This Financial Report includes the financial status and activities of the executive branch, the legislative branch (the U.S. Senate and the U.S. House of Representatives report on a cash basis), and the judicial branch (which also reports on a cash basis) of the Government. The judicial branch reports on a limited basis and is not required by law to submit financial statement information to Treasury. Appendix A of this report contains a list of significant Government entities included and excluded in the Financial Report. Certain entities are excluded from the Financial Report because they are Government-Sponsored Enterprises (GSE), such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), or their activities are not included in the Federal budget, such as the Thrift Savings Fund and the Board of Governors of the Federal Reserve System.
During fiscal year 2008, the Government began a number of additional emergency economic measures relating to the economy that involved various financing programs. Key initiatives effective for fiscal year 2008 involved programs concerning Fannie Mae and Freddie Mac (GSEs), provision of a credit facility for GSEs and Federal Home Loan Banks, purchase of Mortgage-Backed Securities (MBS), and setup of a Money Market Guarantee Program (see Note 11—Investments in and Liabilities to Government-Sponsored Enterprises and Other Financial and Housing Market Stabilization). The Government increased its investment in the recovery effort in fiscal year 2009. The Emergency Economic Stabilization Act of 2008 (EESA) gave the Secretary of the Treasury temporary authority to purchase and guarantee assets in a wide range of financial institutions and markets (see Note 5—TARP Direct Loans and Equity Investments, Net).
Following Generally Accepted Accounting Principles (GAAP) for Federal entities, the Government has not consolidated into its financial statements the assets, liabilities, or results of operations of any financial organization or commercial entity in which Treasury holds either a direct, indirect, or beneficial equity investment. Even though some of the equity investments are significant, under Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, these entities meet the criteria of paragraph 50 and do not appear in the Federal budget section “Federal Programs by Agency and Account.” As such, these entities are not consolidated into the financial reports of the Government. However, the values of the investment in such entities are presented on the balance sheet.
Material intragovernmental transactions are eliminated in consolidation, except as described below in this note and in the Supplemental Information—Unmatched Transactions and Balances. The financial reporting period ends September 30 and is the same as used for the annual budget.
These financial statements were prepared using U.S. GAAP, primarily based on SFFAS’s. Under these principles:
The basis of accounting used for budgetary purposes, which is primarily on a cash and obligation basis and follows budgetary concepts and policies, differs from the basis of accounting used for the financial statements which follow U.S. GAAP. See the Reconciliations of Net Operating Cost and Unified Budget Deficit in the Financial Statements section.
Beginning in fiscal year 2010, the Government has implemented the requirements of new standards related to: pensions, other retirement benefits, and other postemployment benefits; long-term fiscal projections; and subsequent events.
Direct loans obligated and loan guarantees committed after fiscal year 1991 are reported based on the present value of the net cashflows estimated over the life of the loan or guarantee. The difference between the outstanding principal of the direct loans and the present value of their net cash inflows is recognized as a subsidy cost allowance. The present value of estimated net cash outflows of the loan guarantees is recognized as a liability for loan guarantees.
The subsidy expense for direct or guaranteed loans disbursed during a fiscal year is the present value of estimated net cash outflows for those loans or guarantees. A subsidy expense also is recognized for modifications made during the year to loans and guarantees outstanding and for reestimates made as of the end of the fiscal year to the subsidy allowances or loan guarantee liability for loans and guarantees outstanding.
Direct loans obligated and loan guarantees committed before fiscal year 1992 are valued under two different methodologies within the Government: the allowance-for-loss method and the present-value method. Under the allowance-for-loss method, the outstanding principal of direct loans is reduced by an allowance for uncollectible amounts; the liability for loan guarantees is the amount the agency estimates would more likely than not require future cash outflow to pay default claims. Under the present-value method, the outstanding principal of direct loans is reduced by an allowance equal to the difference between the outstanding principal and the present value of the expected net cashflows. The liability for loan guarantees is the present value of expected net cash outflows due to the loan guarantees.
