Statement No. 24 of the. Governmental Accounting Standards Board. Accounting and Financial Reporting for Certain Grants and Other Financial Assistance

Transcription

1 NO. 111-A JUNE 1994 Governmental Accounting Standards Series Statement No. 24 of the Governmental Accounting Standards Board Accounting and Financial Reporting for Certain Grants and Other Financial Assistance Governmental Accounting Standards Board of the Financial Accounting Foundation

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3 Summary This Statement establishes accounting and financial reporting standards for passthrough grants, food stamps, and on-behalf payments for fringe benefits and salaries. Pass-through grants are those grants that are received by a recipient government to transfer to or spend on behalf of a secondary recipient. As a general rule, recipient governments should recognize all cash pass-through grants as revenue and expenditures or expenses in a governmental, proprietary, or trust fund. In those infrequent cases in which a recipient government serves only as a cash conduit that is, it has no administrative or direct financial involvement in the program the grant should be reported in an agency fund. This Statement requires state governments to recognize their distributions of food stamp benefits as revenue and expenditures in the general fund or a special revenue fund, whether the state government distributes the benefits directly or through agents and whether the benefits are in paper or electronic form. State governments should report food stamp balances held by them or by their agents at the balance sheet date as an asset offset by deferred revenue. On-behalf payments for fringe benefits and salaries are direct payments made by one entity (the paying entity) to a third-party recipient for the employees of another, legally separate entity (the employer entity). They include payments made by governmental entities on behalf of nongovernmental entities and payments made by nongovernmental entities on behalf of governmental entities. This Statement requires employer governments to recognize revenue and expenditures or expenses for these onbehalf payments. Revenue should equal the amounts that third-party recipients have received and that are receivable at year-end for the current fiscal year. For employer governments that are not legally responsible for the payments, expenditures or expenses should equal the amounts recognized as revenue. Employer governments that are legally i

4 responsible for the payments should follow accounting standards for that type of transaction to recognize expenditures or expenses and related liabilities or assets. This Statement requires governmental entities that make on-behalf payments for fringe benefits and salaries to classify those payments in the same manner that they classify similar cash grants to other entities. The provisions of this Statement are effective for financial statements for periods beginning after June 15, Earlier application is encouraged. Unless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including public benefit corporations and authorities, public employee retirement systems, utilities, hospitals and other healthcare providers, and colleges and universities. Paragraph 4 discusses the applicability of this Statement. ii

5 Statement No. 24 of the Governmental Accounting Standards Board Accounting and Financial Reporting for Certain Grants and Other Financial Assistance June 1994 Governmental Accounting Standards Board of the Financial Accounting Foundation 401 Merritt 7, PO Box 5116, Norwalk, Connecticut iii

6 Copyright 1994 by Governmental Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Governmental Accounting Standards Board. iv

7 Statement No. 24 of the Governmental Accounting Standards Board Accounting and Financial Reporting for Certain Grants and Other Financial Assistance June 1994 CONTENTS Paragraph Numbers Introduction Standards of Governmental Accounting and Financial Reporting Scope and Applicability of This Statement Pass-Through Grants... 5 Food Stamps... 6 On-Behalf Payments for Fringe Benefits and Salaries Definition... 7 Employer Government Reporting Recognition and Measurement Disclosure Paying Government Reporting Reporting Entity Considerations Effective Date and Transition Glossary Appendix A: Background Information Appendix B: Basis for Conclusions Appendix C: Codification Instructions v

8 Statement No. 24 of the Governmental Accounting Standards Board Accounting and Financial Reporting for Certain Grants and Other Financial Assistance June 1994 INTRODUCTION 1. This is the first in a series of Statements 1 that will establish accounting and financial reporting standards for grants and other financial assistance. 2 Grants and other financial assistance are transactions in which one governmental entity transfers cash or other items of value to (or incurs a liability for) another governmental entity, an individual, or an organization as a means of sharing program costs, subsidizing other governments or entities, or otherwise reallocating resources to the recipients. 2. This Statement addresses accounting and financial reporting for pass-through grants, food stamps, and on-behalf payments for fringe benefits and salaries. Previous standards for pass-through grants were not sufficiently clear to result in consistent and comparable reporting. There previously were no standards for state government reporting of the food stamp program and no comprehensive standards for onbehalf payments for fringe benefits and salaries. 1 Accounting and financial reporting standards for expenditure-driven and nonreimbursement grants will be addressed in one or more subsequent Statements. 2 Terms defined in the glossary (paragraph 16) are printed in boldface type the first time they are used in this statement. 1

