Financial Accounting Manual
- Revision Set 53
- Chapter 1. Balance Sheet
- Chapter 2. Collateral and Custodies
- Chapter 3. Property and Equipment
- Chapter 4. Central Bank Unique Accounting
- Chapter 5. Federal Reserve Notes
- Chapter 6. Reporting Requirements
- Chapter 8. Special Topics
Appendix A. Currency
A.1 Currency Shipments
In this Section:
The following summarizes the long-standing same-day-settlement (SDS) procedures, originally established in 1994, for accounting for BEP currency shipments, accounting for Fed-to-Fed currency shipments, and problem resolution.1
Accounting for shipments received from the Bureau of Engraving and Printing (BEP)
Entries for currency shipments received from the BEP are passed using SDS. It is the responsibility of the receiving office to initiate SDS entries for currency shipments sent from the BEP. Entries must be made by the receiving office, even if the shipment is still in transit at the close of business. The entry to be made is as follows:
- Debit Held by Bank and Branches, or In-Transit, as appropriate (210-050 or 210-075)
- SDS Credit FR Notes outstanding for the District whose notes are being shipped (210-025)
For example, if Charlotte is receiving a shipment of Minneapolis notes, Charlotte must initiate an SDS entry to Minneapolis' FR Notes outstanding account.
The District whose notes are being shipped is not required to make any entries relating to its currency. This District will receive entries to its FR Notes outstanding account via SDS from the receiving office.
Accounting for shipments received from other Feds (Fed-to-Fed shipments)
Entries for currency shipments between two Feds must be made by each of the parties involved (shipping and receiving Fed). These entries utilize the "Due To/Due From" process and accounts (Interdistrict settlement 180-025 and Transit items FRBs 150-025). Entries must be made by the shipping and receiving Fed on the day the currency is shipped (i.e., the receiving office, again, must make entries even if the shipment is still in transit at the close of business). The entries to reflect Fed-to-Fed shipments are as follows:
Entries made by shipping Fed:
- Debit Transit Items FRB/"Due From" (150-025)
- Credit Held by Bank and Branches (210-050)
- Debit Held by Bank and Branches (or In-Transit, as appropriate) (210-050 or 210-075)
- Credit Interdistrict Settlement Account/"Due To" (180-025)
Entries made by receiving Fed:
Districts should ensure that their FR Notes outstanding balances per the FR34 equal those shown on the FR5 system. This edit check is also performed at the Board upon the daily submission of FR34s. An out of balance condition may arise in your District due to another District's failure to initiate SDS entries for BEP shipments, posting of an SDS entry to the wrong District, or for other reasons.
If FR34 and FR5 balances do not agree, Reserve Banks must resolve the discrepancy, make correcting entries via late general ledger, and retransmit the FR34 to the Board if an out of balance condition existed on the original transmission. In order to resolve out of balance conditions, a member of your District's cash operations should be contacted in order to obtain information on currency shipments for the day for which the balances do not agree. Cash staff in all Districts can access the Cash Ordering System (COS) which has information about currency shipments from the BEP to all Districts. Cash operations also have information about scheduled Fed-to-Fed currency shipments involving your District. If adequate information is obtained from cash operations to resolve the discrepancy, Accounting in the District with the out of balance condition should contact Accounting in the head office of the other District involved to coordinate entries to correct the error.
Entries to correct out of balance conditions for the prior day must be made in late general ledger. Because SDS entries cannot be made via late general ledger, more than one District generally must make entries to correct for an error. The nature of the entries to be made will depend on the type of error. Some examples of common errors and their suggested resolutions are shown below.
Problems related to currency shipment accounting should be communicated to RBOPS FRB Financial Accounting Section in a timely manner. A member of the Deposit Reports Unit of the Board's IT Division should also be contacted if your District plans to retransmit its FR 34. District accounting departments, however, should take the initiative in attempting to resolve the source of out of balance conditions related to currency. Communication between District accounting and cash operations should expedite and streamline the problem resolution process.
Accounting Entries for Currency Shipment Problems
SCENARIO 1. Fed X receives currency shipment from BEP of Fed Y notes but...
