Accounting Principles, Standards, and Requirements: Title 2	 
Standards Not Superceded by FASAB Issuances (01-NOV-01, 	 
GAO-02-248G).							 
                                                                 
This is one in a series or reports designed to help federal	 
agencies improve or maintain effective internal control,	 
financial management systems, and financial reporting. GAO	 
discusses the status of the 13 remaining standards in Title 2,	 
"Accounting," of the GAO Policy and Procedures Manual for	 
Guidance of Federal Agencies in light of the most recent	 
compendium of Federal Accounting Standards Advisory Board (FASAB)
standards and guidance. GAO either (1) reprinted the standards	 
that remain in effect, along with any updated citations to	 
relevant guidance, or (2) provided the citation of current	 
guidance replacing that standard.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-248G					        
    ACCNO:   A02685						        
  TITLE:     Accounting Principles, Standards, and Requirements: Title
2 Standards Not Superceded by FASAB Issuances			 
     DATE:   11/01/2001 
  SUBJECT:   Accounting procedures				 
	     Accounting standards				 
	     Cost accounting					 
	     Executive agencies 				 
	     Federal agency accounting systems			 
	     Financial management systems			 
	     Internal controls					 
	     Reporting requirements				 

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GAO-02-248G
     
                  United States General Accounting Office

GAO

                               November 2001

ACCOUNTING PRINCIPLES, STANDARDS, AND REQUIREMENTS

Title 2 Standards Not Superceded by FASAB Issuances

GAO-02-248G

______________________________________________________________________________

PREFACE

______________________________________________________________________________

November 2001

Before 1991, accounting principles, standards, and related requirements for
executive agencies were published in appendix 1 of Title 2, "Accounting," of
the GAO Policy and Procedures Manual for Guidance of Federal Agencies,1 in
accordance with 31 U.S.C. 3511. The establishment of the Federal Accounting
Standards Advisory Board (FASAB) in 1990 inaugurated a new process for
developing and issuing accounting principles and standards.

At the time of the creation of FASAB, Title 2 contained 39 accounting
standards. In March 1997, GAO published a compendium2 of FASAB's original
standards and guidance, which at that time had replaced all but 13 of the 39
Title 2 standards. Those 13 were to remain authoritative guidance until
FASAB issued standards or guidelines superseding them, in whole or in part.
Since 1997, FASAB has continued its standards development work, and in 2001,
it issued an updated compendium containing the most current standards and
guidance it has issued to date.

The purpose of this update is to convey the status of the remaining 13
standards in Title 2 in light of the most recent compendium of FASAB
standards and guidance. Based on the 2001 FASAB update, we either (1)
reprint the standards that remain in effect, along with any updated
citations to relevant guidance, or (2) provide the citation of the current
guidance replacing that standard. Of the 13 standards, 7 have been
superceded by FASAB statements and other guidance while the remaining 6
continue to be in effect. For the remaining 6 standards, changes to the
original text are italicized and deletions are indicated by strikeouts.

This document is part of a series of documents we have issued to assist in
improving or maintaining effective internal control, financial management
systems, and financial reporting. A list of related products appears at the
end of this document.

Jeffrey C. Steinhoff
Managing Director
Financial Management and Assurance

1See GAO's Home Page for an announcement earlier this year entitled, GAO
Policy and Procedures Manual for Guidance of Federal Agencies. On GAO's Home
Page, click on "Other Publications," then "Government Policy and Guidance,"
and then the manual. 2GAO/AIMD-21.1.1, March 1997.

GAO-02-248G - Title 2 Standards Not Superceded by FASAB (11/01)

                     (This page is intentionally blank)

   Page 2 GAO-02-248G - Title 2 Standards Not Superceded by FASAB (11/01)

_____________________________________________________________________________

CONTENTS

_____________________________________________________________________________
Generally Accepted Accounting Principles for the Federal Government 5
Standard C30 Compensated Absences 7 Standard E10 Entitlements 8

Standard E20 Equity of the U.S. Government 9 Standard F30 Foreign Currency
10 Standard F40 Fund Accounting 12 Standard G10 Grants and Cooperative
Agreements 13 Standard I10 Imputed Interest 15 Standard I40 Investments 17
Standard L10 Leases 18 Standard L40 Long-Term Contracts 19 Standard P40
Property, Plant, and Equipment 21 Standard R20 Regulatory Accounting 22
Standard R40 Research and Development 24 Related Products 25