The MBS are treated similar to direct loans, and the value of the Government’s position and the associated credit subsidy requirements are determined based on the net present value of the securities’ forecasted future cashflows. For more details on MBS', see Note 4—Loans Receivable, Mortgage-Backed Securities, and Loan Guarantee Liabilities, Net.
Accounts receivable represent claims to cash or other assets from entities outside the Government that arise from the sale of goods or services, duties, fines, certain license fees, recoveries, or other provisions of the law. Accounts receivable are reported net of an allowance for uncollectible accounts. An allowance is established when it is more likely than not the receivables will not be totally collected. The allowance method varies among the agencies in the Government and is usually based on past collection experience and is re-estimated periodically as needed. Methods include statistical sampling of receivables, specific identification and intensive analysis of each case, aging methodologies, and percentage of total receivables based on historical collection.
Taxes receivable consist primarily of uncollected tax assessments, penalties, and interest when taxpayers have agreed the amounts are owed or a court has determined the assessments are owed. The Balance Sheets do not include unpaid assessments when neither taxpayers nor a court have agreed that the amounts are owed (compliance assessments) or the Government does not expect further collections due to factors such as the taxpayer’s death, bankruptcy, or insolvency (writeoffs). Taxes receivable are reported net of an allowance for the estimated portion deemed to be uncollectible. The allowance for doubtful accounts is based on projections of collectibles from a statistical sample of unpaid tax assessments.
TARP equity investments are accounted for at fair value which is defined as the estimated amount of proceeds that would be received if the equity investments were sold to a market participant. Consistent with the present value accounting concepts embedded in SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, TARP Direct Loans and Equity Investments, net, disbursed and outstanding are recognized as assets at the net present value of their estimated future cashflows and outstanding asset guarantees are recognized as liabilities or assets at the net present value of their estimated future cashflows. Market risk is considered in the calculation and determination of the estimated net present values.
The subsidy allowance for TARP’s Direct Loans and Equity Investments, net, represents the difference between the face value of the outstanding direct loan and equity investment balance and the net present value of the expected future cashflows, and is reported as an adjustment to the face value of the direct loan or equity investment.
The recorded subsidy allowance for a direct loan, equity investment or asset guarantee is based on a set of estimated future cashflows.
The Government used the following methodologies for valuation of the TARP Direct Loans and Equity Investments:
The estimated future cashflows for TARP direct loans were derived using analytical models that estimate the cashflows to and from the Government over the life of the loan. These cashflows include the scheduled principal, interest, and other payments to the Government, including estimated proceeds from equity interest obtained or additional notes. These models also include estimates of default and recoveries, incorporating the value of any collateral provided by the contract. The probability and timing of default and losses relating to a default are estimated by using applicable historical data when available, or publicly available proxy data, including credit rating agency historical performance data. The models include an adjustment for market risk which is intended to capture the risk of unexpected losses, but are not intended to represent fair value, i.e., the proceeds that would be expected to be received if the loans were sold to a market participant.
TARP preferred stock cashflows are projected using an analytical model developed to incorporate the risk of losses associated with adverse events, such as failure of the institution or increases in market interest rates. The model estimates how cashflows vary depending on: (1) current interest rates, which may affect the decision whether to repay the preferred stock; and (2) the strength of a financial institution’s assets. Inputs to the model include institution specific accounting data obtained from regulatory filings, an institution’s stock price volatility, and historical bank failure information, as well as market prices of comparable securities trading in the market. The Government estimates the values and projects the cashflows of warrants using an option-pricing approach based on the current stock price and its volatility. Investments in common stock which are exchange traded are valued at the market price. The result of using market prices, either quoted prices for the identical asset or quoted prices for comparable assets, is that the equity investments are recorded at estimated fair value.