9 STANDARDS OF GOVERNMENTAL ACCOUNTING AND FINANCIAL REPORTING Scope and Applicability of This Statement 3. This Statement establishes standards of accounting and financial reporting for (a) pass-through grants, (b) food stamps, and (c) on-behalf payments for fringe benefits and salaries. 4. The provisions of paragraph 5 on pass-through grants apply to all state and local governmental entities, including public benefit corporations and authorities, public employee retirement systems, utilities, hospitals and other healthcare providers, and colleges and universities except for those that report using the AICPA College Guide model as defined in GASB Statement No. 15, Governmental College and University Accounting and Financial Reporting Models. The remaining provisions of this Statement apply to all state and local governmental entities. This Statement amends paragraph 8 of NCGA Statement 2, Grant, Entitlement, and Shared Revenue Accounting by State and Local Governments. Pass-Through Grants 5. Governmental entities often receive grants and other financial assistance to transfer to or spend on behalf of a secondary recipient. These amounts are referred to as passthrough grants. All cash pass-through grants received by a governmental entity (referred to as a recipient government) should be reported in its financial statements. As a general rule, cash pass-through grants should be recognized as revenue and expenditures or expenses in a governmental, proprietary, or trust fund. In those infrequent cases in which a recipient government serves only as a cash conduit, the grant should be reported in an agency fund. A recipient government serves only as a cash conduit if it merely transmits grantor-supplied moneys without having administrative or direct financial involvement in the program. A recipient government has administrative involvement if, for example, it 2

10 (a) monitors secondary recipients for compliance with program-specific requirements, (b) determines eligible secondary recipients or projects, even if using grantor-established criteria, or (c) has the ability to exercise discretion in how the funds are allocated. A recipient government has direct financial involvement if, for example, it finances some direct program costs because of a grantor-imposed matching requirement or is liable for disallowed costs. Food Stamps 6. State governments should recognize distributions of food stamp benefits 3 as revenue and expenditures in the general fund or a special revenue fund, whether the state government distributes the benefits directly or through agents and whether the benefits are in paper or electronic form. Expenditures should be recognized when the benefits are distributed 4 to the individual recipients by the state government or its agents; revenue should be recognized at the same time. State governments should report food stamp balances held by them or by their agents at the balance sheet date as an asset offset by deferred revenue. 5 Revenue, expenditures, and balances of food stamps should be measured based on face value. 3 Catalog of Federal Domestic Assistance [CFDA] program number Office of Management and Budget and U.S. General Services Administration, 1993 Catalog of Federal Domestic Assistance (Washington, DC: Government Printing Office, 1993). 4 In an electronic benefit transfer (EBT) system, distribution takes place when the individual recipients use the benefits. 5 In a paper system, food stamp coupons should not be classified as cash or as cash equivalents. In an EBT system, there generally would be no balance to report. However, if there is (for example, because cash drawn failed to post properly to a retailer s account), it should be classified in the same manner as similar cash balances. 3

11 On-Behalf Payments for Fringe Benefits and Salaries Definition 7. On-behalf payments for fringe benefits and salaries are direct payments made by one entity (the paying entity or paying government) to a third-party recipient for the employees of another, legally separate entity (the employer entity or employer government). On-behalf payments include pension plan contributions, employee health and life insurance premiums, and salary supplements or stipends. For example, a state government may make contributions directly to a pension plan for elementary and secondary schoolteachers employed in public school districts within the state. On-behalf payments include payments made by governmental entities on behalf of nongovernmental entities and payments made by nongovernmental entities on behalf of governmental entities. 6 They may be made not only for paid employees of the employer entity but also for volunteers, such as state government pension contributions for volunteer firefighters that work with a city fire department. Employer Government Reporting Recognition and Measurement 8. An employer government should recognize revenue and expenditures or expenses for on-behalf payments for fringe benefits and salaries. The employer government should recognize revenue equal to the amounts that third-party recipients of the payments received and that are receivable at year-end for the current fiscal year. a. If the employer government is not legally responsible for the payment, it should recognize expenditures or expenses equal to the amount recognized as revenue. 6 For example, a nongovernmental fund-raising foundation affiliated with a governmental university may supplement salaries of certain university faculty. Those payments constitute on-behalf payments for purposes of reporting by the university if they are made to the faculty members in their capacity as employees of the university. 4