Abbreviations

AICPA American Institute of Certified Public Accountants
APB Accounting Principles Board
FASB Financial Accounting Standards Board
FASAB Federal Accounting Standards Advisory Board
GAAP Generally Accepted Accounting Standards
OMB Office of Management and Budget
SAS Statement on Auditing Standards
SFFAS Statements of Federal Financial Accounting Standards
TFM Treasury Financial Manual

   Page 3 GAO-02-248G - Title 2 Standards Not Superceded by FASAB (11/01)

(This page is intentionally blank)

______________________________________________________________________________

Generally Accepted Accounting Principles for the Federal Government
______________________________________________________________________________

In October 1999, the American Institute of Certified Public Accountants
(AICPA) issued Statement on Auditing Standard (SAS) No. 91, Federal GAAP
Hierarchy, which amended SAS No. 69, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles in the Independent
Auditor's Report (AICPA, Professional Standards, vol. 1, AU sec. 411). SAS
No. 91 established the following hierarchy of accounting principles for
federal government entities.

"(a) ... FASAB Statements and Interpretations, as well as AICPA and FASB
pronouncements specifically made applicable to federal government entities
by FASAB Statements or Interpretations; ... (b) FASAB Technical Bulletins
and, if specifically made applicable to federal government entities by the
AICPA and cleared by the FASAB, AICPA Industry Audit and Accounting Guides
and AICPA Statements of Position; ... (c) AICPA AcSEC Practice Bulletins if
specifically made applicable to federal government entities and cleared by
the FASAB, as well as Technical Releases of the Accounting and Auditing
Policy Committee of the FASAB; ... (d) implementation guides published by
the FASAB staff, as well as practices that are widely recognized and
prevalent in the federal government."

SAS 91 further states:

"In the absence of a pronouncement covered by rule 2033or another source of
established accounting principles, the auditor of financial statements of a
federal governmental entity may consider other accounting literature,
depending on its relevance in the circumstances. Other accounting literature
includes, for example, FASAB Concept Statements; the pronouncements referred
to in categories4 (a) through (d) of paragraph 10 when not specifically made
applicable to federal governmental entities by the FASAB...''

Those parts of Title 2 not yet addressed by FASAB are considered to be under
category "(a)" in the hierarchy of accounting principles for federal
government entities established by SAS 91 in the preceding hierarchy.5

3Rule 203 provides that an auditor should not express an unqualified opinion
if the financial statements contain a material departure from such
pronouncements unless, due to unusual circumstances, adherence to the
pronouncements would make the statements misleading. 4These categories
consist of FASB statements of financial accounting standards,
interpretations, and technical bulletins; APB opinions; and AICPA accounting
research bulletins, technical bulletins, practice bulletins, as well as
related interpretation and implementation guides. 5Prior to the
establishment of FASAB, accounting standards contained in Title 2 were
considered to be a part of GAAP for the federal government.

(This page is intentionally blank)

______________________________________________________________________________

C30 Compensated Absences
________________________________________________________________________

Introduction

A compensated absence is an employee absence for vacation or illness, for
which the employee will be paid. When employees accrue rights to take leave
with pay, the government incurs an expense and liability measured by the
salary cost of the time that may be taken.

Accounting Standard

The accrual of annual leave in the federal government is material and needs
to be recognized annually in agency accounting records and financial
statements. Federal employers, therefore, shall recognize the expense and
related liability for annual leave (including home leave) as it accrues.
Sick leave need not be accrued unless such information is needed for budget
and management purposes. The expense and related liability for annual leave
shall initially be recorded at the wage rates at which the leave is earned.
Use of a fringe benefit rate is also acceptable for calculating accrued
annual leave.

The liabilities for annual leave shall be adjusted at least annually to
reflect all pay increases and unused leave balances for financial statement
purposes.

______________________________________________________________________________

E10 Entitlements
________________________________________________________________________

This standard was superceded by the following FASAB Standards (SFFAS).