The beneficial interest in trust represents the Government’s beneficial interest in the American International Group (AIG) stock held by a trust established by the Federal Reserve Bank of New York (FRBNY), under the terms of a credit facility agreement with AIG and the FRBNY. The value of beneficial interest is based on the market value of the trust’s AIG holdings as of the reporting date; as the underlying AIG common stock is actively traded on the New York Stock Exchange, this represents the best independent valuation available for the Government’s beneficial interest (See Note 6—Beneficial Interest in Trust for further details).
Inventory is tangible personal property that is (1) held for sale, principally to Federal agencies, (2) in the process of production for sale, or (3) to be consumed in the production of goods for sale or in the provision of services for a fee. Inventories within the Government are valued using historical cost. However, most of the inventories are held by the Department of Defense (DOD) and its inventory value for most activities is not reported in accordance with GAAP. Historical cost methods include first-in-first-out, weighted average, and moving average. To a lesser degree, the DOD also uses latest acquisition cost (LAC) methods adjusted for holding gains and losses to approximate the historical cost of resale inventory items remaining in the legacy systems. When using historical cost valuation, estimated repair costs reduce the value of inventory held for repair. Excess, obsolete, and unserviceable inventories are valued at estimated net realizable value. When latest acquisition cost is used to value inventory held for sale, it is adjusted for holding gains and losses in order to approximate historical cost.
Related property includes commodities, seized and monetary instruments, forfeited and foreclosed property, raw materials and work in process. Operating materials and supplies are valued at historical cost, latest acquisition cost, and standard price using the purchase and consumption method of accounting. Operating materials and supplies that are valued at latest acquisition cost and standard pricing are not adjusted for holding gains and losses.
Property, plant, and equipment consists of tangible assets including equipment, buildings, construction in progress, internal use software, assets acquired through capital leases, including leasehold improvements, and other assets used to provide goods and services.
Property, plant, and equipment used in Government operations are carried at acquisition cost, with the exception of DOD military equipment (e.g., ships, aircraft, combat vehicles, and weapons) and some National Aeronautics and Space Administration (NASA) equipment. DOD military equipment is valued at estimated historical costs, which are calculated using internal DOD records. DOD identified the universe of military equipment by accumulating information relating to program funding and associated military equipment, equipment useful life, and program acquisitions and disposals to create a baseline. The equipment baseline is updated using expenditure information and information related to acquisition and logistics to identify acquisitions and disposals. NASA also uses estimates of historical cost to value some of its equipment for which historical cost information is not readily available, such as components of the International Space Station.
All property, plant, and equipment is capitalized if the acquisition costs (or estimated acquisition cost for DOD) are in excess of capitalization thresholds that vary considerably between the Federal entities. Depreciation and amortization expense applies to property, plant, and equipment reported on the balance sheets except for land, unlimited duration land rights and construction in progress. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the assets. All property, plant, and equipment are assigned useful lives depending on their category and vary considerably between the Federal entities. The cost of acquisition, betterment, or reconstruction of all multi-use heritage assets is capitalized as general property, plant, and equipment and is depreciated. Construction in progress is used for the accumulation of the cost of construction or major renovation of fixed assets during the construction period. The assets are transferred out of construction in progress when the project is substantially completed. Internal use software includes purchased commercial off-the-shelf software, contractor-developed software, and software internally developed.
Debt and Equity securities are classified as held-to-maturity, available-for-sale, and trading securities and investments. Held-to-maturity debt and equity securities are reported at amortized cost, net of unamortized premiums and discounts. Available-for-sale debt and equity securities are reported at fair value. Trading debt and equity securities are reported at fair value.
The senior preferred stock liquidity preference (preferred stock) and associated common stock warrant (warrant(s)) in GSEs are presented at their fair value as permitted by Office of Management and Budget (OMB) Circular No. A-136. This Circular includes language that generally requires agencies to value non-Federal investments at acquisition cost, and also permits the use of other measurement basis, such as fair value, in certain situations. Treasury performs annual valuations, as of September 30th, to provide a “sufficiently reliable” estimate of the outstanding commitments in order for Treasury to record the remaining liability in accordance with SFFAS No. 5. The valuations incorporated various forecasts, projections, and cashflow analyses to develop an estimate of the potential liability. Annual valuations are performed, as of September 30, of the preferred stock and warrants and any changes in valuation, including impairment, are recorded and disclosed in accordance with SFFAS No. 7, Accounting for Revenue and Other Financing Sources. Since the valuation is an annual process, the changes in valuation of the preferred stock and warrants are deemed usual and recurring. Accordingly, changes in valuation are recorded as an exchange transaction which is either an expense or revenue. Since the costs of preferred stock and warrants are exchange transactions, any change in valuation is also recorded as an exchange transaction.
