AGA Today

Federal Accounting Corner
by Simcha Kuritzky, CGFM CPA    

Appropriated Financing Sources
Federal Accounting Standards Advisory Board (FASAB) Accounting Standard No. 7, Accounting for Revenue and Other Financing Sources, says, in part (paragraph 7): "Appropriations are accounted for as a financing source when used. The remaining amount of appropriations enacted into law, but not yet recognized as 'appropriations used,' is treated as capital." Accordingly, the Standard General Ledger (SGL) Board has designated account 3101 Unexpended Appropriations - Appropriations Received to hold new appropriations on the proprietary side (credit balance), and when these are used, transaction B134 reduces equity by debiting 3107 Unexpended Appropriations - Used and recognizes the financing source by crediting 5700 Expended Appropriations. These two accounts, 3107 and 5700, always have the same balance.

Capital
What is capital? In a partnership, capital is raised when a partner deposits funds or assigns other assets to the company. In a public corporation, capital is raised when new stock is issued. Capital is therefore created by financing sources other than borrowing. So FASAB's statement that appropriations are not financing sources until they are used is contradicted by their statement that unused appropriations are capital. This is why the entry recognizing appropriations used (B134) seems superfluous. Obviously agencies are funded by appropriations (and their associated warrants), which is why equity is recognized when cash (or, in rare cases, a receivable) is booked. However, that cash has a big string attached.

Liability
Appropriations expire, unlike investments by a partner or shareholder. The appropriation is there to be spent for a particular purpose, and if it is not all spent by the time the fund closes (generally six years after the appropriation is granted), the funds are returned to Treasury. This is probably why FASAB said that appropriations are not a financing source until they are spent—because unspent appropriations will go away.

But then why treat appropriations as capital when granted? Since agencies are required to return unused appropriations to Treasury, why not instead treat them as a liability? There are two existing liability models we can follow. When an agency receives payment for a reimbursement or fee in advance, they credit 2320 Deferred Credits. When the revenue is earned, it is recognized by transferring the 2320 balance to a 5000 series revenue account. Why not set up a deferred credit account for unexpended appropriations that is transferred to 5700 when the funds are expended? The other model would be to use an account similar to one of the special Treasury liability accounts 2970 Resources Payable to Treasury (currently used for capital transfers) and 2980 Custodial Liability (which may not necessarily go to Treasury's General Fund, but often does). Their balances would also be transferred to 5700 on expenditure.

In either case, adjustments could have their own subsidiary liability account that closes to the main liability account at year end, so no changes would be necessary to the format of the Statement of Changes in Net Position.

Consolidated Statements
In the consolidating agency statements for the Financial Report of the U.S. Government, both agency equity and the fund balance with Treasury that gives rise to the equity are eliminated.  The consolidated net position is just equal to federal assets net of liabilities.  This is another reason to classify unused appropriations as a liability, because it is more natural to eliminate assets against liabilities than against equity.

This column is provided as part of a free exchange of ideas in federal accounting, and is not reviewed substantively before publication. Please send all comments, queries, or corrections to Simcha.Kuritzky@CGIFederal.com.