SFFAS 1, Accounting for Selected Assets and Liabilities, par. 83 and 84.

SFFAS 5, Accounting for Liabilities in the Federal Government, par. 19, 24 -
34, 56 - 76, and the glossary.

SFFAS 7, Accounting for Revenue and Other Financing Sources, par. 71 - 72
and 78 - 79.

SFFAS 17, Accounting for Social Insurance, par. 14, 18, 20, 22, and 23.

________________________________________________________________________

E20 Equity of the U.S. Government
________________________________________________________________________

This standard has been superceded by the following FASAB standards and OMB
guidance.

SFFAC 2, Entity and Display, par. 83

SFFAS 3, Accounting for Inventory and Related Property, par. 57 - 78.

SFFAS 6, Accounting for Property, Plant, and Equipment, par. 17 - 22,
30 -- 33, 35 - 36, 38 - 43, and the glossary.

SFFAS 7, Accounting for Revenue and Other Financing Sources, par. 62,
71 - 72, 76, 83 - 87, and 226 - 234.

SFFAS 8, Supplementary Stewardship Reporting, par. 83 - 85.

OMB Bulletin 01- 09, Attachment A, Form and Content of Agency Financial
Statements, pp. 18, 27, and 33 - 38; p. 77, Note 10 (section 9.10); p. 78,
Note 11
(section 9.11); p. 100 (section 10.3A); and p. 102 (section 10.3D).

________________________________________________________________________

F30 Foreign Currency
________________________________________________________________________

Introduction

This standard prescribes the accounting and financial reporting requirements
for federal agencies' financial transactions when differing currencies are
involved.

Accounting Standard

Because the U.S. dollar is the basic measurement unit of the federal
government's financial position, financial statements required by the
Financial Reporting standard, 19 and 57 - 58, Note 4, section 9.4 and SFFAS 1, par. 27 and 32 shall be
stated in U.S. dollars.

Federal departments may need to translate or remeasure foreign currency
transactions into U.S. dollars for departmental financial reports when (1)
foreign currency transactions occur and/or (2) financial statements for use
by component operating units (lower than departmental or independent agency
level) are not in U.S. dollars. For further guidance on remeasurement and/or
translation, refer to FASB Current Text respectively TFM - Vol. I - Part 2, Chapter 3200, section 3220, Reporting
Requirements.

Foreign Currency Transactions

Foreign currency transactions are those financial events involving a
monetary unit different from the currency in the primary economic
environment (functional currency) of a (1) federal department or (2)
component operating unit of a federal department. Gains or losses resulting
from the settlement of foreign currency receivables or payables shall be
included in the results of operation for the period when settlement occurs.
This financial accounting requirement should not be construed as superceding
the accounting requirement concerning gains or losses in foreign currency
transactions as set forth in 31 U.S.C. 3342.

Financial Statements

All federal departments shall report in U.S. dollars for departmental
financial statements, budgetary reporting, and fund control purposes.
Component operating units of federal departments may prepare financial
statements for their own use, and they may or may not be in U.S. dollars.
These lower-level statements, however, shall be translated into U.S. dollars
when used to prepare departmental financial statements.

When a component operating unit of a federal department prepares financial
statements for its own use, these statements shall be in the operating
unit's functional currency, as determined in coordination with departmental
management and in accordance with 
FASB Current Textnot be the U.S. dollar. Translation adjustments which result from
translation from component-operating units' financial statements to
departmental statements shall be reported in a separate section of invested
capital with a corresponding increase or decrease to the asset or liability.

Disclosure

Any restrictions on the use or actual conversion of assets denominated in
foreign currencies shall be disclosed in the financial statements. The
financial statements shall also disclose the effects of exchange-rate
changes on the agency's financial position that occur after the end of the
period but before the financial statements are issued if the effects are
significant.

Treasury Requirements

Pursuant to responsibilities assigned by 22 U.S.C. 2363, the Secretary of
the Treasury has prescribed procedures in the Treasury Financial Manual,
parts 2, 4, and 5 of Volume I (formerly the Requirements Manual for Guidance of Departments and relating to the administration of all foreign currency assets; these
procedures are to be observed by all federal agencies and their disbursing
officers. The law specifically vests the Secretary of the Treasury with the
authority to prescribe exchange rates at which foreign currencies or credits
are to be reported by all government agencies. Reports of foreign currency
holdings are also prescribed by the Treasury.