The GSE Senior Preferred Stock Purchase Agreements (SPSPAs) provide that Treasury will increase its investment in the GSEs’senior preferred stock if at the end of any quarter the Federal Housing Finance Agency (FHFA), acting as the conservator, determines the liabilities of either GSE, individually, exceed its respective assets. Based on U.S. GAAP, these contingent liquidity commitments, predicated on the future occurrence of any shareholders’ deficits of the GSEs at the end of any reporting quarter, are potential liabilities of Treasury. The potential liabilities to the GSEs are assessed annually and recorded at the gross amount, without considering the increase in preferred stock liquidity preference, future divided payments, or future commitment fees, due to the uncertainties involved. The Government currently accounts for the GSE MBS purchase program and the two programs of the Housing Financing Agency (HFA) Initiative (the New Issue Bond Program (NIBP) and Temporary Credit and Liquidity Program (TCLP)) under the provisions of credit reform and the use of estimates is dictated by the SFFAS No. 2. See Note 11—Investments in and Liabilities to Government-Sponsored Enterprises and Other Financial and Housing Market Stabilization for further details.
Accrued interest on Treasury Securities Held by the Public is recorded as an expense when incurred, instead of when paid. Certain Treasury securities are issued at a discount or premium. These discounts and premiums are amortized over the term of the security using an interest method for all long-term securities and the straight line method for short-term securities. Treasury also issues Treasury Inflation-Protected Securities (TIPS). The principal for TIPS is adjusted daily over the life of the security based on the Consumer Price Index (CPI) for all Urban Consumers.
Generally, Federal employee and veteran benefits payable are recorded during the time employee services are rendered. The related liabilities for defined benefit pension plans, veterans’ compensation and burial benefits, post-retirement health benefits, life insurance benefits, and Federal Employee and Compensation Act benefits are recorded at estimated present value of future benefits, less any estimated present value of future normal cost contributions. The estimated present value for veterans’ pension benefits is disclosed but is not included in the Federal employee and veteran benefits payable line. These benefits are expensed when services are provided.
Normal cost is the portion of the actuarial present value of projected benefits allocated as an expense for employee services rendered in the current year. Actuarial gains and losses (and prior service cost, if any) are recognized immediately in the year they occur, without amortization.
Beginning in fiscal year 2010, the Federal Government has implemented the requirements of a new standard related to Federal Employee and Veteran Benefits Payable. SFFAS No. 333 highlights gains and losses from changes in assumptions. As required by SFFAS No. 33, gains and losses from changes in long-term assumptions used to estimate Federal employee pensions, ORB, and OPEB liabilities are reflected separately on the Statement of Net Cost and the components of the expense related to Federal employee pension, ORB, and OPEB liabilities are disclosed in Note 15—Federal Employee and Veteran Benefits Payable. Based on SFFAS No 33, fiscal year 2009 amounts were not reclassified to conform to fiscal year 2010 presentation. In addition, SFFAS No. 33 also provides a standard for selecting the discount rate assumption for present value estimates of Federal employee pension, ORB, and OPEB liabilities.
Environmental and disposal liabilities are recorded at the estimated current cost of removing, containing, treating, and/or disposing of radioactive waste, hazardous waste, chemical and nuclear weapons, and other environmental contaminations, assuming the use of current technology. Hazardous waste is a solid, liquid, or gaseous waste that, because of its quantity or concentration, presents a potential hazard to human health or the environment. Remediation consists of removal, decontamination, decommissioning, site restoration, site monitoring, closure and post-closure cost, treatment, and/or safe containment. Where technology does not exist to clean up radioactive or hazardous waste, only the estimable portion of the liability, typically monitoring and safe containment is recorded.
