Title 2--Equity Accounting (Correspondence, 10/13/93, GAO/AIMD-94-11R).

The National Institute of Standards and Technology (NIST) requested an
opinion on the application of the Title 2 equity standard for preparing
its Working Capital Fund financial statements. GAO found that: (1) the
Department of Commerce's Inspector General (IG) has cited NIST for
noncompliance with the equity standard; (2) IG has recommended that NIST
adjust its equity accounts to reflect property depreciation and consider
returning its excess earnings to the Department of the Treasury, since
it receives duplicate equipment cost recoveries through appropriations
and user fees; (3) NIST believes it is not required to reduce its equity
accounts every year, since its equipment appropriation is intended to
increase its working capital fund; (4) NIST believes that the monies
received through permanent appropriations and user fees are intended to
be reinvested in property and its equity accounts should not be reduced;
and (5) NIST should not reduce its equity accounts, since its
appropriations meet permanent investment criteria.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-11R
     TITLE:  Title 2--Equity Accounting
      DATE:  10/13/93
   SUBJECT:  Federal fund accounts
             Property depreciation
             Accounting procedures
             Accounting systems
             Funds management
             Financial management
             Procurement appropriations
             Permanent budget authority
             Inspectors General
             Noncompliance

             
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Cover
================================================================ COVER



October 1993


GAO/AIMD-94-11R

Title 2 - Equity Accounting

(922205)


Abbreviations
=============================================================== ABBREV

  IG - inspector general
  NIST - National Institute of Standards and Technology

Letter
=============================================================== LETTER


B-254191

October 13, 1993

Mr.  John C.  McGuffin, Comptroller
National Institute of Standards and
 Technology
Department of Commerce

Dear Mr.  McGuffin: 

This letter responds to your request for an opinion on the
application of the equity standard in Title 2, "Accounting," of GAO's
Policy and Procedures Manual for Guidance of Federal Agencies.  The
Title 2 standard states that when equipment is purchased using
appropriated funds, the equity account in the balance sheet
reflecting the equipment acquisition, which is an invested capital
account, should (1) be reduced by the amount of depreciation expense
recognized each period and (2) be credited to an account eventually
closed to the cumulative earnings account.  The National Institute of
Standards and Technology (NIST) has adopted Title 2 for purposes of
preparing financial statements for its Working Capital Fund (the
Fund).  The statements are audited annually by the Department of
Commerce's Inspector General (IG). 

The basis of your request is the IG's report which cited NIST for
noncompliance with the above Title 2 standard.  To supplement the
descriptions of the accounting treatment in your letter and the IG
report, we met with your staff to obtain more information about the
reasons behind NIST's accounting treatment and met with the IG's
staff to obtain additional information about their report. 

The IG recommended that NIST adjust the equity accounts of the Fund
to show balances that would have existed had NIST periodically
reduced the amounts related to depreciation expense on property
acquired through use of an appropriation. 

The IG also recommended that NIST consider whether the Fund should
return its excess earnings to the Treasury.  The IG stated that since
the Fund charges customers for the services it performs, it receives
twice the amount of the equipment cost, once through the
appropriation awarded to acquire the property and once through user
charges which include the depreciation expense as a cost in
establishing the rate base to charge customers.  If NIST had charged
the equity account for the same amount as the depreciation expense,
(1) the capital investment account would have been reduced and (2)
the cumulative earnings account of the Fund would have increased,
including both the appropriation and the revenues related to
depreciated property.  Consequently, the IG concluded that the
cumulative earnings account would have shown an inflated balance
since the Fund receives twice the amount of the equipment, thus
raising the question of whether the Fund has excess earnings that
should be returned to the Treasury. 

Your staff stated, however, that they interpreted Title 2 as not
requiring the equity account to be reduced every year if the
appropriation used to acquire the equipment was intended to increase
the corpus of the Fund.  They stated that the appropriation NIST
receives each year for the acquisition of property and the revenues
it receives from the depreciation included in the rate base are
intended to be continuously reinvested in property to replace older,
used property for use within the Fund.  Your staff also stated that
the fiscal year 1994 budget request for the appropriation to be
transferred to the Fund includes specific language emphasizing the
permanent nature of the appropriation.  In addition, your staff
stated that the Fund is in a growth period where operations are
expanding.  Consequently, NIST management believes that the invested
capital account reflecting the acquisition of property should not be
reduced because of the permanent nature of the appropriation to the
Fund. 

Title 2 requires the capital investment account in the equity section
of the balance sheet to be reduced every year to the extent
depreciation expense is recognized.  However, an appropriation
awarded or transferred for the purpose of acquiring long-lived assets
would be continuously retained in the capital investment account if
the appropriation is intended to be a permanent capital infusion and
not intended to be diminished.  In this regard, the appropriation is
analogous to an appropriation for initial investment to begin a new
activity or an appropriation to expand current operations. 

Although NIST is required by law to charge customers for the cost of
its capital assets, amounts appropriated to NIST for transfer to the
Working Capital Fund are also available for the acquisition of
capital assets.  Further, federal law provides that NIST does not
have to pay to the Treasury net earnings that are applied to (1)
restore any prior impairment to the Fund or (2) ensure the
availability of capital to replace equipment and inventories. 
Accordingly, so long as NIST intends to apply appropriations
transferred to the Fund in this manner, the appropriations constitute
a permanent capital infusion.  As such, these appropriations meet the
Title 2 criteria of a permanent investment.  Therefore, in our
opinion, NIST should not reduce the capital investment account when
depreciation expense is recognized on assets acquired through use of
this appropriation. 

We discussed our position with Mr.  Thomas Gary and others of your
staff.  We hope this response is helpful to you.  Should you have any
questions, please contact Mr.  John W.  Hill, Jr., Director, Audit
Support and Analysis, at (202) 512-8549. 

Sincerely yours,

Donald H.  Chapin
Assistant Comptroller General

*** End of document. ***