Foreign currencies that exceed the needs of the Treasury may be allocated to
agencies for use in their programs, with the approval of OMB. Foreign
currency so allocated is part of the agency's fund balance maintained by the
Treasury and is accounted for in a manner similar to the accounting for an
appropriation from the Congress. These foreign currency transactions will be
recorded, using the Treasury current exchange rate, on the date Treasury
allocates the currencies. For total accountability, the foreign currency
shall be included in the financial statements as Foreign Currency Holdings
and credited to a gain as a financing source in the Statement of Operations,
with explanatory footnote disclosure as to the use and availability of the
currency, i.e., "not available for the payment of general obligations" (in
another currency).

Agencies may also purchase foreign currencies with U.S. dollars from
Treasury. These foreign currency transactions shall be recorded using the
current exchange rate on the date of purchase.

___________________________________________________________________________

F40 Fund Accounting
_____________________________________________________________________

This standard  has been superceded by the  following FASAB standards and OMB
and Treasury guidance.

SFFAS 7,  Accounting for Revenue  and Other Financing Sources, par.  83 - 87
relating to reporting on the various funds.

OMB  Bulletin 01-09,  Attachment A,  Form  and Content  of Agency  Financial
Statements, pp.  28 - 33  (sections 4.1 -  4.8) and 39 -  51 (sections 6.1 -
7.7).

OMB Circular A-127, section 7.

TFM, Volume  I, Part  2, Chapter 1500,  Description of Accounts  Relating to
Financial Operations.

________________________________________________________________________

G10 Grants and Cooperative Agreements
________________________________________________________________________

Introduction

Except as otherwise expressly authorized by law, federal grants and
cooperative agreements are federal assistance agreements under which
payments in cash or in kind are made to provide assistance for specified
purposes. Grants and Cooperative Agreements are accounted for similarly.
Entitlements are covered under the entitlements by SFFAS 17, Accounting for Social Insurance.

The acceptance of an assistance award from the federal government creates a
legal duty on the part of the recipient to use the available funds or
property in accordance with the terms and conditions of the assistance
agreement. Assistance payments may be made in advance or as reimbursement
either for work performed or for costs incurred by recipients. The award
recipients are generally required to return to the federal government (1)
the unused balances of advance payment awards (plus earned interest unless
recovery is prohibited by statute), (2) any funds improperly applied,
whether received as an advance or a reimbursement, and (3) property or
facilities purchased or otherwise made available under the conditions of the
awards (or the appropriate federal share, relative to the disposition or
sale of property acquired with federal funds), unless legal title thereto is
vested unconditionally in the recipient by the terms of the award.

Accounting Standard

Accounting for a federal assistance award begins with the execution of an
agreement or the approval of an application or similar document in which the
amount and purposes of the grant, the performance periods, the obligations
of the parties to the award, and other terms are set out. A legal obligation
to disburse the assistance funds, in accordance with the terms of the
agreement, generally occurs with an executed agreement or an approved
application or similar document.

Advance payments to award recipients (including amounts drawn against
letters of credit) shall be accounted for as advances of the assisting
agency until the recipient has performed under the award or contract.

Once the recipient has performed under the grant or agreement, the assisting
agency shall record an expense in an amount equal to the cost of the
services performed or costs incurred and reduce the advance account by a
like amount.

Payments to award recipients as reimbursement for work performed or costs
incurred shall be accounted for as expenditures and as expenses incurred or
as reductions of liabilities if the expenses were recorded previously.

Amounts of assistance awards to be made in future periods shall be disclosed
in the footnotes to the financial statements. (See also OMB Bulletin 01 -
09, pp. 85 and 86, section 9.19).

When title to assets acquired by award recipients vests in the government,
appropriate property records shall be established, and the capital assets
should be included in the financial statements of the federal agency that
has the title. Such assets shall be recorded at their cost to the award
recipient, and the agency's Invested Capital account shall be increased by a
like amount. The agency shall follow its normal depreciation policy.

At the termination of a grant or cooperative agreement, funds unused and/or
improperly applied by the recipient shall be established as a receivable by
the assisting agency.

