B-115398, MAY 4, 1968

B-115398, MAY 4, 1968

SUBJECT: ACCOUNTING FOR ACCRUED EXPENDITURES AND REVENUES

TO HEADS OF DEPARTMENTS AND AGENCIES:

THE PRESIDENT'S APPROVAL IN DECEMBER 1967 OF THE RECOMMENDATIONS OF HIS COMMISSION ON BUDGET CONCEPTS THAT BUDGET EXPENDITURES AND RECEIPTS BE REPORTED ON AN ACCRUAL BASIS RATHER THAN IN TERMS OF CASH PUT ADDED EMPHASIS ON THE NEED FOR EACH FEDERAL AGENCY TO MAINTAIN ITS ACCOUNTS ON THE ACCRUAL BASIS.

THE COMMISSION CONCLUDED THAT EXPENDITURES SHOULD BE REFLECTED IN THE BUDGET AND FEDERAL FINANCIAL REPORTING WHEN THE GOVERNMENT INCURS LIABILITIES TO PAY FOR GOODS AND SERVICES.

SPECIFIC INSTRUCTIONS TO THE EXECUTIVE AGENCIES FOR IMPLEMENTING THE COMMISSION'S RECOMMENDATIONS ARE CONTAINED IN BUREAU OF THE BUDGET BULLETIN 68-10, DATED APRIL 26, 1968. THE GENERAL ACCOUNTING OFFICE WAS CONSULTED IN THE PREPARATION OF THIS BULLETIN AND WE HAVE ENDORSED ITS PURPOSE AND CONTENT.

BASIC LAWS AND OUR PRESCRIBED PRINCIPLES AND STANDARDS OF ACCOUNTING FOR FEDERAL AGENCIES HAVE LONG CALLED FOR THE MAINTENANNCE OF ACCOUNTS ON THE ACCRUAL BASIS. HOWEVER, SOME REFINEMENT IN THE APPLICATION OF OUR PRINCIPLES AND STANDARDS IS NECESSARY TO ACCOMMODATE, PRIMARILY AT THE APPROPRIATION LEVEL, THE REPORTING, IN ACCORDANCE WITH THE COMMISSION'S RECOMMENDATIONS, OF REVENUES AND EXPENDITURES IN TERMS OF ACCRUALS RATHER THAN IN TERMS OF RECEIPTS AND DISBURSEMENTS. THE PRINCIPAL REFINEMENTS ARE THAT ACCRUED REVENUE AND EXPENDITURE DATA BE OBTAINED ON A MONTHLY BASIS AND THAT IN THE CASE OF CONTRACTORS PERFORMING WORK TO THE GOVERNMENT'S SPECIFICATIONS, ACCRUED EXPENDITURES BE RECOGNIZED IN FEDERAL ACCOUNTS AND REPORTS ON THE BASIS OF CONSTRUCTIVE RECEIPT OF GOODS AND SERVICES, WITHOUT AWAITING PHYSICAL DELIVERY TO OR ACCEPTANCE BY THE GOVERNMENT.

TO CLARIFY OUR ACCOUNTING PRINCIPLES AND STANDARDS WITH RESPECT TO THESE REFINEMENTS AND TO LEND ADDITIONAL EMPHASIS TO THE REQUIREMENT THAT FEDERAL AGENCY ACCOUNTING SYSTEMS MUST BE DESIGNED TO PRODUCE MONTHLY DATA ON REVENUES AND EXPENDITURES ON THE ACCRUAL BASIS, THE FOLLOWING PRINCIPAL CHANGES ARE BEING MADE IN TITLE 2 OF THE GAO POLICY AND PROCEDURES MANUAL FOR GUIDANCE OF FEDERAL AGENCIES:

1. INSERT THE FOLLOWING PARAGRAPH IN SECTION 9 WHICH PRESCRIBES THE ACCRUAL BASIS OF ACCOUNTING:

"THE ACCRUAL BASIS OF ACCOUNTING CAN CONTRIBUTE MATERIALLY TO EFFECTIVE FINANCIAL CONTROL OVER RESOURCES AND COSTS OF OPERATIONS AND IS ESSENTIAL TO THE DEVELOPMENT OF ADEQUATE COST INFORMATION. FURTHERMORE, IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE PRESIDENT'S COMMISSION ON BUDGET CONCEPTS IN 1967, AS APPROVED BY THE PRESIDENT, THIS BASIS OF ACCOUNTING MUST BE EMPLOYED TO MEASURE ACCRUED REVENUES AND EXPENDITURES OF THE FEDERAL GOVERNMENT TO BE REPORTED MONTHLY TO THE BUREAU OF THE BUDGET AND THE TREASURY DEPARTMENT."

2. ADD TO SECTION 9 A NEW SUBSECTION UNDER THE HEADING "ACCRUED EXPENDITURES" AS FOLLOWS:

"ACCRUED EXPENDITURES ARE THE CHARGES INCURRED DURING A GIVEN PERIOD REQUIRING THE PROVISION OF FUNDS FOR:

(1) GOODS AND OTHER TANGIBLE PROPERTY RECEIVED,

(2) SERVICES PERFORMED BY EMPLOYEES, CONTRACTORS, GRANTEES, LESSORS, AND OTHER PAYEES, AND

(3) AMOUNTS BECOMING OWED UNDER PROGRAMS FOR WHICH NO PERFORMANCE OR CURRENT SERVICES ARE REQUIRED (SUCH AS ANNUITIES, INSURANCE CLAIMS, OTHER BENEFIT PAYMENTS, AND SOME CASH GRANTS).