12 b. If the employer government is legally responsible for the payment, it should follow accounting standards for that type of transaction to recognize expenditures or expenses and related liabilities or assets. For example, expenditures or expenses for on-behalf payments for contributions to a pension plan should be recognized and measured using pension accounting standards for state and local governmental employers. For purposes of applying the requirements of this paragraph, the legally responsible entity is the entity required by legal 7 or contractual provisions to make the payment. For example, for a state government s payments to pension plans that cover local government employees, including elementary and secondary schoolteachers, state laws generally provide that either the state government or the local governmental employer shall make the current payment. 9. Employer governments should obtain information about the amount of on-behalf payments for fringe benefits and salaries from the paying entity or the third-party recipient; interentity cooperation is encouraged. If information cannot be obtained from those sources, employer governments should make their best estimates of the amounts. On-behalf payments to cost-sharing multiple-employer defined benefit pension plans and to other fringe benefit plans with cost-sharing features should be recognized in a manner that allocates the payment among the covered employers using a systematic and rational allocation method, consistently applied. The allocation method generally should be based on the ratio of an individual employer s covered payroll to the entire covered payroll related to the on-behalf payments. 10. If an employer government s fiscal year differs from that of the paying entity, and if a measurement cannot be made of on-behalf payments received and receivable based on 7 According to NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, paragraph 6, legal provisions include those arising from constitutions, charters, ordinances, resolutions, governing body orders, and intergovernmental grant or contract regulations. 5

13 the employer government s fiscal year, the payments should be consistently measured based on the fiscal year of the paying entity that ends during (a) the employer government s fiscal year or (b) the first quarter of the employer government s subsequent fiscal year. 11. An employer government is not required to allocate on-behalf payments to individual funds. However, the employer government may choose to allocate a portion of the revenue and expenditures or expenses to one or more funds based on the related salaries charged in those funds. If an employer government reports using more than one fund and a single fund is used to report on-behalf payments, that fund usually should be the general fund or the unrestricted current fund. 8 Disclosure 12. Employer governments should disclose in the notes to financial statements the amounts recognized for on-behalf payments for fringe benefits and salaries. Further, for on-behalf payments that are contributions to a pension plan for which the employer government is not legally responsible, the employer government should disclose the name of the plan that covers its employees and the name of the entity that makes the contributions. Paying Government Reporting 13. A paying government should classify the expenditures or expenses for the on-behalf payments that it makes in the same manner that it classifies similar cash grants to other entities. For example, if a state government classifies state aid payments to school 8 There may be situations in which it would be more appropriate to use a fund other than the general or the unrestricted current fund as the single fund. For example, the on-behalf payment may relate entirely to an enterprise fund and should, therefore, be reported in that fund. 6

14 districts as education expenditures, on-behalf payments of pension contributions for the school districts also should be classified as education expenditures, rather than as pension expenditures. Reporting Entity Considerations 14. In some cases, two legally separate entities that are the parties to a transaction involving pass-through grants or on-behalf payments for fringe benefits and salaries are part of the same governmental reporting entity. In the reporting entity s financial statements, revenue and expenditures or expenses relating to these intra reporting entity transactions should be reclassified as operating transfers in accordance with the provisions of GASB Statement No. 14, The Financial Reporting Entity, paragraph 57. For example, a state government may make retirement contributions on behalf of a component unit. In the reporting entity s financial statements, the paying entity should classify the on-behalf payments as an operating transfer-out rather than as an expenditure or expense, and the employer entity should classify them as an operating transfer-in rather than as revenue. The amounts of the operating transfers should be based on the amount recognized as revenue by the employer entity. EFFECTIVE DATE AND TRANSITION 15. The provisions of this Statement are effective for financial statements for periods beginning after June 15, Earlier application is encouraged. Accounting changes adopted to conform to the provisions of this Statement should be applied retroactively, if practical, by restating financial statements for all prior periods presented. If restatement of financial statements for prior periods presented is not practical, the cumulative effect of applying this Statement, if any, should be reported as a restatement of beginning fund balance or retained earnings, as appropriate, for the earliest period restated. In the period this Statement is first applied, the financial statements should disclose the nature of any 7

15 restatement and its effect. Also, the reason for not restating prior periods presented should be explained. The provisions of this Statement need not be applied to immaterial items. This Statement was adopted by the affirmative votes of three members of the Governmental Accounting Standards Board. Messrs. Freeman and Klasny dissented. Messrs. Freeman and Klasny object to this Statement because they believe the approach taken to address these specific issues is fundamentally flawed. A comprehensive Discussion Memorandum (DM) was issued in 1992 to gather views on how state and local governmental entities should account for and report on grants and other financial assistance. Messrs. Freeman and Klasny believe that pass-through grants, food stamps, and on-behalf payments should not have been carved away from the other topics covered in the DM. Indeed, much of the guidance in this Statement either prejudges or sets an inappropriate precedent for future GASB standards or contradicts current GASB pronouncements. Moreover, it seems to be based on the assumption that accountability can be demonstrated only by reporting transactions in the governmental funds or proprietary funds that reporting transactions and events in agency fund financial statements (or disclosing them in the notes) cannot achieve accountability reporting. Messrs. Freeman and Klasny believe the Board has missed an opportunity to establish a sound foundation for reporting all grants and other financial assistance transactions. For example, when the term pass-through grants was introduced in NCGA Statement 2, consistent guidance was provided for all of the transactions that met this definition. This Statement maintains the NCGA Statement 2 definition; however, the Board has chosen to split the accounting and reporting guidance in a manner that changes the fundamental nature of agency funds. In addition, this Statement does not contain a sound, operational definition of the term grant. Messrs. Freeman and Klasny believe that 8

