[Federal Register Volume 62, Number 48 (Wednesday, March 12, 1997)]
[Notices]
[Pages 11505-11508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6134]


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OFFICE OF MANAGEMENT AND BUDGET


Interpretation Numbers 1 and 2 Related to Statement of Federal 
Financial Accounting Standards Numbers 4, 5, and 7

AGENCY: Office of Management and Budget.

ACTION: Notice of interpretations.

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SUMMARY: This notice includes two interpretations of Statements of 
Federal Financial Accounting Standards (SFFAS), adopted by the Office 
of Management and Budget (OMB). These interpretations were recommended 
by the Federal Accounting Standards Advisory Board (FASAB) and adopted 
in their entirety by OMB.

FOR FURTHER INFORMATION CONTACT: Norwood J. Jackson, Jr. (telephone: 
202-395-3993), Office of Federal Financial Management, Office of 
Management and Budget.

SUPPLEMENTARY INFORMATION: This Notice includes two interpretations of 
Statements of Federal Financial Accounting Standards (SFFAS), adopted 
by the Office of Management and Budget (OMB). These interpretations 
were recommended by the Federal Accounting Standards Advisory Board 
(FASAB) and adopted in their entirety by OMB.
    Under a Memorandum of Understanding among the General Accounting 
Office, the Department of the Treasury, and OMB on Federal Government 
Accounting Standards, the Comptroller General, the Secretary of the 
Treasury, and the Director of OMB (the Principals) decide upon 
standards and concepts after considering the recommendations of FASAB. 
After agreement to specific standards and concepts, they are published 
in the Federal Register and distributed throughout the Federal 
Government.
    An Interpretation is a document, originally developed by FASAB, of 
narrow scope which provides clarification of the meaning of a standard, 
concept or other related guidance. Once approved by the designated 
representatives of the Principals, they are published in the Federal 
Register.
    This Notice, including the first two interpretations of SFFAS, is 
available on the OMB home page on the internet which is currently 
located at http://www.whitehouse.gov/WH/EOP/OMB/html/ombhome.html, 
under the caption ``Federal Register Submissions.''
G. Edward DeSeve,
Controller, Office of Federal Financial Management, Office of 
Management and Budget.

Interpretation Number 1 of Statement of Federal Financial Accounting 
Standards Number 7

Reporting on Indian Trust Funds in General Purpose Financial Reports of 
the Department of the Interior (DOI) and in the Consolidated Financial 
Statements of the United States Government: An Interpretation of SFFAS 
No. 7

Introduction

    1. The DOI requested guidance about how to report information on 
Indian trust funds in the general purpose financial report of the 
Department. The Indian trust funds are managed by DOI's Office of 
Special Trustee, Office of the Secretary. (Prior to FY 1996, the trust 
funds were managed by the Bureau of Indian Affairs.) Some of the funds 
belong to individual Indians, others belong to tribes. The funds are 
managed by the Federal Government in a trust arrangement. While the 
government's responsibility for all of these funds is of a fiduciary 
nature, some portion of the annual flows for some of the funds have

[[Page 11506]]

been included in the Budget of the United States Government. (Further 
discussion regarding types of funds involved is provided in paragraphs 
7 and 8.)
    2. According to Statement of Federal Financial Accounting Concepts 
(SFFAC) No. 2, ``Entity and Display,'' inclusion of a program in the 
section of the Federal Budget, currently entitled ``Federal Programs by 
Agency and Account,'' is conclusive evidence that the program should be 
part of the reporting entity. The question thus arises whether the 
assets and activities of the Indian trust funds should be reported in 
DOI's general purpose financial statements. Also, Statement of Federal 
Financial Accounting Standards (SFFAS) No. 7, ``Accounting for Revenue 
and Other Financing Sources,'' requires certain disclosures regarding 
``dedicated collections,'' including fiduciary funds. During discussion 
of this issue at the Federal Accounting Standards Advisory Board 
(FASAB), questions arose about what type of disclosures should be 
provided regarding the Indian trust funds.

Interpretation

    3. The assets, liabilities and operating transactions of the Indian 
trust funds are not part of DOI and should not be included in the 
balance sheet, statement of net cost, and statement of changes in 
financial position of the Department or of the United States 
Government. However, the Department does have a fiduciary 
responsibility for these funds and is required to report on them in 
footnotes to the financial statements by SFFAS No. 7, paragraphs 83-87.

