
consider issuance of an implementation guide, SFFAS 10 Implementation Topics/Issues, developed by a CFO Council
task force. The guide provides
supplemental guidance to agencies implementing SFFAS 10.
The
AAPC agreed to review 6 of the 22 issues provided by the CFOC. Ms. Payne noted that Bert Edwards, Chair of
the CFOC Standards Committee and Rich Fontenrose, FASAB Staff member, have
written an article on those issues not addressed by the FASAB or the AAPC. The article will be published in the AGA Journal
and in the JFMIP Newsletter in the near future.
The
task force reviewing this issue presented to the full committee a draft
Technical Release (TR). Committee members offered several edits to the
documents that were accepted. Also,
several members had questions about the level of guidance being provided in the
TR. It was noted that many of the
responses in the TR did not appear to provide much additional guidance, outside
of reiterating what is currently in SFFAS 10 and requiring consistency of related
policies. The AAPC task force explained
that the CFOC task force prepared both the questions and the responses. Mr. Fontenrose noted that the CFOC task
force felt that the guidance submitted was sufficient [in those areas addressed
by the AAPC].
Several Committee members had concerns about
Question #6, Bulk Purchases. The
members were uncertain as to the question being asked. They asked, “What is
the question, is it: ‘are seat license purchases considered bulk purchases’? Or
is the question, ‘how should bulk purchases be recognized as it relates to
capitalization thresholds’? Or
both? Or is there another
question?” Ms. Payne asked the AAPC
task force to send this issue back to the CFOC task force for further
clarification.
Ms. Payne stated that once the issue
with Question #6 was resolved, the draft document would be posted on the AAPC
website for an informal comment period.
Issue #25 Federal Aviation
Administration’s request for guidance on Grant Accounting
At
the May AAPC meeting, the Committee agreed to accept a grant accounting issue
from the Federal Aviation Administration (FAA). The FAA requested policy guidance on a grant accounting issue
that deals with the liability recognition by FAA (the grantor) for expenses
incurred by a grantee when the grantee incurs costs after a letter of intent
has been issued by the FAA but prior to the execution of the grant agreement. AAPC member Luise Jordan is chairing the
task force and AAPC members Bob Dacey, Jay Lane, and David Zavada are also
serving on the task force.
The
task force gave an update on its latest work.
The task force met in late July with DOT and
FAA officials to learn more about the events surrounding this issue, as well as
other letter of intent issues being addressed by other component organizations
within DOT (for example, the Federal Highway Trust Fund). The task force
also plans to hold discussions with the CFO Council Grant
Accounting Committee to gather information as to the extent of letters of
intent at other agencies and how they are accounting for such agreements.
In July 2000 the AAPC was asked by the Railroad Retirement Board (RRB) to provide guidance on the accounting and reporting of RRB’s Financial Interchange (FI) with the social security systems. RRB was requesting an interpretation of the current Federal accounting standards as they apply to the RRB FI. See Appendix A for staff issue paper on this topic.
Three members of the RRB staff briefed the Committee on the background of the FI, as well as the issues currently at hand. The representatives from RRB were Kenneth Boehne, RRB Chief Financial Officer; Pete Larson, RRB Director of Fiscal Operations; and Letty Benjamin Jay, RRB Audit Team Leader, Office of the Inspector General (OIG). Mr. Boehne informed the Committee of the following facts.
n RRB pays approximately $8 billion in retirement benefits per year.
n RRB’s two sources of revenue are taxes from the railroad industry and the financial interchange.
n RRB received $3.2 billion in June 2000 from the financial interchange.
Mr. Boehne noted that the position of RRB’s Office of the CFO is to recognize the transactions between the parties on an accrual basis, this is to maintain consistency between the entities involved. Mr. Boehne explained that the actuarial estimate calculated as of year-end (September 30) is the best possible estimate at the given time. Mr. Boehne also noted that the difference between the 9/30/99 accrual of the FI and the actual amount received was only .36% of RRB’s total assets. In order to address the concerns of the auditors, management is willing to disclose whatever information is necessary to adequately inform the reader of the nature of the estimated accrual.