Insurance and guarantee programs provide protection to individuals or entities against specified risks except for those specifically covered by Federal employee and veteran benefits, social insurance, and loan guarantee programs. Insurance and guarantee program funds are commonly held in revolving funds in the Government and losses sustained by participants are paid from these funds. Many of these programs receive appropriations to pay excess claims and/or have authority to borrow from the Treasury. The values of insurance and guarantee program liabilities are particularly sensitive to changes in underlying estimates and assumptions. Insurance and guarantee programs with recognized liabilities in future periods (i.e., liabilities that extend beyond one year) are reported at their actuarial present value.
Deferred maintenance is maintenance that was not performed when it should have been or scheduled maintenance that was delayed or postponed. Maintenance is the act of keeping fixed assets in acceptable condition, including preventative maintenance, normal repairs, and other activities needed to preserve the assets, so they continue to provide acceptable services and achieve their expected life. Maintenance excludes activities aimed at expanding the capacity of assets or otherwise upgrading them to serve needs different from those originally intended. Deferred maintenance expenses are not accrued in the Statements of Net Cost or recognized as liabilities on the Balance Sheets. However, deferred maintenance information is disclosed in the Unaudited Supplemental Information section of this report.
Liabilities for contingencies are recognized on the Balance Sheets when both:
The estimated contingent liability may be a specific amount or a range of amounts. If some amount within the range is a better estimate than any other amount within the range, then that amount is recognized. If no amount within the range is a better estimate than any other amount, then the minimum amount in the range is recognized and the range is disclosed.
Contingent liabilities that do not meet the above criteria for recognition, but for which there is at least a reasonable possibility that a loss may have been incurred, are disclosed in Note 22—Contingencies.
In the normal course of business, the Government has a number of unfulfilled commitments that may require the use of its financial resources. Note 23—Commitments describes the components of the Government’s actual commitments that need to be disclosed because of their nature and/or their amount. They include long-term leases, undelivered orders, and other commitments.
A liability for social insurance programs (Social Security, Medicare, Railroad Retirement, Black Lung, and Unemployment) is recognized for any unpaid amounts currently due as of the reporting date. No liability is recognized for future benefit payments not yet due. For further information, see the Unaudited Supplemental Information—Social Insurance section, and Note 26—Social Insurance.
Federal Reserve banks (FRBs) and private banks, which are not part of the reporting entity, serve as the Government’s depositary and fiscal agents. They process Federal payments and deposits to the Treasury General Account (which functions as the Government’s checking account for deposits and disbursements) and service Treasury securities. As of September 30, 2010, the FRBs had total holdings of $813.6 billion, including a net of $1.9 billion in Treasury securities held by the FRB as collateral for securities lending activities. As of September 30, 2009, the FRB had total holdings of $769.2 billion, excluding a very small amount in Treasury securities lent by the FRB to dealers. These securities are held in the FRBs’ System Open Market Account (SOMA) for the purpose of conducting monetary policy. Additionally, under the Supplementary Financing Program (SFP), the Government had on deposit $200 billion and $165 billion with the Federal Reserve as of September 30, 2010, and 2009 respectively, to support Federal Reserve initiatives (see Note 2—Cash and Other Monetary Assets). FRBs earnings that exceed statutory amounts of surplus established for FRBs are paid to the Government and are recognized as nonexchange revenue. Those earnings totaled $75.8 billion and $34.3 billion for the years ended September 30, 2010, and 2009, respectively and reflect the increase in securities held by the FRB. Also, the FRBs hold Special Drawing Rights Certificates (SDRCs) (see Note 19—Other Liabilities, international monetary liabilities and gold certificates).The U.S. Government—primarily Treasury and the Federal Deposit Insurance Corporation—and the Board of Governors of the Federal Reserve System and the FRBs engaged in concurrent and/or coordinated actions during fiscal years 2009 and 2010 to help stabilize the financial system and the housing market. See further details in Note 5—TARP Direct Loans and Equity Investments, net, Note 6—Beneficial Interest in Trust, and Note 11—Investments in and Liabilities to Government-Sponsored Enterprises and Other Financial and Housing Market Stabilization.
