INTERPRETATION OF FEDERAL FINANCIAL
INTERPRETATION NO. 2
Accounting for Treasury Judgment Fund Transactions
An interpretation of SFFAS No. 4 and SFFAS No. 5
1 The Federal Accounting Standards Advisory Board (FASAB) has been asked to clarify
Federal accounting standards as they relate to the Treasury Judgment Fund. The Treasury
Judgment Fund was established by Congress in the 1950's to pay in whole or in part the
court judgments and settlement agreements negotiated by the Justice Department on
behalf of agencies, as well as certain types of administrative awards. The Congress
established the Judgment Fund as a permanent, indefinite appropriation.
2 The clarification addresses (1) how Federal entities should report the costs and liabilities arising from claims to be paid by the Treasury Judgment Fund and (2) how the Judgment Fund should account for the amounts that it is required to pay on behalf of Federal entities. This interpretation has been prepared on the basis of the following three accounting Standards:
-- Statement of Federal Financial Accounting Standards (SFFAS) Number 4, Managerial Cost Accounting Concepts and Standards for the Federal Government
-- Statement of Federal Financial Accounting Standards Number 5, Accounting for Liabilities of the Federal Government
-- Statement of Federal Financial Accounting Standards Number 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary
and Financial Accounting.
The provisions of this interpretation need not be applied to immaterial items.
Accounting by the Federal Entity
3 SFFAS No. 5 states that a contingent liability should be recognized when a past event or
exchange transaction has occurred; a future outflow or other sacrifice of resources is
probable; and the future outflow or sacrifice of resources is measurable. The Federal
entity's management, as advised by the Justice Department, must determine whether it is
probable that a legal claim will end in a loss for the Federal entity and the loss is
estimable. If the loss is probable and estimable, the entity would recognize an expense
and liability for the full amount of the expected loss [Footnote 1: See paragraph 39 in SFFAS #5
for the complete discussion on "Estimating Contingent Liabilities."]. The expense and liability would
be adjusted periodically, as necessary, based on any changes in the estimated loss. The
Federal entity involved in the litigations shall discuss in a footnote to the financial
statements the Judgment Fund's role in the payment of a possible loss.
4 Once the claim is either settled or a court judgment is assessed against the Federal entity
and the Judgment Fund is determined to be the appropriate source for the payment of the
claim, the liability should be removed from the financial statements of the entity that
incurred the liability and an "other financing source"[Footnote 2: See paragraph 73 in SFFAS #7
for the complete discussion on "Financing Imputed for Cost Subsidies." ] amount (which represents the
amount to be paid by the Judgment Fund) would be recognized. If the Judgment Fund is
responsible for only a portion of the claim or settlement, the imputed financing source
amount would reflect only that amount to be paid by the Judgment Fund on behalf of the
Accounting by the Treasury Judgment Fund
5 Once the claim is either settled or a court judgment is assessed and the Judgment Fund is
determined to be the appropriate source for payment of the claim, the Judgment Fund
would recognize an expense and an accounts payable or a cash outlay for the full cost of
the loss. According to SFFAS 4, the imputed financing source amount recognized by the
Federal entity and the expense recognized by the Judgment Fund would be eliminated at
the Federal consolidated financial report level.
6 This interpretation is effective upon implementation of SFFAS 4 & 5, which become
effective for fiscal periods beginning after September 30, 1996.
APPENDIX A: BASIS FOR CONCLUSIONS
7 This interpretation is primarily based on the principles of SFFAS 5 and SFFAS 4. The
following brief discussion explains the basis for the interpretation in terms of those
standards which are the foundation for the interpretation.
8 In accordance with the general principles of the liability standard (SFFAS 5), once a legal
claim is filed against a Federal entity, the entity's management should determine the
likelihood that the Federal entity will incur a loss related to the claim [Footnote 3: In most
cases this determination involves the U.S. Department of Justice.], regardless of the fact that the
payment may be paid in full or in part by the Judgment Fund. The contingencies [Footnote
4: A contingency is an existing condition, situation or set of circumstances involving uncertainty as to possible
gain or loss to an entity. The uncertainty will ultimately be resolved when one or more future events occur or
fail to occur. Resolution of the uncertainty may confirm a gain or loss. ] section of SFFAS 5 states that
if the likelihood of the contingent loss is remote no reporting is necessary; if the
likelihood of the loss is reasonably possible and the amount is measurable the estimated
loss should be disclosed; and, if the likelihood of loss is probable (more likely than not
which is a greater than 50% chance of occurrence) and estimable, the estimated loss must
be recognized as a liability. If the probability of the loss is changed at any time prior to
payment of the claim, the proper adjustments should be recognized [e.g., from disclosure
(reasonably possible) to recognition (probable)]. If at any time the estimated loss amount
changes, the liability and expense should be adjusted to reflect the change. [Footnote 5: See
paragraphs 35 - 42 in SFFAS # 5 for the complete discussion on "Contingencies." ]
9 In accordance with the principles of SFFAS 4 [Footnote 6: See paragraphs 89 - 104 and 105 - 115 in
SFFAS #4 for the complete discussion on "Full Cost" and "Inter-entity Costs", respectively. ], a Federal
entity incurring a loss or expense must recognize the full cost of the loss [claim],
regardless of who is actually paying the [settlement or judgment] amount. The standard
requires the Federal entity incurring a loss or expense to use an estimate of the cost if the
actual cost information is not provided. The estimate must be reasonable and should be
aimed at determining realistic losses expected.
APPENDIX B: ILLUSTRATIVE JOURNAL ENTRIES
Based on the above noted accounting standards and the generalized events described below, the
conceptual journal entries [Footnote 7: Actual journal entries are under the authority of the Standard General
Ledger. ] should be as follows:
Federal entity entries:
The Federal entity's management, through the advisement of the Justice Department, has
determined that the probability of the legal claim ending in a loss against the Federal entity is
probable and the loss is estimable. The entity would recognize an expense and liability for the
full amount of the expected loss. The expense and liability would be adjusted as necessary based
on any changes in the estimated loss.
CR. Liability -- Legal claims
Once the claim is either settled or a court judgment is assessed against the Federal entity and the
Judgment Fund is determined to be the appropriate source for payment of the claim, the liability
should be removed and an other financing source recognized. If the Judgment Fund is
responsible for only a portion of the claim or settlement, the imputed financing source amount
would only reflect that amount paid by the Judgment Fund on behalf of the Federal entity.
DR. Liability -- Legal claims
CR. Imputed Financing Source -- Expenses Paid by Other Entities*
Treasury Judgment Fund entries:
The claim is either settled or a court judgment is assessed and the Judgment Fund is determined
to be the appropriate source for payment..
DR. Expenses Paid for Other Entities*
CR. Cash or Fund Balance with Treasury
*According to the Cost Accounting Standard, the imputed financing source and expenses paid
for other entities amounts would be eliminated at the consolidation level.