Scope of Interpretation

    4. This Interpretation deals with what information about Indian 
trust funds should be included in the general purpose financial report 
of DOI and the consolidated financial statements of the United States 
Government. It does not address issues regarding: (1) reporting formats 
for the footnote disclosure required by SFFAS No. 7, (2) inclusion or 
exclusion of other fiduciary funds as components of the Federal 
reporting entity, (3) inclusion or exclusion of any funds or entities 
in the Budget of the United States Government, or (4) reporting on 
other funds labeled ``trust funds'' in the Federal Budget, reporting 
for trust funds, or reporting on deposit funds generally.1
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    \1\ This restriction on the scope of this interpretation does 
not imply that this treatment would be inappropriate for the other 
fiduciary funds. Other funds were not included in the research 
supporting this Interpretation and are, therefore, excluded.
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Effective Date

    5. The interpretation is effective upon implementation of SFFAS No. 
7, which is effective for reporting periods that begin after September 
30, 1997. Earlier application of SFFAS No. 7 is encouraged.

Appendix: Basis For Conclusions

Entity Criteria

    6. In its discussion of the budgetary perspective, SFFAC No. 2 
notes:

    18. Care must be taken in determining the nature of all trust 
funds and their relationship to the entity responsible for them. A 
few trust funds are truly fiduciary in nature. Most trust funds 
included in the Federal Budget are not of a fiduciary nature and are 
used in Federal financing in a way that differs from the common 
understanding of trust funds outside the Federal Government. In many 
ways, these trust funds can be similar to revolving or special funds 
in that their spending is financed by earmarked collections.
    19. In customary usage, the term ``trust fund'' refers to money 
belonging to one party and held ``in trust'' by another party 
operating as a fiduciary. The money in a trust must be used in 
accordance with the trust's terms, which the trustee cannot 
unilaterally modify, and is maintained separately and not commingled 
with the trustee's own funds. This is not the case for most Federal 
funds that are included in the Federal Budget--the fiduciary 
relationship usually does not exist. The beneficiaries do not own 
the funds and the terms in the law that created the trust fund can 
be unilaterally altered by Congress.

    7. Indian trust funds are ``true'' trust funds in the customary 
sense, in which there is a legal fiduciary relationship between the 
Federal Government as trustee and the Indians as trustor. The Federal 
Government does not own the assets of the funds. In some cases, the 
Federal Government's trustee relationship is with individuals, in other 
cases with tribes. For many of the funds involved, a tribe or 
individual can use the funds or dissolve the trust at any time; 
however, there is a restriction on the use of funds that have been 
received through legal judgments. Those funds are generally not 
available until the beneficiaries agree how the funds are to be 
distributed among them.
    8. The Federal Budget treats the two types of Indian trust funds 
differently. Tribal funds are included in the Federal Budget. 
Individuals' funds are not in the Federal Budget; they are treated as 
deposit funds. The Indian tribal trust funds appear to meet SFFAC No. 
2's conclusive criterion because of their budgetary treatment. The 
question regarding these funds is whether this implies that these funds 
should be reported on the face of DOI's financial statements, with the 
assets, liabilities, revenues and expenses of the Department.
    9. Another question arises regarding the Indian trust funds that do 
not appear to meet the conclusive criterion: would they meet the 
indicative criteria? DOI interprets the indicative criteria in 
paragraph 44 of SFFAC No. 2 to mean that the Indian trust funds do not 
possess any of these characteristics.
    10. Some people believe that the sixth indicative criterion does, 
in fact, apply: ``* * * a fiduciary relationship with a reporting 
entity * * *'' However, they believe that meeting any single indicative 
criterion is not necessarily sufficient to define the Indian trust 
funds as part of a reporting entity. SFFAC No. 2 cautioned expressly 
that ``no single indicative criterion is a conclusive criterion.''
    11. Other people do not believe that even this indicative criterion 
applies. They believe that, notwithstanding the use of this 
terminology, the relationship discussed in the sixth indicative 
criterion concerns factors relating to committing the component entity 
financially, controlling the collection and disbursement of funds, or 
having financial interdependence. They believe that this type of 
financial control and interdependence does not exist between the Indian 
trust funds and the Federal Government.
    12. While the Indian tribal funds might appear to meet the criteria 
for inclusion as a component of the Federal reporting entity (by virtue 
of the budgetary criterion, if no other), the sovereignty of the Indian 
tribes as entities outside the Federal Government, and the fiduciary 
relationship between the Federal Government and the Indians, indicate 
that the criteria stated in SFFAC No. 2 should not be interpreted to 
suggest that the assets, liabilities, revenues and expenses of these 
fiduciary funds should be reported on the face of DOI's financial 
statements.
    13. SFFAC No. 2's discussion of the budget perspective cautions 
that, when defining a reporting entity, care must be taken in 
determining the nature of all trust funds and their relationship to the 
entity responsible for them (SFFAC No. 2, paragraph 18). This provides 
some common sense advice relevant to the Indian trust funds.

