OF MANAGEMENT AND BUDGET
Interpretation Numbers 1 and 2 related to
Statement of Federal Financial Accounting Standards
Numbers 4, 5, and 7
Office of Management and Budget.
Notice of Interpretations.
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.
FURTHER INFORMATION CONTACT: Norwood J. Jackson, Jr. (telephone:
202-395-3993), Office of Federal Financial Management, Office of
Management and Budget.
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.
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.
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
Notice, including the first two interpretations of SFFAS, is available
on the OMB home page on the internet which is currently located
at /OMB/, under the caption "Federal Register Submissions."
NUMBER 1 OF
STATEMENT OF FEDERAL FINANCIAL
ACCOUNTING STANDARDS NUMBER 7
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
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 been included in the Budget
of the United States Government. (Further discussion regarding
types of funds involved is provided in paragraphs 7 and 8.)
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
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.
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
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.
BASIS FOR CONCLUSIONS
its discussion of the budgetary perspective, SFFAC No. 2 notes:
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.
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.
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.
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.
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."
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.
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.
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.
FOR DEDICATED COLLECTIONS
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 received on the exposure draft
leading to SFFAS No. 7, the Board specifically noted that:
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.
This restriction on the scope ofo 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.
NUMBER 2 OF
STATEMENT OF FEDERAL FINANCIAL
ACCOUNTING STANDARDS NUMBERS 4 AND 5
for Treasury Judgment Fund Transactions: An Interpretation of
SFFAS No. 4 and SFFAS No. 5
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,
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
by the Federal Entity
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.
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.
by the Treasury Judgment Fund
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
interpretation is effective upon implementation of SFFAS No. 4 and
SFFAS No. 5, which become effective for fiscal periods beginning
after September 30, 1996.
A: BASIS FOR CONCLUSIONS
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 contingencies4
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
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.
B: ILLUSTRATIVE JOURNAL ENTRIES
on the above noted accounting standards and the generalized events
described below, the conceptual journal entries7
should be as follows:
Federal entity's management, through the advisement of DOJ, has
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.
-- 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
-- Legal claims
Financing Source -- Expenses Paid by Other Entities8
Judgment Fund entries:
claim is either settled or a court judgment is assessed and the
Judgment Fund is determined to be the appropriate source for payment.
Paid for Other Entities8
or Fund Balance with Treasury
See paragraph 39 in SFFAS No. 5 for the complete discussion on "Estimating
See paragraph 73 in SFFAS No. 7 for the complete discussion on
"Financing Imputed for Cost Subsidies."
In most cases this determination involves DOJ.
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.
See paragraogs 35 - 42 in SFFAS No. 5 for the complete discussion
See paragraphs 89 - 104 and 105 - 115 in SFFAS No. 4 for the complete
discussion on "Full Cost" and "Inter-entity Costs," respectively.
Actual journal entries are under the authority of the Standard
According to SFFAS No. 4, the imputed financing source and expenses
paid for other entities amounts would be eliminated at
the consolidation level.