FRBs issue Federal Reserve notes, the circulating currency of the United States. Specific assets owned by FRBs, typically Treasury securities, collateralize these notes. Federal Reserve notes are backed by the full faith and credit of the Government.
The Government generally does not guarantee payment of the liabilities of Government-Sponsored Enterprises such as Fannie Mae, Freddie Mac, or the Federal Home Loan Banks, which are privately owned. Fannie Mae and Freddie Mac have been placed under conservatorship as of September 7, 2008. On December 24, 2009, Treasury amended the SPSPAs to replace the existing fixed $200 billion cap per the Government-Sponsored Enterprises (GSE) on Treasury advances, with a formulaic cap for the next 3 years that will adjust upwards quarterly by the cumulative amount of any losses realized by either Fannie Mae or Freddie Mac and downwards by the cumulative amount of any gains, but not below $200 billion per GSE. At the conclusion of the 3-year period, the remaining commitment will then be fixed and available to be drawn per the terms of the agreements (referred to as the “Adjusted Cap”). As of September 30, 2010, the Government has committed to provide up to $508 billion in capital (i.e., adjusted cap amounts as of September 30, 2010) to Fannie Mae and Freddie Mac to the extent that these entities liabilities exceed assets (see Note 11—Investments in and Liabilities to Government-Sponsored Enterprises and Other Financial and Housing Market Stabilization). These entities also are excluded from the reporting entity.
The Department of Transportation (DOT) has possession of two long term notes with the National Railroad Passenger Service Corporation (more commonly referred to as AMTRAK). The first note is for $4 billion and matures in 2975 and; the second note is for $1.1 billion and matures in 2082 with renewable 99 year terms. Interest is not accruing on these notes as long as the current financial structure of AMTRAK remains unchanged. If the financial structure of AMTRAK changes, both principal and accrued interest are due and payable. DOT does not record the notes in its financial statements because the present value of the notes was immaterial at September 30, 2010. These notes were discounted according to rates published in OMB M-10-07 Appendix C and the maturity dates of 2975 and 2082.
In addition, DOT has possession of all the preferred stock shares (109.4 million) of AMTRAK. Congress through the DOT continues to fund AMTRAK since 1981; originally through the purchase of preferred stock, notes receivable and then through grants after 1997. The AMTRAK Reform and Accountability Act of 1997 (Act) changed the structure of the preferred stock by rescinding the voting rights and eliminating the preferred stock's liquidation preference over the common stock. The Act also eliminated further issuance of preferred stock to the DOT. DOT does not record the AMTRAK stock in its financial statements because it is not publicly traded and no fair market value can be placed on it.
AMTRAK is not a department, agency or instrumentality of the Government or the DOT. The nine members of AMTRAK’s Board of Directors are appointed by the President of the United States and are subject to confirmation by the United States Senate. Once appointed, Board Members, as a whole, act independently without the consent of the Government or any of its officers to set AMTRAK policy, determine its budget and decide operational issues. The Secretary of Transportation is statutorily appointed to the nine member Board. Traditionally, the Secretary of Transportation has designated the Administrator of the Federal Rail Administration to represent the Secretary at Board meetings.
The Export-Import Bank of the United States (Ex-Im Bank) has contractual agreements with the Private Export Funding Corporation (PEFCO). PEFCO, which is owned by a consortium of private-sector banks, industrial companies and financial services institutions, makes medium-term and long-term fixed-rate and variable-rate loans to foreign borrowers to purchase U.S. made equipment when such loans are not available from traditional private sector lenders on competitive terms. Ex-Im Bank’s credit and guarantee agreement with PEFCO extends through December 31, 2020. Through its contractual agreements with PEFCO, Ex-Im Bank exercises a broad measure of supervision over PEFCO’s major financial management decisions, including approval of both the terms of individual loan commitments and the terms of PEFCO’s long-term debt issues, and is entitled to representation at all meetings of PEFCO’s board of directors, advisory board and exporters’ council.