- Fed X fails to make any entries:
Fed X and Fed Y must make correcting entries in late general ledger (using the CHIP account2 ), Fed X and Fed Y must reverse out the correcting entries in current day. Fed X must post the proper SDS entry in current day.
- Fed X credits the Notes outstanding account of Fed Z instead of Fed Y:
Fed Y and Fed Z must make correcting entries in late general ledger (using the CHIP account2), Fed Y and Fed Z must reverse out the correcting entries in current day. Fed X must reverse out the erroneous SDS entry to Fed Z in current day and send the proper SDS entry to Fed Y in current day.
- Fed X sends the SDS entry AFTER Fed Y is closed for the day:
Fed Y must make a correcting entry in late general ledger (using the CHIP account2) and must reverse it out in current day. No further entries are required by Fed X, since IAS will automatically release the CHIP amount.
- Fed X posts two SDS entries related to the same shipment (double counted):
Fed X and Fed Y must make correcting entries in late general ledger (using the CHIP account2), Fed X and Fed Y must reverse out the correcting entries in current day. Fed X must reverse out the erroneous SDS entry in current day.
- Fed X posts the entry to Fed Y using Due To rather than SDS:
Fed Y must make a correcting entry in late general ledger (using Due From3 ). No further entries are required by Fed X.
SCENARIO 2. Fed X receives a currency shipment from Fed Y of Fed Y notes. Fed Y makes the proper Due From entry but...
- Fed X fails to make an entry to record the shipment:
Fed X must make the proper entry in late general ledger (using a credit to Due From3). The Due From credit must be reversed out in current day with the offset to Due To Fed Y. No further entries are required by Fed Y.
- Fed X makes an SDS entry to Fed Y’s notes outstanding account rather than making a Due To entry:
Fed Y must make a correcting entry in late general ledger (using a credit to Due From3). No further entries are required by Fed X.
SCENARIO 3. Fed X receives a currency shipment from Fed Y of Fed Z notes. Fed Y makes the proper Due From entry but Fed X makes an SDS entry to Fed Z's notes outstanding account rather than making a Due To entry to Fed Y:
Fed Z must make a correcting entry (using a credit to Due From3). The Due From credit must be reversed out in current day with the offset to Due To Fed Y. No further entries are required by Fed X or Fed Y.
SCENARIO 4. Fed X receives a currency shipment from Fed Y. Fed X makes the proper Due To entry but Fed Y fails to make any entries:
Fed Y must make a correcting entry in late general ledger (using Due From3). No further entries are required by Fed X.
A.2 BPS 3000 Machine Useful Lives
On September 17, 2012, the Board of Governors' Division of Reserve Bank Operations and Payment Systems (RBOPS) approved the recommendation of the Cash Product Office (CPO) to extend the estimated useful life of the BPS 3000 currency processors (CP) and reconciling stations (RS) from December 31, 2017, to December 31, 2022. This change in the estimated useful life is supported by both the BPS 3000 upgrade that was completed in 2010 and by the added functionality to the system. The upgrade introduced technology that will support the currency authentication and verification process over the next 10 years. Further support for the change to the estimated useful life change is based o. the enhancements to the machine via new and upgraded sensors in 2012 and 2013 and from the extended maintenance terms with Giesecke & Devrient America, Inc. through 2022. The estimated useful life change is effective January 1, 2013.
Useful life history of the BPS 3000 machines:
- In 1992, the BPS 3000 machines were installed with a 10-year useful life.
- In 1997, the useful life was extended 5 years, until 2007.
- In 2004, the useful life was extended an additional 10 years, until 2017.
- In 2012, the useful life was extended an additional 5 years, until 2022.
The machines were originally thought to have a 30-year useful life, but the original 10-year life was based on the collective anticipated life of the System's information technology, data architecture, and computer components. Over time, the machines have continued to operate with new sensors and extended maintenance agreements. The current sensors have useful lives through 2022. Sensors have the capability to authenticate the current currency's design, and up to one additional currency design. The CTO extended the maintenance agreements through 2022 with the maintenance provider, which is confident of the viability of the technology over the extended period.