16 the Board should develop sound, operational definitions of grants and other, nongrant financial assistance, and that well-defined and consistently applied terminology and guidance can be achieved only through a comprehensive standard. Pass-Through Grants The Board asserts that paragraph 18 of NCGA Statement 1, which provides that agency funds are purely custodial, was intended to narrow the use of agency funds. But the definition of agency funds set forth in paragraph 26 of NCGA Statement 1 and the guidance provided by NCGA Statement 2 for pass-through grants are based on a more usual, broader application of the agent relationship. Thus, Messrs. Freeman and Klasny believe the Board has misinterpreted the NCGA literature it has adopted. If the NCGA s intent had been to limit the use of agency funds to purely custodial arrangements in NCGA Statement 1, one would question why on the same day conflicting guidance was issued in NCGA Statement 2 or why the Board used the agency fund classification for deferred compensation plans in GASB Statement No. 2, Financial Reporting of Deferred Compensation Plans Adopted under the Provisions of Internal Revenue Code Section 457. Taking the term purely custodial out of context leads to a misinterpretation of agency relationships which are not infrequent as portrayed in this Statement. Messrs. Freeman and Klasny believe that financial assistance that is received from another government should be reported in an agency fund when the recipient government is an intermediary serving as the grantor s agent to transfer the assistance to a secondaryrecipient government, individual, not-for-profit organization, or other organization. They believe that a recipient government serves as an agent if it has little or no discretion in determining how the assistance will be used. For example, if a recipient government receives assistance that it is required to provide to any who meet grantor-established criteria, it may be serving only as an agent of the grantor. Reporting that assistance in the operations of the recipient government, as would be required by this Statement, would 9

17 significantly distort the magnitude and nature of the recipient government s own operations. If, however, a grantor allows a government that receives a grant or other financial assistance to establish program objectives or secondary recipient selection criteria, the assistance should be reported as part of the recipient government s operations. The description of administrative involvement in this Statement contains criteria that are common to agency relationships specifically, monitoring secondary recipients and determining eligible secondary recipients using grantor-established criteria. The criterion of direct financial involvement also is irrelevant to determining the existence of an agency relationship. The only criterion in this Statement that is relevant to determining whether a grant or other financial assistance received should be part of the recipient government s operations is recipient government discretion to determine how the assistance is allocated. Food Stamps Messrs. Freeman and Klasny object to the guidance in paragraph 6 for reporting the food stamp program. Using the approach outlined in the second preceding paragraph for distinguishing governmental and proprietary activities from agency transactions, any governments that distribute food stamp benefits, even if through an EBT system, would report these transactions (except assistance administration grants) in agency funds. Messrs. Freeman and Klasny also object to the requirement to report unissued food stamp coupons as assets and deferred revenue. They believe that unissued food stamp coupons are not assets. Rather, they are more in the nature of unissued checks with no value to the government until they are issued and used by the recipients. Recognizing the food stamp coupons as assets is misclassifying a contingent liability that should only be disclosed in the notes. 10

18 Messrs. Freeman and Klasny also are concerned that expenditure-driven guidance is being provided to the states although a recent GASB survey shows that over 80 percent of the responding states currently are not reporting food stamp transactions in their governmental funds. They believe this guidance also prejudges the outcomes of the Board deliberations on reimbursement grants and will result in most state governments changing their accounting to implement this Statement and then possibly being required to change again when standards are issued on reimbursement grants. Messrs. Freeman and Klasny also object to accounting standards based on speculation concerning possible future events specifically, the expectation that food stamp benefits will be distributed through EBT systems in the near future and that those possible future systems will bear some resemblance to the few demonstration projects currently being tested. On-Behalf Payments Messrs. Freeman and Klasny agree with employer governments recognizing revenue and expenditures or expenses for on-behalf payments for fringe benefits and salaries when the employer government is legally responsible for the payment. In these cases, the transfer of the amounts directly from the paying entity to a third-party recipient is merely for cash flow convenience or for control over the payments and represents an indirect flow of financial resources. However, they strongly object to the employer government s recognition of such payments when it is not legally responsible to make them. A government is not accountable for payments that it neither makes nor is responsible to make. In these cases, employer governments experience no flow of financial resources, either direct or indirect. Messrs. Freeman and Klasny believe that the only logical justification for reporting these transactions is the perceived need to report the cost of services. They point out that, unlike the commercial model, the governmental funds reporting model does not attempt to report cost of services. These 11