________________________________________________________________________

I10 Imputed Interest
________________________________________________________________________

Introduction

The federal government incurs significant interest costs6 in financing its
debt. This standard discusses the inclusion of this interest cost in the
selling price of products when (1) the agencies do not pay the Treasury for
the full or partial amount of interest costs that the Treasury incurs and
(2) the agencies are engaged in selling goods or services outside the
government. Agencies making loans and loan guarantees should refer to the
Interest Payable and Receivable standard, section I20, Statement of Federal
Accounting Standards (SFFAS) 2, Accounting for Direct Loans and Loan
Guarantees for guidance on imputing interest on those the costs of loans and
loan guarantees. Agencies constructing property, plant, and/or equipment for
sale outside the federal government must also consider imputed interest.

Accounting Standard

To ensure that proper costs are recovered when agencies are engaged in
selling services or goods to outsiders, the imputed interest costs to the
government shall be determined as part of the cost of providing a service or
the cost of an asset to be sold to a nonfederal entity.

The interest cost for each year shall be based on a weighted average of the
federal investment in the activity engaged in selling services or goods to
nonfederal entities. Accumulated net income or deficit shall not be included
in the interest calculation base.

The rate of interest used shall be the Average Interest Rate for Marketable
Interest-Bearing Debt determined by the Secretary of the Treasury.

The imputed interest on the government's investment shall be included when
determining the prices of services or goods sold or to be sold outside the
federal government on a systematic and rational basis. For example, if the
government's investment can be specifically identified solely for the
activity of producing and selling services or goods outside the federal
government, then that portion of the total government investment so
identified would provide a rational basis for such determination. On the
other hand, when agencies cannot specifically identify the government's
investment solely for the activity of producing and selling services or
goods outside the federal government, some other basis (e.g., the percentage
of total agency effort devoted to this activity) shall be used for such
determination.

6This standard deals with consideration of interest costs in establishing
pricing. Although FASAB's standards and guidance do not generally cover
pricing, this standard was included in Title 2 to provide agencies guidance
in setting prices to recover certain interest costs.

When agencies are required to pay interest to the Treasury at a
substantially lower rate than the rate determined by the Secretary of the
Treasury, the imputed interest is the difference between the stated rate and
the Treasury's rate.

Unless otherwise specified by law, that portion of the payments received by
agencies that covers the imputed interest must be returned to Treasury
together with the other revenue as interest on the public debt.

_________________________________________________________________________

I40 Investments
_________________________________________________________________________

This standard has been superceded by the following FASAB standards and OMB
and Treasury guidance.

SFFAS 1, Accounting for Selected Assets and Liabilities, par. 62 - 73.

OMB Bulletin 01-09, Attachment A, Form and Content of Agency Financial
Statements, p. 20 (section 3.3) and pp. 59 and 60, Note 5 (section 9.5).

_______________________________________________________________________________

L10 Leases
________________________________________________________________________

This standard  has been superceded by the following  FASAB standards and OMB
guidance.

SFFAS 5, Accounting  for Liabilities of the Federal Government, par. 43 - 46
relating to reporting on the various funds.

SFFAS  6,  Accounting  for Property,  Plant, and  Equipment,  par. 20  -  29
relating to reporting on the various funds.

OMB  Bulletin 01-09,  Attachment  A, Form  and Content  of Agency  Financial
Statements, p. 26 (section 3.4) and pp. 83 - 85, Note 17 (section 9.17).

__________________________________________________________________________

L40 Long-Term Contracts
__________________________________________________________________________

Introduction

This standard includes the requirements for long-term contract accounting by
federal agencies for the following:

-- long-term contracts for the purchase or sale of goods or services, and

-- long-term contracts for the purchase or sale of property manufactured or
constructed.

Accounting Standard

Long-Term Contracts for the Purchase or Sale of Goods Property, Plant, and Equipment) or Services 
Agencies shall recognize the liability for goods and services purchased
under a long-term contract in the period in which the goods or services (or
a portion thereof) are received or accepted by the agency. The related asset
(i.e., inventory, materials, and supplies; or work in process) or expense,
as appropriate, shall be recorded at the same time as the liability.