"EXPENDITURES ACCRUE REGARDLESS OF WHEN CASH PAYMENTS ARE MADE, OF WHETHER INVOICES HAVE BEEN RENDERED, OR, IN SOME CASES, OF WHETHER GOODS OR OTHER TANGIBLE PROPERTY HAVE BEEN PHYSICALLY RECEIVED. THE PORTION OF ANY SUCH EXPENDITURES WHICH IS UNPAID AT A GIVEN POINT IN TIME IS A LIBILITY. THE PORTION OF PAYMENTS MADE FOR WHICH THE EXPENDITURE HAS NOT ACCRUED (SUCH AS ADVANCES) IS AN ASSET.

"CONSTRUCTIVE RECEIPT OF GOODS OR OTHER TANGIBLE PROPERTY, RATHER THAN PHYSICAL RECEIPT OR THE PASSING OF LEGAL TITLE, IS THE MEASURE OF THE ACCRUAL IN CERTAIN CASES. WHEN A CONTRACTOR PROVIDES GOODS TO THE GOVERNMENT WHICH HE HOLDS HIMSELF AVAILABLE TO SELL TO OTHERS, THE ACCRUAL OCCURS WHEN PHYSICAL DELIVERY BY THE CONTRACTOR AND RECEIPT BY THE GOVERNMENT TAKES PLACE AND TITLE PASSES. HOWEVER, WHEN A CONTRACTOR MANUFACTURES OR FABRICATES GOODS OR EQUIPMENT TO THE GOVERNMENT'S SPECIFICATIONS, CONSTRUCTIVE RECEIPT OCCURS IN EACH ACCOUNTING PERIOD WHEN THE CONTRACTOR EARNS A PORTION OF THE CONTRACT PRICE, AND THE ACCRUAL TAKES PLACE AS THE WORK IS PERFORMED. FORMAL ACCEPTANCE OF THE WORK BY THE GOVERNMENT IS NOT A TEST.

"EACH FEDERAL AGENCY ACCOUNTING SYSTEM SHALL INCORPORATE PROCEDURES FOR OBTAINING ON A MONTHLY BASIS ACCRUED EXPENDITURE DATA FOR EACH APPROPRIATION OR FUND BEING ACCOUNTED FOR. SUCH DATA SHALL BE AVAILABLE PROMPTLY FOR REPORTING MONTHLY, IN ACCORDANCE WITH PRESCRIBED REQUIREMENTS, TO THE BUREAU OF THE BUDGET AND THE TREASURY DEPARTMENT FOR USE IN PREPARING PERIODIC REPORTS OF BUDGET EXPENDITURES OF THE FEDERAL GOVERNMENT."

3. REVISE THE FIRST PARAGRAPH OF SECTION 13.6 "LIABILITIES UNDER CONTRACT WORK" TO READ AS FOLLOWS (CHANGES ARE UNDERSCORED):

"UNDER SOME CONTRACTS, SUCH AS WHERE A CONTRACTOR BUILDS FACILITIES OR MANUFACTURES GOODS OR EQUIPMENT TO THE GOVERNMENT'S SPECIFICATIONS, THE LIABILITY TO PAY FOR WORK IS INCURRED AS IT IS PERFORMED BY THE CONTRACTORS RATHER THAN WHEN DELIVERIES ARE MADE. UNDER THESE CIRCUMSTANCES, MATERIALS OR SERVICES BEING ACQUIRED SHALL BE RECORDED AS ACCRUED EXPENDITURES ON THE BASIS OF REPORTED PERFORMANCE OF WORK, RATHER THAN AS INVOICES ARE RECEIVED OR AS DISBURSEMENTS ARE MADE, AND A RELATED LIABILITY SHALL BE RECOGNIZED."

4. ADD NEW SUBSECTION 15.4 UNDER REVENUES, AS FOLLOWS:

"EACH FEDERAL AGENCY ACCOUNTING SYSTEM SHALL INCORPORATE PROCEDURES FOR OBTAINING MONTHLY DATA ON ACCRUED REVENUES FOR WHICH IT IS ACCOUNTABLE. SUCH DATA SHALL BE AVAILABLE PROMPTLY FOR INCLUSION IN MONTHLY REPORTS REQUIRED BY THE BUREAU OF THE BUDGET AND THE TREASURY DEPARTMENT."

THE FOREGOING CHANGES WILL BE INCORPORATED IN THE NEAR FUTURE IN TITLE 2 OF THE GAO POLICY AND PROCEDURES MANUAL FOR GUIDANCE OF FEDERAL AGENCIES.

THE CAPABILITY TO PRODUCE ACCRUED REVENUE AND EXPENDITURE DATA IS A SPECIFIC REQUIREMENT FOR ALL FEDERAL AGENCY ACCOUNTING SYSTEMS. ACCORDINGLY, ALL APPROVED SYSTEMS IN OPERATION MUST BE REVISED AS NECESSARY TO PRODUCE THE REQUIRED DATA. FOR ALL OTHER SYSTEMS, THE NECESSARY PROCEDURES FOR OBTAINING SUCH DATA MUST BE INCORPORATED AS A REQUISITE TO APPROVAL BY THE COMPTROLLER GENERAL.