19 payments represent expenditures or expenses of the paying entity, not of the employer government, if the paying entity is required by function of law to make them. If the Board believes that on-behalf transactions are so significant as to make the total revenues and total expenditures reported incomplete (because they generally are offset and thus have no effect on net results), then all in-substance transactions should be included within the scope of this Statement to provide a consistent solution. Messrs. Freeman and Klasny point out that this project s scope was expanded from fringe benefits to include salaries, and they see no reason that the scope was not expanded further so that a comprehensive answer would have been reached. By limiting the scope of this Statement to the recognition of on-behalf payments for fringe benefits and salaries, the Board is setting a precedent whose nature and extent are questionable. Messrs. Freeman and Klasny believe that this Statement s requirement for recognizing on-behalf payments for fringe benefits and salaries is the tip of the iceberg if the Board determines that to be fully accountable state and local government financial reporting should reflect the total costs associated with the government, whether incurred by the reporting government, another government (federal, state, or local), not-for-profit or profit-seeking organizations, or individuals. Members of the Governmental Accounting Standards Board: James F. Antonio, Chairman Martin Ives, Vice-Chairman Robert J. Freeman Barbara A. Henderson Edward M. Klasny 12

20 GLOSSARY 16. The following define certain terms used in this Statement: Employer entity The entity that employs the individuals for whom a paying entity makes on-behalf payments for fringe benefits and salaries. The employer entity may be governmental or nongovernmental. Food stamp program A federal program (Catalog of Federal Domestic Assistance [CFDA] program number ) that is intended to improve the diets of members of low-income households by increasing their ability to purchase food. Grants and other financial assistance Transactions in which one governmental entity transfers cash or other items of value to (or incurs a liability for) another governmental entity, an individual, or an organization as a means of sharing program costs, subsidizing other governments or entities, or otherwise reallocating resources to the recipients. Legally responsible entity For on-behalf payments for fringe benefits and salaries, the entity required by legal or contractual provisions to make the payment. Legal provisions include those arising from constitutions, charters, ordinances, resolutions, governing body orders, and intergovernmental grant or contract regulations. On-behalf payments for fringe benefits and salaries Direct payments made by one entity (the paying entity or paying government) to a third-party recipient for the employees of another, legally separate entity (the employer entity or employer government). They include payments made by 13

21 governmental entities on behalf of nongovernmental entities and payments made by nongovernmental entities on behalf of governmental entities, and may be made for volunteers as well as for paid employees of the employer entity. Pass-through grants Grants and other financial assistance received by a governmental entity to transfer to or spend on behalf of a secondary recipient. Paying entity The entity that makes on-behalf payments for fringe benefits and salaries for the employees of another, employer entity. The paying entity may be governmental or nongovernmental. Recipient government In a pass-through grant, a governmental entity that receives grants and other financial assistance to transfer to or spend on behalf of a secondary recipient. Secondary recipient The individual or organization, governmental or otherwise, that is the ultimate recipient of a pass-through grant, or another recipient organization that passes the grant through to the ultimate recipient. Third-party recipient For purposes of on-behalf payments for fringe benefits and salaries, the individual or organization that receives the payment for example, an employee who receives a salary supplement or a pension plan that receives pension contributions. 14

22 Appendix A BACKGROUND INFORMATION 17. The grants project issues originated in the Board s measurement focus and basis of accounting (MFBA) project, which was part of the Board s original 1984 agenda. In 1987, before issuing the MFBA Exposure Draft (ED), the Board decided that the grants issues required more research before recognition and measurement standards could be proposed. A separate grants project resulted. 18. The GASB has undertaken extensive research in the course of this project. These efforts include: A survey of state government reporting practices for three federal grant programs, resulting in the report GASB Research Findings: Food Stamps, Aid to Families with Dependent Children, and Commodities Programs. Visits to several state and local governments to identify potential project issues. Review of various federal programs to determine the programs operations and administration and to identify project-related issues. A survey of state governments to determine the major types of state aid being distributed to local political subdivisions and individuals, resulting in the report GASB Research Findings: State Aid to Local Governments and Individuals. A survey of grants received by governmental colleges and universities, resulting in the report GASB Research Findings: Federal, State, and Local Government Assistance to Governmental Colleges and Universities. A survey of state governments to determine their accounting and financial reporting practices for (among other grant transactions) pass-through grants, food stamps, and on-behalf payments for fringe benefits. 19. A Discussion Memorandum (DM), Grants and Other Financial Assistance of Cash, Food Stamps, and Vouchers, was issued in 1992 to gather views on how state and local governments should account for and report on certain grants and other financial assistance in their external financial statements. The Board received ninety comment letters in response to the DM. In 1993, the Board issued an ED of a proposed Statement, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance. 15