Disclosures for Dedicated Collections

    14. As noted, the disclosure requirements for dedicated collections 
in SFFAS No. 7, paragraphs 83-87, are applicable to the Indian trust 
funds. DOI should include this information in footnotes to its basic 
financial statements. In addressing the comments

[[Page 11507]]

received on the exposure draft leading to SFFAS No. 7, the Board 
specifically noted that:

    226.1  The proposed standard did not cover funds administered by 
a Federal entity in a fiduciary relationship with beneficiaries that 
were not included in the entity's financial statement. In addition, 
it did not cover other funds which are of the same nature as many 
trust funds. The standard now requires disclosures for these funds 
also.

Interpretation Number 2 of Statement of Federal Financial Accounting 
Standards Numbers 4 and 5

Accounting for Treasury Judgment Fund Transactions: An Interpretation 
of SFFAS No. 4 and SFFAS No. 5

Introduction

    1. The Federal Accounting Standards Advisory Board (FASAB) was 
asked to clarify Federal accounting standards as they relate to the 
Treasury Judgment Fund. The Treasury Judgment Fund was established by 
Congress in the 1950's to pay in whole or in part the court judgments 
and settlement agreements negotiated by the Department of Justice (DOJ) 
on behalf of agencies, as well as certain types of administrative 
awards. The Congress established the Judgment Fund as a permanent, 
indefinite appropriation.
    2. The clarification addresses (1) how Federal entities should 
report the costs and liabilities arising from claims to be paid by the 
Treasury Judgment Fund and (2) how the Judgment Fund should account for 
the amounts that it is required to pay on behalf of Federal entities. 
This interpretation has been prepared on the basis of the following 
three accounting Standards:

--Statement of Federal Financial Accounting Standards (SFFAS) No. 4, 
``Managerial Cost Accounting Concepts and Standards for the Federal 
Government''
--SFFAS No. 5, ``Accounting for Liabilities of the Federal Government''
--SFFAS No. 7, ``Accounting for Revenue and Other Financing Sources and 
Concepts for Reconciling Budgetary and Financial Accounting.''

    The provisions of this interpretation need not be applied to 
immaterial items.

Interpretation

Accounting by the Federal Entity

    3. SFFAS No. 5 states that a contingent liability should be 
recognized when a past event or exchange transaction has occurred; a 
future outflow or other sacrifice of resources is probable; and the 
future outflow or sacrifice of resources is measurable. The Federal 
entity's management, as advised by DOJ, must determine whether it is 
probable that a legal claim will end in a loss for the Federal entity 
and the loss is estimable. If the loss is probable and estimable, the 
entity would recognize an expense and liability for the full amount of 
the expected loss.1 The expense and liability would be adjusted 
periodically, as necessary, based on any changes in the estimated loss. 
The Federal entity involved in the litigations shall discuss in a 
footnote to the financial statements the Judgment Fund's role in the 
payment of a possible loss.
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    \1\ See paragraph 39 in SFFAS No. 5 for the complete discussion 
on ``Estimating Contingent Liabilities.''
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    4. Once the claim is either settled or a court judgment is assessed 
against the Federal entity and the Judgment Fund is determined to be 
the appropriate source for the payment of the claim, the liability 
should be removed from the financial statements of the entity that 
incurred the liability and an ``other financing source'' 2 amount 
(which represents the amount to be paid by the Judgment Fund) would be 
recognized. If the Judgment Fund is responsible for only a portion of 
the claim or settlement, the imputed financing source amount would 
reflect only that amount to be paid by the Judgment Fund on behalf of 
the Federal entity.
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    \2\ See paragraph 73 in SFFAS No. 7 for the complete discussion 
on ``Financing Imputed for Cost Subsidies.''
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Accounting by the Treasury Judgment Fund

    5. Once the claim is either settled or a court judgment is assessed 
and the Judgment Fund is determined to be the appropriate source for 
payment of the claim, the Judgment Fund would recognize an expense and 
an accounts payable or a cash outlay for the full cost of the loss. 
According to SFFAS No. 4, the imputed financing source amount 
recognized by the Federal entity and the expense recognized by the 
Judgment Fund would be eliminated at the Federal consolidated financial 
report level.