Per FAM paragraph 30.76, the change in estimate shall be accounted for prospectively such that the remaining net book value is depreciated over the expected remaining useful life of the asset. This extension applies to the BPS 3000 CP and RS and all production sensors. This change in estimate, however, does not affect the accounting for spare sensors because spare sensors are recorded as deferred assets and amortized over the life of the maintenance agreement.
A.3 Accounting for Currency Costs
The costs incurred by the Bureau of Engraving and Printing (BEP) for printing Federal Reserve notes are invoiced monthly to the Board. The amount charged is based on the number and denomination of notes that are moved to dedicated storage vaults at BEP facilities ("Fed vault") during that month. When the BEP invoice is received by the Board, it assesses each Reserve Bank a pro rata share of the BEP's printing costs based on each Bank's share of the number of FR notes outstanding at December 31 of the previous year. The Board assesses the Banks for the monthly printing cost, settles the assessment with the Banks, and remits payment to the BEP within the same month. As a result, the Board has no residual asset or liability at any month- or year-end. The Reserve Banks record the monthly assessment received from the Board directly to expense, in accordance with FAM (see paragraph 12.45).
Does the inventory of Federal Reserve notes in the BEP vault, the cost of which has been paid by the Board, create an asset of either the Board or the Reserve Banks. This document examines that question from the Reserve Bank perspective and concludes that the current Reserve Bank accounting for these costs is appropriate.
Federal Reserve Act Provisions
The current accounting treatment by both the Board and the Reserve Banks is based on the relevant provisions of the Federal Reserve Act (the Act). Relevant excerpts are as follows:
- Section 16 (¶1) - Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are hereby authorized.
- Section 16 (¶2) - Any Federal Reserve bank may make application to the local Federal Reserve agent for such amount of the Federal Reserve notes hereinbefore provided for as it may require. Such application shall be accompanied with a tender to the local Federal Reserve agent of collateral in amount equal to the sum of the Federal Reserve notes thus applied for and issued pursuant to such application.
- Section 16 (¶4) - The Board of Governors of the Federal Reserve System shall have the right, acting through the Federal Reserve agent, to grant in whole or in part, or to reject entirely the application of any Federal Reserve bank for Federal Reserve notes; but to the extent that such application may be granted the Board of Governors of the Federal Reserve System shall, through its local Federal Reserve agent, supply Federal Reserve notes to the banks so applying, and such bank shall be charged with the amount of the notes issued to it.
- Section 16 (¶9) - When such notes have been prepared, the notes shall be delivered to the Board of Governors of the Federal Reserve System subject to the order of the Secretary of the Treasury for the delivery of such notes in accordance with this Act.
- Section 16 (¶10) - The expenses necessarily incurred in executing the laws relating to the procuring of such notes, and all other expenses incidental to their issue and retirement, shall be paid by the Federal reserve banks, and the Board of Governors of the Federal Reserve System shall include in its estimate of expenses levied against the Federal reserve banks a sufficient amount to cover the expenses herein provided for.
- Section 10 (¶3) - The Board of Governors of the Federal Reserve System shall have power to levy semiannually upon the Federal reserve banks, in proportion to their capital stock and surplus, an assessment sufficient to pay its estimated expenses and the salaries of its members and employees for the half year succeeding the levying of such assessments, together with any deficit carried forward from the preceding half year.
These provisions establish that the Board is responsible for approving issuance of notes to the Reserve Banks, supplying notes to the Reserve Banks, and assessing the Reserve Banks for the expenses incurred in procuring notes. Section 10 of the Act addresses the general approach to the Board's assessment of expenses.
The BEP's practice of invoicing costs on a per-unit basis is not specified in the Federal Reserve Act. Presumably, this convention was developed as a mechanism for systematically charging to the Board its costs related to producing notes. The Federal Reserve Act requires that the Reserve Banks bear the ultimate costs incurred to procure Federal Reserve notes through the Board's assessment mechanism. (Federal Reserve Act Section 16 ¶10). The Board's assessment on the Banks provides the Board with sufficient resources to fund its operations, including the expenses related to procuring notes. The assessment is similar to a tax because it is a statutory obligation, and it is not based on a contractual relationship between the Reserve Banks and the Board. The assessments levied on individual Reserve Banks are not based on which District's notes were produced in that period.