23 The Board received ninety-six comment letters on the ED, a majority of which supported its provisions. Certain changes have been made to this Statement, however, as a result of ED respondent recommendations. Pass-Through Grants 20. Previous governmental accounting and financial reporting standards for passthrough grants were established in NCGA Statement 2. Paragraph 8 of that Statement, which is amended by this Statement, defined pass-through grants as resources that are received by a recipient government to transfer to or spend on behalf of a secondary recipient, governmental or otherwise, in accordance with legal or contractual provisions. That paragraph required recipient governments to report pass-through grants in agency funds. NCGA Statement 1, paragraph 18(3), defines agency funds as funds that are used to account for assets held by a governmental unit as an agent for individuals, private organizations, other governmental units, or other funds, and states that these funds are purely custodial. 21. The definition of pass-through grants in NCGA Statement 2 could have been broadly interpreted and could have encompassed many grant programs. However, recipient governments generally have applied a narrow interpretation of the definition; GASB research shows that many transactions that appeared to meet the definition of passthrough grants are reported in fund types other than agency funds. In practice, if an agency fund is used to account for grants, it is generally only for those programs in which the recipient government acts in a limited capacity. 16

24 Food Stamps 22. The food stamp program is a federal program that is intended to improve the diets of members of low-income households by increasing their ability to purchase food. Under the current paper system, the federal government provides coupons 9 for distribution to eligible households by state governments or by their agents, which may include local governments. Individual recipients use the coupons, which have a dollar value, to purchase eligible food items at participating stores (retailers). The retailers submit the coupons to banks, which in turn submit the coupons to a Federal Reserve Bank for redemption. Under this system, state governments are not involved in the process of redeeming the food stamp coupons from retailers. 23. All state governments participate in the food stamp program. The states administrative duties include determining eligible recipients and distributing the food stamp coupons. The federal government establishes eligibility requirements and the amount of benefits to be provided to eligible households. States have the discretion to involve local governments in administering the program, and some do. Some local governments perform eligibility determinations only, and others perform both eligibility determinations and distribution. 24. State resources help finance the administrative costs of the program, but not the cost of redeeming the food stamp coupons. When local governments participate in administration, they also generally share administrative costs, although some local governments are fully reimbursed for administrative costs. If food stamps are lost, stolen, or improperly issued, the federal government generally bills the state government. The state government in turn generally charges the local governments or nongovernmental 9 A few states distribute a small amount of food stamp benefits in cash. 17

25 agents for those losses when those other entities are responsible for determining eligibility or distributing the food stamps. 25. According to goals set by the U.S. Department of Agriculture s Food and Nutrition Service, the delivery of food stamp benefits by electronic benefit transfer (EBT) systems is expected to be substantially under way in all states by In the current state government-administered demonstration and pilot EBT systems, eligible individuals use benefit cards that typically have a magnetic strip encoded with identifying information to pay for eligible food items using point-of-sale terminals at the retailers checkout lanes. This card, when used with the individual s personal identification number, authorizes access to the individual s benefit file in an electronic database established by the state government. The transaction is simultaneously debited to the individual s account and credited to the retailer s account. (Usually, the state government contracts with an outside processing firm to operate the database.) At the end of each day, information about that day s EBT transactions is transferred to a concentrator bank that credits the retailers and initiates a request for funds that are drawn from the U.S. Treasury by the state government s fiscal agent, which is the concentrator bank or the database processor. Future EBT systems for delivering food stamp benefits are expected to be state government administered systems substantially similar to the demonstration programs now in place, although some alternatives, such as regional EBT systems and retailer settlement through the federal banking system, are being explored. Local government involvement in these systems may include determining eligible recipients and their benefits, but is not expected to include control over the distribution of benefits through the electronic database or responsibility for paying the retailers. 26. There have been no accounting and financial reporting standards for the food stamp program, and practice varies. Some governmental entities that distribute the benefits recognize revenue and expenditures in their financial statements, some disclose either or 18