Ms. Jay made the following comments concerning the issue.
n The public accountants who disclaimed on RRB’s financial statements in fiscal years 1994, 1995 & 1996 did not fully understand RRB’s financial interchange based on the comments provided to RRB by the accountants.
n The OIG agrees that there is no better accrual estimate available at the time of reporting, since the actuarial assumptions are subject to change right up to the time the final FI amount is determined.
n In FY 1995 the difference between the actual FI and the accrued FI amounted to an overstatement of revenue that was equal to 52% of the excess revenue and financing sources over total expenses. However, the overstatement was 3.8% in FY 1999. The concern is the uncertainty involved. The difference between the actual and the accrual can have a substantial impact on the excess revenue and financing sources over total expenses.
n Is there an option to recognize the FI on a cash basis?
Once the RRB representative made their presentations, the Committee members asked several questions and gave their observations on the issue. The following is a summary of that discussion.
n The accounting standards are clear; account receivables and payables must be recognized on an accrual basis. The only relief to recognizing these transactions on a cash basis would be a change in the accounting standards. Such an amendment would have to be made by the FASAB.
n The issue is a timing difference between the estimate and the actual accrual.
n If the actuarial estimate is being audited and the auditor is comfortable with the process, then you have the best estimate available.
Based on the discussion between the Committee members and the RRB representatives, the following final comments were made by the AAPC members.
- The issue involves audit judgment, which is based on the supporting evidence. If the estimate is the best estimate available, then there is an option to disclose in the financial statement the past experiences of the differences, as well as the nature of the estimate.
- Excess revenue and financing sources over total expenses may not be the most appropriate gauge of materiality in this situation. Total revenue, total expenses, or total assets is generally a more relevant gauge of materiality for Federal financial reports.
- All preparers and auditors deal with some level of uncertainty; the key is to become comfortable with the process involved in determining the accrual.
- There is no additional guidance that the Committee can provide RRB on the issue. The focus should be on the estimation process and the reasons for the uncertainty.
The Committee agreed not to accept the RRB issue as a project of the AAPC. The members stated that the current accounting and auditing standards were clear and adequately addressed the issue.
Next Meeting
The
next meeting will be on Thursday, November 9, 2000, at 1:30 p.m. in Room 4N30.
Adjournment
The meeting was adjourned at 3:47 p.m.
APPENDIX A: AAPC Summary Issue Paper on the Railroad
Retirement Board’s Financial Interchange
The AAPC has been asked to provide guidance to the Railroad Retirement Board (RRB) on the accounting and reporting of its Financial Interchange (FI) with the social security systems. RRB is requesting an interpretation of the current Federal accounting standards as they apply to the RRB FI.
The financial interchange between the railroad
retirement and social security systems is intended to put the Social Security
Old-Age, Survivors, and Disability Insurance (OASDI) and Hospital Insurance
(HI) trust funds in the same position they would have been in had railroad
employment been covered under the Social Security and Federal Insurance
Contributions Acts. The financial
interchange provision was introduced by the 1951 amendments to the Railroad
Retirement Act and was made retroactive
to January 1, 1937. The interchange
involves computing (1) the amount of social security level payroll taxes
related to railroad employment, (2) the income taxes on the social security
level benefits, and (3) the amount of additional benefits which social security
would have paid to railroad retirement beneficiaries during the same fiscal
year (credit is given for any social security benefits actually paid to
railroad retirement beneficiaries).
When benefit reimbursements exceed payroll and income taxes, the
difference, with an allowance for interest and administrative expenses, is
transferred from the social security trust funds to the railroad retirement
account. If taxes exceed benefit
reimbursements, a transfer would be made in favor of the social security trust
fund.
Financial interchange transfers are made in a
lump sum for a whole fiscal year in the June following the close of the fiscal
year. For example, the transfer
reflecting transactions which occurred from October 1998 through September 1999
took place in June 2000. To avoid any
cash-flow problems from this lag, 1983 amendments provided for monthly
transfers from U.S. Treasury general funds.
Each transfer is equal to an estimate of the amount the RRB would have
received for the preceding month if the financial interchange with the Social
Security Administration (SSA) and Health Care Financing Administration (HCFA)
were on an up-to-date basis, with interest adjustments. The RRB must repay these transfers when it
receives the amount against which the money was advanced. The Department of the Treasury treats these
cash transfers as loans to RRB.
The RRB accrues the estimated receivable and
interest due from SSA, the estimated amount payable and interest due HCFA, and
the amount payable and interest due Treasury.
