Federal Financial Statements: The Revolution Is Here!

EXECUTIVE SUMMARY * IN THE FISCAL YEAR ENDED September 30, 1998, federal executive branch agencies for the first time prepared financial statements in accordance with a comprehensive set of federal accounting principles. * THERE WAS LITTLE AGREEMENT in the past within the federal government about appropriate federal financial accounting standards. As a consequence, federal agencies used a variety of accounting methods. * NEW STANDARDS CREATED BY THE FASAB are an effort to remedy this problem. Given the new focus on reporting standards, CPAs who work in or with federal government agencies should be familiar with these pronouncements. * OMB BULLETIN NO. 97-01 MANDATES that a federal reporting entity prepare an annual financial statement consisting of (1) an overview of the reporting entity, (2) principal statements and related notes, (3) required supplemental stewardship information and (4) required supplemental information. Important differences exist between many of these Items and corporate financial statements. What CPAs need to know about the new comprehensive set of federal accounting standards. In the fiscal year ended September 30, 1998, a long-awaited revolution began as federal executive branch agencies prepared their financial statements in accordance with a comprehensive set of federal accounting standards. The Federal Accounting Standards Advisory Board has spent the last eight years deliberating on standards tailored to reflect the unique characteristics of the federal government (see the sidebar on page 55). The FASAB standards have been accepted by the GAO, OMB and the Treasury Department and are issued by OMB and the GAO as statements of federal financial accounting concepts (SFFAC) and statements of federal financial accounting standards (SFFAS). Given the new focus on reporting standards, CPAs who work in or with federal government agencies should be familiar with these pronouncements and their requirements. DEVELOPING A FRAMEWORK Before formation of the FASAB in 1990, federal agencies used a variety of accounting methods, which created inconsistency. The new standards attempt to remedy this problem. SFFAC no. 1, Objectives of Federal Financial Reporting, establishes the objective that federal financial reporting provide information about budgetary integrity, operating performance, stewardship and systems and control. SFFAC no. 2, Entity and Display, specifies criteria for determining what entities must be included in federal general purpose financial statements. Determining which entities to include was a troublesome issue because the federal government is one economic entity with undefined boundaries, unlike state and local governments and the private sector, federal financial entities issue financial statements for dependent subunits of that economic entity. Because there are many quasi-federal and federally funded organizations, it was necessary to establish guidelines on which subunits are parts of the federal reporting entities. SFFAC no. 2 also addressed the appropriate content of general purpose financial reports issued by federal entities. This content is now covered in OMB Bulletin no. 97-01, Form and Content of Agency Financial Statements. This bulletin stipulates that each federal reporting entity must prepare an annual financial statement consisting of * An overview of the reporting entity, which is similar to the management discussion and analysis of private-sector financial statements. * Principal statements and related notes. * Required supplemental stewardship information. * Required supplemental information. OMB requires that an entity's annual financial statement include numerous principal statements. To acquaint CPAs with these statements, they are described below, along with a discussion of the content of the required supplementary stewardship reports and other supplementary information requirements. …