26 both activity and year-end balances, and some do not report the distributions in their financial statements in any fashion. On-Behalf Payments for Fringe Benefits and Salaries 27. GASB research indicates that many state governments make on-behalf payments for fringe benefits, generally for teachers or other local government employees retirement contributions. Some of the retirement contributions are for volunteer firefighters who work with local government fire departments or districts. In addition, a few states pay part of the salary of or a stipend to selected local government employees. GASB research also indicates that on-behalf payments of faculty salaries are sometimes made by foundations affiliated with governmental colleges and universities. 28. Except for the following provisions, governmental accounting and financial reporting standards previously did not require reporting of on-behalf payments for fringe benefits and salaries. a. Governmental colleges and universities that use the AICPA College Guide model as provided for in GASB Statement 15 are required to report the effect of on-behalf contributions to retirement systems as part of their operations. American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 74-8, Financial Accounting and Reporting by Colleges and Universities, specifically requires that amounts paid directly into a state or local retirement system by the appropriating government on behalf of the college or university should be recorded as revenue of the institution Cited in AICPA Industry Audit Guide, Audits of Colleges and Universities, with Conforming Changes as of May 1, 1993 (Jersey City, NJ: AICPA, 1993), p

27 b. GASB Statement No. 5, Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers, paragraph 41, requires an employer government that is not legally responsible for making contributions to a public employee retirement system to make disclosures about the contributions that are made on its behalf by another governmental entity. These disclosures include the name of the entity making the contribution, the amount of the contribution, the paying government s obligation to contribute, and the authority under which that obligation is established. 20

28 Appendix B BASIS FOR CONCLUSIONS Contents Paragraph Numbers Introduction Scope and Applicability of This Statement Pass-Through Grants Food Stamps and Voucher Programs Recognition Reporting On-Behalf Payments for Fringe Benefits and Salaries Recognition Inclusion of Payments by or for Nongovernmental Entities Definition Measurement Basis for the Measure Allocating Payments among Employers Source of Information for the Measure Different Year-Ends between Paying and Employer Entities Allocating Payments among Funds of an Employer Government Employer Government Disclosures Paying Government Reporting Scope of On-Behalf Payments Reporting Entity Considerations

29 Appendix B BASIS FOR CONCLUSIONS Introduction 29. This appendix discusses factors considered by Board members in reaching the conclusions in this Statement. It includes discussion of the alternatives considered and the Board s reasons for accepting some and rejecting others. Individual Board members gave greater weight to some factors than to others. Scope and Applicability of This Statement 30. The DM addressed issues on five topics, but this Statement covers only three passthrough grants, food stamps, and on-behalf payments for fringe benefits and salaries. The two remaining topics concern expenditure-driven and nonreimbursement grants and relate to the implementation of an accrual basis of accounting, which has been deferred by GASB Statement No. 17, Measurement Focus and Basis of Accounting Governmental Fund Operating Statements: Amendment of the Effective Dates of GASB Statement No. 11 and Related Statements. The Board decided to develop a Statement on the three topics rather than delay issuing a Statement until all project issues could be deliberated. Although a majority of ED respondents agreed with issuing a final Statement, some respondents were concerned about this approach or disagreed with issuing a Statement on these three topics alone. However, the Board believes these three issues stand on their own and that the provisions of this Statement will result in improved financial reporting. 31. In developing this Statement, the Board also considered the accounting and financial reporting for voucher programs, but did not establish any reporting requirements for them, as discussed in paragraph 43. In voucher programs, an entity provides vouchers to a governmental entity for distribution to eligible individuals. The individuals use the vouchers to obtain goods or services from participating retailers, which then redeem them 22

30 from either the entity that initially provided the voucher or its third-party agent. GASB research shows that the only significant voucher program currently in operation in state and local governmental entities is the special supplemental food program for women, infants, and children (WIC program CFDA program number ). In some states, local governments distribute the state s WIC vouchers. 32. The provisions of this Statement concerning food stamps and on-behalf payments for fringe benefits and salaries apply to all governmental entities, including colleges and universities that report using the AICPA College Guide model. These colleges and universities will not be affected by the requirements for state government reporting of the food stamp program. Governmental colleges and universities that use the AICPA College Guide model presently are required to recognize on-behalf payments for contributions to pension plans. Therefore, the Board believes that extending this Statement s requirements for reporting on-behalf payments for fringe benefits will have little effect on those entities. Further, the Board is aware that on-behalf payments for salaries can be significant in colleges and universities whose faculty salaries are supplemented by payments from related units, such as fund-raising foundations. However, the Board sees no reason that those transactions should not be subject to the requirements of this Statement at this time. This Statement s provisions for pass-through grants, however, do not apply to governmental colleges and universities that report using the AICPA College Guide model because the Board has not conducted the research necessary to determine whether this would be appropriate. The Board expects to address this issue in its separate project on colleges and universities. However, the pass-through grants standards established in this Statement could influence the standards that the Board develops in the future for these colleges and universities. 33. A few ED respondents were concerned about the exclusion of governmental colleges and universities that report using the AICPA College Guide model from the proposed 23

