AGA Today

Federal Accounting Corner
By: Simcha Kuritzky, CGFM

Prior Period Adjustments

Background

The Standard General Ledger (SGL) Board has designated the 7000 series of accounts as "non-operational items" (my term, not theirs). They include various items that are outside the normal activity of an agency, such as gains and losses on disposition, dividends and extraordinary items. Despite this special status, all but one of these accounts is included in the Statement of Net Costs along with operational expenses. Only accounts 7400 and 7401 for prior period adjustments (PPA), is left out of the Net Costs calculation, and instead appears on the Statement of Financing as an "other resource" (line 16). Account 7400 is to be used for material errors or changes in accounting principles. Account 7401 is only to be used when the error correction is so material that financial statements are restated for comparison purposes (per SFFAS 21).

Practice

Many agencies have found it useful to designate certain revenues and expenses as PPA. Examples include reclassifying prior-year unidentified deposits as either a vendor refund or reimbursable income, or correcting a misposting from a prior year. I've recommended that these agencies set up at least four subaccounts for 7400 and 7401: for funded expenses (posted along with an expenditure account such as 4972 Downward Adjustments of Prior-Year Paid Delivered Orders - Obligations, Refunds Collected), unfunded expenses (such as adjusting depreciation), funded revenues (posted along with a budgetary collection account such as 4252 Reimbursements and Other Income Earned - Collected), and unfunded revenues (such as 5900 Other Revenue). The PPA accounts should only be posted when the amounts are material.

Issues

An item is a prior-year adjustment when it occurs in a previous fiscal year from when it is reported. This means it could be an item reported in a prior year but not recorded in the accounting system, or it could be an item that occurred in a prior year but not reported in that year's statements. The former case is very rare, but I've seen it happen. In that case, the classification of an item as "prior year" indicates that it is not to be reported on the financial statements at all—the entry is needed to only bring the books to where they should have been at the beginning of the current year. The latter case is the more common, and those adjustments are reported as such (the basic premise of the SGL is that it is used as the basis of financial statements).

A complication involves audit adjustments, since most of these are made after the books are closed. If an audit adjustment involves changing the amount of expenditures or funding, then it must be recorded in the accounting system, and the system may require that it show up as annual activity and not simply as an adjustment to the beginning balance. The expenditure, however, would update the budget and therefore affect budgetary reports such as the SF-133 Report on Obligations and the FMS-2108 Year-End Close Statement. Usually audit adjustments occur too late to be included in the budgetary databases, so an agency may need to include expenditure or collection adjustments on budgetary reports, but exclude them from the proprietary financial statements, such as the Statement of Net Cost.

Subaccounts

From all this, it appears that there can be up to eight subaccounts for 7400 or 7401, based on three binary attributes:

• revenue versus expense

• funded versus unfunded

• reported in a previous year's statements versus to be reported in this year's statements

Any balance of subaccounts that were reported in a previous year's statements would have to be treated as equity (specifically, account 3310 Cumulative Results of Operations) for financial statement purposes.

In addition, special subaccounts may be needed for the associated budgetary accounts (such as 4902 Delivered Orders - Obligations, Paid or 4261 Actual Collection of Business-Type Fees), if activity posted there was actually reported on last year's budgetary reports, so these amounts can be excluded from this year's reports. —Simcha Kuritzky, CGFM, CPA

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.