Agencies shall recognize the revenue and costs of goods and services sold
under a long-term contract in the period in which the goods or services are
delivered or constructively delivered to the purchaser. Constructive
delivery occurs when an agency (the seller) meets the obligations of the
long-term contract.

Long-Term Contracts for the Purchase or Equipment 
For financial reporting purposes, agencies shall compute the liability for
property, plant, and equipment manufactured or constructed for them under
long-term contracts on the basis of verified estimates of work completed
(percentage-of-completion method) per contractor reports or invoices
received during each accounting period, rather than on disbursements made.
Appropriate liabilities for contract retainages, if any, shall also be
recorded. The appropriate property, plant, and equipment accounts (including
construction in progress) shall also be adjusted based on liabilities
recorded. See the P40, paragraph .09 SFFAS 6, Accounting for Property, Plant, and Equipment,
par. 20 and 26.

Advances Under Long-Term Contracts 
Payments by agencies to contractors under any long-term contract in excess
of related liabilities at the end of an accounting period shall be accounted
for as advance payments under long-term contracts. For accounting guidance,
see the Advances and Prepayments Accounting for Selected Assets and Liabilities, par. 57

- 61.

Receipts by an agency from purchasers under any long-term contract in excess
of revenues earned as of the end of an accounting period shall be reported
as revenues received in advance (a liability account). The liability amount
shall be decreased as the revenues are earned and recognized.

________________________________________________________________________

P40 Property, Plant, and Equipment
________________________________________________________________________

This standard has been superceded by the following FASAB standards and other
requirements.

SFFAS 3, Accounting for Inventory and Related Property, par. 79 - 81.

SFFAS 4, Managerial Cost Accounting Concepts and Standards for the Federal
Government, par. 67 - 71, 90, 102, and 103.

SFFAS 6, Accounting for Property, Plant, and Equipment, par. 1 - 11, 13, 17
- 45, 71, 148, and 149.

SFFAS 8, Supplementary Stewardship Reporting, par. 1 - 88.

SFFAS 10, Accounting for Internal Use Software, par. 15 - 27, and 35.

SFFAS 11, Amendments to Accounting for Property, Plant, and Equipment, par.
10 and 11.

SFFAS 16, Amendments to Accounting for Property, Plant, and Equipment -
Measurement and Reporting for Multi-Use Heritage Assets, 1999, par. 9 - 11.

Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1, pp. 11, 12, and 14.

OMB Bulletin 01 - 09, Attachment A, Form and Content of Agency Financial
Statements, p. 32; p. 77, Note 10 (section 9.10); pp. 83 - 85, Note 17
(section 9.17);

p. 107 (section 11.1D).

Property Management Systems Requirements, JFMIP-SR-00-4, October 2000, pp.
12 - 19.

________________________________________________________________________

R20 Regulatory Accounting
________________________________________________________________________

Introduction

A rate-regulated agency generally is an agency involved in a business-like
activity to provide certain regulated goods or services, such as electricity
or water, to customers where the prices charged (rates) are established or
approved, in whole or in part, by an entity (a rate regulator) that is
independent of the agency. This external setting of rates may be imposed by
law or regulation. Because the rates charged to customers are not within the
control of the agency to the same extent as in most other business-like
activities, certain accounting treatments are allowable, such as the
recognition of costs which are not usually accepted in the present framework
of accounting for nonregulated activities. This standard provides guidance
on the accounting treatments to be applied by certain rate-regulated
agencies that may differ from accounting practices required for nonregulated
activities.

Accounting Standard

This statement applies to the accounting treatment of an agency involved in
a business-like activity that has regulated operations that meet all of the
following criteria:

a. The rates charged to customers for regulated services or products are
established by or subject to approval by a third-party regulator or by its
governing board empowered by statute or regulation to set rates.

b. The rates set are designed to recover specific costs of providing the
service or product.

c. The rates set for services or products to recover costs are based on
consideration of anticipated changes in levels of demand during the recovery
period for capitalized costs and can be reasonably assumed to be collectible
from customers.