Neither the Board nor the Reserve Banks have regarded the printing costs of notes held at the Fed vault to be assets, such as inventory or prepaid expenses. This is because the Act describes the costs of procuring notes as expenses (Federal Reserve Act Section 16 ¶10). The Board does not regard the notes delivered to the Fed vault to be assets because it does not believe the costs represent a future economic benefit as defined in Statement of Financial Accounting Concept No. 6.11 While the Board may control the Reserve Banks' access to the notes, the costs incurred to produce the notes do not result in net cash inflows to the Board. The Reserve Banks do not control access to the Federal Reserve notes until such time as they are shipped from the BEP.
Another reason that the Reserve Banks do not consider the assessments to be assets is because the costs do not result in future net cash inflows but, rather are an expense related to carrying out activities that constitute the Banks' ongoing major or central operations, as described in Statement of Financial Accounting Concept No. 6.12 Statement of Financial Accounting Concept No. 6 recognizes that the character of expenses depends on the nature of the operations involved. Because the Reserve Banks' payment of currency printing costs is an assessment, it is most accurately treated as an expense item similar to other Board assessments, which is also consistent with the provisions of the Federal Reserve Act. The assessments are similar to a tax levied on the Banks by the Board.
Based on the Federal Reserve Act provisions and the discussion of assets and expenses in Statement of Financial Accounting Concept No. 6, treatment of the assessment for the costs to procure Federal Reserve notes as a period expense is appropriate.
Consideration might be given to treating the costs to procure notes as debt issuance cost. Statement of Financial Accounting Concept No. 6 discusses debt issue cost as follows:"Debt issue cost...is either an expense or a reduction of the related debt liability. Debt issue cost is not an asset for the same reason that debt discount is not--it provides no future economic benefit. Debt issue cost in effect reduces the proceeds of borrowing and increases the effective interest rate and thus may be accounted for the same as debt discount. However, debt issue cost may also be considered an expense of the period of borrowing."
We do not believe that the note printing costs are debt issuance costs. Federal Reserve notes differ from typical debt instruments because they are non-interest bearing in a traditional sense and have no stated term. The printing costs do not reduce the proceeds of the Bank's liability related to outstanding Federal Reserve notes and, therefore, are not similar to a debt discount. The issuance of Federal Reserve notes is fundamentally different than the debt issuances described in this section of Concept Statement No. 6 and treating the costs as assessment expense is a more appropriate accounting approach. Further, Concept Statement No. 6 allows for treatment of the costs as a period expense.
The accounting treatment of BEP printing costs that has been followed by the Board and the Reserve Banks remains appropriate. This accounting treatment is based on the requirements of the Federal Reserve Act, and is consistent with the accounting guidance in Statement of Financial Accounting Concept No. 6.
1. This appendix is based on a memo issued by Gregory L. Evans, Manager, FRB Financial Accounting, on February 26, 1999, addressed to the Accounting and Cash Officers in each Federal Reserve District. Return to text
2. Late general ledger entries to CHIP may affect Markstat-M reporting. Return to text
3. Note to Accounting. For proper reconcilement of the Due From process, late general ledger entries to the Due From account must be reversed in current day and re-entered with the appropriate FRB identifier. Return to text
11. Statement of Financial Accounting Concepts No. 6 states that an asset has three essential characteristics: (a) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (b) a particular entity can obtain the benefit and control others access to it, and (c) the transaction or other event giving rise to the entity's right to or control of the benefit has already occurred. Return to text
12. Statement of Financial Accounting Concepts No. 6 states that expenses represent actual or expected cash outlays that have occurred or will eventuate as a result of the entity's ongoing major or central operations. The transactions and events from which expenses arise and the expenses themselves are in many forms - for example, cost of goods sold, cost of services provided, depreciation, interest, rent and salaries and wages - depending on the kinds of operations involved and the way expenses are recognized. Return to text