The contractual agreements provide that Ex-Im Bank will (1) guarantee the due and punctual payment of principal and interest on export loans made by PEFCO and (2) guarantee the due and punctual payment of interest on PEFCO’s long-term secured debt obligations when requested by PEFCO. Related to the amounts for Ex-Im Bank as shown in Note 4—Loans Receivable, Mortgage Backed Securities, and Loan Guarantee Liabilities, Net, these guarantees to PEFCO, aggregating $5.1 billion and $5.0 billion at September 30, 2010 and 2009, respectively, are included within the principal amounts guaranteed by the United States. The allowance related to these transactions is included within the guaranteed loan liability. Ex-Im Bank received fees totaling $0.03 billion and $0.04 billion in fiscal years 2010 and 2009, respectively, for the agreements, which are included as earned revenue on the Statements of Net Costs.
The reconciliation of the change in net position requires that the difference between ending and beginning net position equals the excess of revenues over net cost, plus or minus prior period adjustments.
The unmatched transactions and balances are needed to bring the change in net position into balance. The primary factors affecting this out of balance situation are:
Refer to the Unaudited Supplemental Information—Unmatched Transactions and Balances for detailed information.
A derivative is a financial instrument or other contract with all three of the following characteristics:
An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself. A notional (or face) amount is a number of currency units, shares, bushels, pounds, or other units specified in the contract. The settlement of a derivative instrument with a notional amount is determined by interaction of that notional amount with the underlying. The interaction may be simple multiplication, or it may involve a formula with leverage factors or other constants. A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner.
The accounting for derivative instruments are governed by FASB Accounting Standards Codification Section 815 (formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and amended by SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities) which aims to highlight to financial statement users additional disclosures on an entity’s objectives in its use of derivatives and the method of accounting for such financial instruments. This standard requires that entities with derivatives disclose the following:
For further information, see Note 10—Derivatives.
Certain fiscal year 2009 amounts have been reclassified to conform to the fiscal year 2010 presentation in the following notes: 3—Accounts and Taxes Receivable and 12—Other Assets. This reclassification is discussed in further in Note 10—Derivatives. The reclassification from Note 3 to Note 12 is also reflected in the Balance Sheet and in the Reconciliation of Net Operating Cost and Unified Budget Deficit.
Certain fiscal year 2009, line item amounts have been restated within the Statements of Changes in Cash Balance from Unified Budget and Other Activities. Specifically, due to a correction, with regard to transactions from monetary and other activity, the previously reported amounts for net loan activity and for other activity were both adjusted by $151.7 billion.
Certain fiscal year 2009 amounts have been restated to correct errors within the notes to the financial statements. See Note 23—Commitments and Note 24—Earmarked Funds for further information. With regard to commitments, these errors did not impact the principal financial statements. With regard to earmarked funds, the errors affected the fiscal year 2009 earmarked other taxes and receipts and intragovernmental transfers shown on the consolidated Statement of Operations and Changes in Net Position.
Fiduciary activities are the collection or receipt, and the management, protection, accounting, investment and disposition by the Government of cash or other assets in which non-federal individuals or entities have an ownership interest that the Government must uphold. Fiduciary cash and other fiduciary assets are not assets of the Government and are not recognized on the Balance Sheet. See Note 25—Fiduciary Activities, for further information.
The Government has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues, expenses, and the disclosure of contingent liabilities to prepare these financial statements. There are a large number of factors that affect these assumptions and estimates, which are inherently subject to substantial uncertainty arising from the likelihood of future changes in general economic, regulatory and market conditions. As such, actual results will differ from these estimates and such differences may be material.