Accounting treatments of rate-regulated activities which may differ from
those for a nonregulated activity fall under three general categories: (1)
capitalizing costs or losses incurred (paragraph .04), (2) reducing the
carrying amount of reported assets (paragraph. 05), and (3) recognizing a
liability or reducing the carrying amount of a liability (paragraph. 06) (as
explained in the following paragraphs).

A rate-regulated agency shall capitalize all or part of an incurred cost or
loss that would otherwise be charged to expenses if both of the following
criteria are met:

a. Future revenue in an amount at least equal to the capitalized cost or
loss will result from inclusion of that cost or loss in the rate-making
process.

b. Future revenue will be provided to permit recovery of that previously
incurred cost or loss rather than to provide for expected levels of similar
future costs or losses.

Actions of a rate regulator can reduce or eliminate the value of an asset if
a rate regulator excludes all or part of the cost of an asset as being
recoverable from future revenues through the rate-making process. The
carrying amount of the asset shall be reduced accordingly and charged to an
expense in the period the asset has been impaired since that portion of the
cost reduced is not expected to contribute to future revenues.

Actions of a rate regulator can impose a liability on a regulated agency or
reduce or eliminate the carrying amount of an existing liability originally
imposed by the regulator. Examples include the following:

a. A rate regulator may require refunds to customers, in which case the
regulated agency shall record a liability and a corresponding reduction of
revenue or an expense until the amount is paid or otherwise settled.

b. A rate regulator can set current rates intended to recover future costs
with the understanding that if those future costs are not incurred, future
rates will be reduced by corresponding amounts. Those amounts shall be
recognized as liabilities when received and credited to revenues only when
the associated costs are incurred.

c. A rate regulator can require that a rate-regulated agency's gain be
distributed to customers over future periods. Ordinarily, gains would be
recognized in the period of occurrence. However, if a rate regulator
required that gains be returned to customers by reducing future rates, the
regulated agency shall record the gain as a liability and amortize it into
revenue over the future periods in which the rates are reduced because of
the gain.

There are obviously many other situations in which the required accounting
treatment for rate-regulated agencies differs from that required for
nonregulated agencies. The is discussed in FASB Statement 71, Certain Types of Regulation," December 1982. 
  ________________________________________________________________________

R40 Research and Development
________________________________________________________________________

This standard has been superceded by the following FASAB standard. SFFAS 6,
Accounting for Property, Plant, and Equipment, par. 35 - 37. SFFAS 8,
Supplementary Stewardship Reporting, par. 83, 84, and 96 - 101.

______________________________________________________________________________

Related Products
_______________________________________________________________________

These related products address three main categories: internal control,
financial management systems, and financial reporting (accounting
standards). We have developed these guidelines and tools to assist agencies
in improving or maintaining effective operations and financial management.

Internal Control

Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1, November 1999.

Determining Performance and Accountability Challenges and High Risks,
GAO-01-159SP, November 2000.

Financial Management Systems

Framework for Federal Financial Management System Checklist,
GAO/AIMD-98-21.2.1, May 1998.

System Requirements for Managerial

Cost Accounting Checklist,

GAO/AIMD-99-21.2.9, January 1999.

Human Resources and Payroll

Systems Requirements Checklist

GAO/AIMD-00-21.2.3, March 2000.

Travel System Requirements Checklist, GAO/AIMD-00-21.2.8, May 2000.

Guaranteed Loan System Requirements Checklist, GAO-01-371G, March 2001.

Streamlining the Payment Process While Maintaining Effective Internal
Control, GAO/AIMD-00-21.3.2, May 2000.

Internal Control Management and Evaluation Tool, GAO-01-1008G, August 2001.

Inventory System Checklist,

GAO/AIMD-98-21.2.4, May 1998.

Core Financial System Requirements Checklist, GAO/AIMD-00-21.2.2, February
2000.

Direct Loan System Requirements Checklist, GAO/AIMD-00-21.2.6, April 2000.

Seized Property and Forfeited Assets Requirements Checklist, GAO-01-99G,
October 2000.

Grant Financial System Requirements Checklist, GAO-01-911G, September 2001.

Financial Reporting (Accounting Standards)

"Checklist for Reports Prepared Under the CFO Act" (Section 1004 of the
GPO/PCIE Financial Audit Manual, July 2001). This is a checklist containing
agency financial statement reporting requirements.

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