RRB also recognizes a “Transfer-in” for the estimated receivable and a
“Transfer-out” for the estimated payable on its Statement of Changes in Net
Position.
In their audit reports for fiscal years 1994 and
1995, one of the reasons why Arthur Andersen LLP disclaimed an opinion on the
financial statements was because of the significant differences that have
occurred in prior years between the accruals and the actual settlement amount
of the financial interchange as a percentage of the excess of revenue and
financing sources over total expenses.
This issue also resulted in a disclaimer of opinion by KPMG LLP for
fiscal year 1996 and by the RRB Office of Inspector General (OIG) for fiscal
years 1997, 1998, and 1999.
SFFAS 7, Accounting
for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary
and Financial Accounting, paragraph 70 on Other Financing Sources states:
Financing
sources, other than exchange and nonexchange revenues, that provide inflows of
resources that increase results of operations during the reporting period
include appropriations used, transfers of assets from other Government
entities, and financing imputed with respect to any cost subsidies. Financing
outflows may result from transfers of the reporting entity's assets to other
Government entities or from exchange revenues earned by the entity but required
to be transferred to the General Fund or another Government entity. Unexpended
appropriations are recognized separately in determining net position but are
not financing sources until used.
SFFAS 7, Appendix
B: Guide for the Classification of Transactions, paragraphs 341- 343 state:
Interchange
between the Railroad Retirement Board and the Social Security and Hospital
Insurance trust funds.--The
Railroad Retirement Board pays benefits equivalent to the amounts that would
have been paid if railroad workers had been covered under Social Security since
its inception, plus additional amounts unique to that program. The railroad
retirement program is partly financed by an annual financial interchange that
takes place between the Railroad Social Security Equivalent Benefit Account (a
trust fund) and the trust funds for old-age and survivors insurance, disability
insurance, and hospital insurance (OASDHI). The interchange is designed to
place each of the OASDHI trust funds in the same position as it would have been
if railroad employment had been covered under Social Security since its inception.
The amount of the payment reflects the difference between (a) the benefits that the OASDHI trust funds would have paid to railroad workers and their families if railroad employment had been covered by OASDHI and (b) the payroll taxes that the OASDHI trust funds would have received if railroad employment had been covered by OASDHI. If benefits would have exceeded taxes, the OASDHI trust funds make a payment to the Railroad Social Security Equivalent Benefit Account; if benefits would have been less, the OASDHI trust funds receive a payment. Currently OASI and DI make payments to that Account, and HI receives payment. The interchange differs from the examples in the previous cases primarily in that (a) the payment is between two trust funds and (b) the payment may be made in either direction.
The
financial interchange does not arise from an exchange transaction, because it
is a reallocation of resources among funds, all of which are financed primarily
from nonexchange revenue. Furthermore, the nature of this reallocation is such
that the transferring entity does not receive anything of value and the
recipient entity does not sacrifice anything of value. Therefore, the recipient
entity recognizes the transfer-in as an other financing source, and the transferring
entity recognizes the transfer-out as a negative financing source.
RRB’s Bureau of Fiscal Operations believes that,
“For a fair presentation to our stakeholders, management believes that the
entire financial interchange process should continue to be recorded on an
accrual basis of accounting. Although
this problem could be quickly resolved if the completion of the audit would be
moved to May.”[2]
RRB’s OIG believes the following. “Based on our analysis of prior financial
statements and pertinent public and governmental accounting literature, the OIG
believes that non-accrual accounting for FI transactions would provide a more
consistently reliable presentation than the present accrual treatment. The accrual accounting treatment presently
used for FI transactions has, in the past, led to material misstatements of the
RRB’s financial statements. We believe that the application of accrual
accounting to FI receivables and payables is not entirely consistent with
current standards and definitions. The
RRB-SSA and RRB-HCFA transfers are nonexchange transactions for which the due
dates are after the reporting date.
Based on this analysis, the OIG believes that the present full accrual
accounting treatment is inconsistent with FASAB pronouncements and the
definitions in the U.S. Government Standard General Ledger.”[3]
1. Based on the applicable accounting standards what is the proper recognition of RRB’s financial interchange?
2. Is
there audit guidance on how to deal with the uncertainty associated with the
estimates – either through language in the audit report or other means – as a
possible resolution to RRB’s issue?