Effective Date

    6. This interpretation is effective upon implementation of SFFAS 
No. 4 and SFFAS No. 5, which become effective for fiscal periods 
beginning after September 30, 1996.

Appendix A: Basis For Conclusions

    7. This interpretation is primarily based on the principles of 
SFFAS No. 5 and SFFAS No. 4. The following brief discussion explains 
the basis for the interpretation in terms of those standards which are 
the foundation for the interpretation.
    8. In accordance with the general principles of the liability 
standard (SFFAS No. 5), once a legal claim is filed against a Federal 
entity, the entity's management should determine the likelihood that 
the Federal entity will incur a loss related to the claim,3 
regardless of the fact that the payment may be paid in full or in part 
by the Judgment Fund. The contingencies 4 section of SFFAS No. 5 
states that, if the likelihood of the contingent loss is remote, no 
reporting is necessary; if the likelihood of the loss is reasonably 
possible and the amount is measurable, the estimated loss should be 
disclosed; and, if the likelihood of loss is probable (more likely than 
not which is a greater than 50 percent chance of occurrence) and 
estimable, the estimated loss must be recognized as a liability. If the 
probability of the loss is changed at any time prior to payment of the 
claim, the proper adjustments should be recognized (e.g., from 
disclosure (reasonably possible) to recognition (probable)). If at any 
time the estimated loss amount changes, the liability and expense 
should be adjusted to reflect the change.5
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    \3\ In most cases this determination involves DOJ.
    \4\ A contingency is an existing condition, situation or set of 
circumstances involving uncertainty as to possible gain or loss to 
an entity. The uncertainty will ultimately be resolved when one or 
more future events occur or fail to occur. Resolution of the 
uncertainty may confirm a gain or loss.
    \5\ See paragraphs 35-42 in SFFAS No. 5 for the complete 
discussion on ``Contingencies.''
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    9. In accordance with the principles of SFFAS No. 4,6 a 
Federal entity incurring a loss or expense must recognize the full cost 
of the loss (claim), regardless of who is actually paying the 
(settlement or judgment) amount. The standard requires the Federal 
entity incurring a loss or expense to use an estimate of the cost if 
the actual cost information is not provided. The estimate must be 
reasonable and should be aimed at determining realistic losses 
expected.
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    \6\ See paragraphs 89-104 and 105-115 in SFFAS No. 4 for the 
complete discussion on ``Full Cost'' and ``Inter-entity Costs,'' 
respectively.
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Appendix B: Illustrative Journal Entries

    Based on the above noted accounting standards and the generalized 
events described below, the conceptual journal entries 7 should be 
as follows:
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    \7\ Actual journal entries are under the authority of the 
Standard General Ledger.
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    Federal entity entries:
    The Federal entity's management, through the advisement of DOJ, has

[[Page 11508]]

determined that the probability of the legal claim ending in a loss 
against the Federal entity is probable and the loss is estimable. The 
entity would recognize an expense and liability for the full amount of 
the expected loss. The expense and liability would be adjusted as 
necessary based on any changes in the estimated loss.

Entry #1:

Debit  Expense
Credit  Liability--Legal claims

    Once the claim is either settled or a court judgment is assessed 
against the Federal entity and the Judgment Fund is determined to be 
the appropriate source for payment of the claim, the liability should 
be removed and an other financing source recognized. If the Judgment 
Fund is responsible for only a portion of the claim or settlement, the 
imputed financing source amount would only reflect that amount paid by 
the Judgment Fund on behalf of the Federal entity.

Entry #2:

Debit  Liability--Legal claims
Credit  Imputed Financing Source--Expenses Paid by Other Entities 
8
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    \8\ According to SFFAS No. 4, the imputed financing source and 
expenses paid for other entities amounts would be eliminated at the 
consolidation level.

    Treasury Judgment Fund entries:
    The claim is either settled or a court judgment is assessed and the 
Judgment Fund is determined to be the appropriate source for payment.

Entry #3:

Debit  Expenses Paid for Other Entities \8\
Credit  Cash or Fund Balance with Treasury

[FR Doc. 97-6134 Filed 3-11-97; 8:45 am]
BILLING CODE 3110-01-P