Significant transactions subject to estimates include loans receivable and mortgage backed securities, net; TARP direct loans and equity investments; investments in other non-Federal securities (including GSEs and foreign and domestic public entities) and related impairment, if any; tax receivables; loan guarantees; depreciation; liability for liquidity commitment (GSEs); actuarial liabilities; contingent legal liabilities; credit reform subsidy costs; and insurance and guarantee program liabilities.
The Government recognizes the sensitivity of credit reform modeling to slight changes in some model assumptions and uses regular review of model factors, statistical modeling, and annual reestimates to reflect the most accurate cost of the credit programs to the U.S. Government. Two of the emergency economic programs that the Government implemented in the latter part of September 2008, the purchase program for MBS and the GSE credit line facility, are accounted for pursuant to the provisions of credit reform and the use of estimates as dictated by the Federal Credit Reform Act of 1990 (FCRA). FCRA loan receivables and loan guarantees are disclosed in Note 4—Loans Receivable, Mortgage Backed Securities, and Loan Guarantee Liabilities, Net. Additionally, all TARP credit activity, including investments in common and preferred stock and loans and asset guarantees, are also subject to credit reform accounting (see Note 5—TARP Direct Loans and Equity Investments, Net).
The forecasted future cashflows used to determine credit reform amounts as of September 30, 2010, and 2009, are sensitive to slight changes in model assumptions, such as general economic conditions, specific stock price volatility of the entities in which the Government has an equity interest, estimates of expected default, and prepayment rates. Forecasts of future financial results have inherent uncertainty and the TARP Direct Loans and Equity Investments, Net line item as of September 30, 2010, and 2009, is reflective of relative illiquid, troubled assets whose values are particularly sensitive to future economic conditions and other assumptions.
The GSE senior preferred stock purchase agreements provide that the Government will make funding advances to the GSEs, if at the end of any quarter, FHFA, acting as the conservator, determines that the liabilities of either GSE, individually, exceed its respective assets. These contingent liquidity commitments predicated on the future occurrence of any shareholders’ deficits of the GSEs at the end of any reporting quarter, are potential liabilities of the Government. Valuation analyses were performed to attempt to provide a “sufficiently reliable” estimate of the outstanding commitment which is recorded as a liability in accordance with SFFAS No. 5, Accounting for Liabilities of the Federal Government. The valuation incorporated various forecasts, projections and cashflow analysis to develop an estimate of potential liability. Note 11—Investments in and Liabilities to Government-Sponsored Enterprises and Other Financial and Housing Market Stabilization discusses the results of the valuation and the contingent liability recorded as of September 30, 2010, and 2009.
Credit risk is the potential, no matter how remote, for financial loss from a failure of a borrower or a counterparty to perform in accordance with underlying contractual obligations. The Government takes on credit risk when it makes direct loans or credits to foreign entities or becomes exposed to institutions which engage in financial transactions with foreign countries.
The Government also takes on credit risk related to committed but undisbursed direct loans, liquidity commitment to GSEs, MBS portfolio, investments, loans, and asset guarantees of the TARP, guarantee of money market funds, and the Terrorism Risk Insurance Program. Except for the Terrorism Risk Insurance Program, these activities focus on the underlying problems in the credit markets, and the ongoing instability in those markets exposes the Government to potential unknown costs and losses. The extent of the risk assumed is described in more detail in the notes to the financial statements, and where applicable, is factored into credit reform models and reflected in fair value measurements.
1SFFAS No. 36, Reporting Comprehensive Long-Term Fiscal Projections for the U.S. Government.(Back to Content)
2SFFAS No. 39, Subsequent Events: Codification of Accounting and Financial Reporting Standards Contained in the AICPA Statements on Auditing Standards.(Back to Content)
3SFFAS No.33, Pensions, Other Retirement Benefits, and Other Postemployment Benefits: Reporting the Gains and Losses from Changes in Assumptions and Selecting Discount Rates and Valuation Dates.(Back to Content)
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