31 standard for pass-through grants. These respondents support comparability between public- and private-sector colleges and universities and observed that FASB Statement No. 116, Accounting for Contributions Received and Contributions Made, would result in different reporting for pass-through grants than would this Statement. They believe that if those colleges and universities are excluded from this Statement s standards for passthrough grants, it is unlikely that the entire issue will be reconsidered in the colleges and universities project. The Board established its colleges and universities project partly in reaction to the constituency s concern about comparability and, for that reason, believes that project is the appropriate project in which to address this issue. Pass-Through Grants 34. NCGA Statement 1, paragraph 18(3), states that agency funds are purely custodial. The Board believes that if a recipient government has administrative involvement in a pass-through grant, its responsibility in relation to the resources is more than custodial; the recipient government is essentially exercising operational responsibility. Research shows that the types of administrative involvement recipient governments have with pass-through grants include (a) monitoring secondary recipients for compliance with program-specific requirements, (b) determining eligible secondary recipients or projects, even if using grantor-established criteria, and (c) having the ability to exercise discretion in how the funds are allocated. A recipient government s administrative involvement with a passthrough grant usually takes place both before and after the grantor government makes the award. However, some pass-through grants may involve only pre-award administrative involvement by the recipient government. For example, in several states, federal Airport Improvement Program grants (CFDA program number ) pass through the state government because of state legislation called channeling acts that requires airports that apply for the grants to coordinate their activities through a state aviation agency or board that controls the content and submission of the grant application. This grant meets 24

32 this Statement s criteria for reporting as revenue and expenditures and expenses based on the state government s pre-award administrative involvement. 35. The Board also believes that direct financial involvement in the grant places a recipient government in other than a custodial role. Indicators of direct financial involvement include (a) recipient government financing of some direct program costs because of a grantor-imposed matching requirement and (b) recipient government liability for disallowed costs. The Board believes that providing required financing of some direct program costs expands the recipient s role because it essentially allows a recipient government to exercise discretion over whether the grant will be awarded. The Board also believes that a recipient government s liability for disallowed costs indicates that the government s responsibility exceeds that of a custodian. This Statement does not require that a recipient government s payment of administrative costs (indirect financial involvement) be separately evaluated in determining the reporting of pass-through grants. If a recipient government serves only as a cash conduit, it may incur some incidental administrative costs; the Board does not believe that those incidental costs should by themselves result in the grant s being reported in other than agency funds. If a recipient government s administrative costs are more than incidental, that would be the result of administrative involvement. In this case, the pass-through grant already would meet that criterion for reporting in other than agency funds. 36. The Board found that considering administrative and direct financial involvement will cause recipient governments to report few, if any, pass-through grants in agency funds. This is consistent with GASB research indicating that state governments generally do not report any federal pass-through grants in agency funds, as discussed in paragraph 21. During its research, the Board identified only one federal pass-through grant that would meet this Statement s criteria for reporting in agency funds. Under Public Law , Chapter 69, Payment for Entitlement Land, Section 6904, the U.S. Department of 25

33 the Interior pays amounts to local governments for the first five years after the federal acquisition of an interest in land for the national parks or national forest wilderness areas when that land had been subject to real property taxes within the five-year period before it was acquired. The local governments that receive these payments are required to distribute them to units and school districts that lost real estate property taxes because of the federal acquisition. Federal legislation gives the recipient governments no discretion in allocating these funds and attaches no other administrative responsibilities or direct financial involvement. Board research shows that two similar federal programs, the Department of Defense s payments to states in lieu of real estate taxes (CFDA program number ) and the National Forest Service s schools and roads grants to states (CFDA program number ), should be reported in other than agency funds using the criteria in this Statement because federal legislation provides the state governments with (a) some discretion in allocating the resources to the secondary-recipient county governments and (b) the authority to establish how the secondary recipients use the resources. 37. During its research, the Board found that some recipient governments do not report some pass-through grants in their financial statements in any fashion. Generally, these are federal grants (a) for which the recipient government has little administrative and no direct financial involvement or (b) that the U.S. Office of Management and Budget has determined are not subject to the specialized reporting that is required for federal financial assistance. However, the Board believes that all grants and other financial assistance that a governmental entity receives should be reported in its financial statements in some fashion and has provided for that in this Statement. 38. A large majority of ED respondents agreed that pass-through grants should be reported as part of a recipient government s operations unless it is serving only as a cash conduit, and they support this Statement s criteria of administrative and direct financial involvement. A few respondents, however, believe that unless a recipient government is 26