Financial Accounting Manual
- Revision Set 54
- Chapter 1. Balance Sheet
- Chapter 2. Collateral and Custodies
- Chapter 3. Property and Equipment
- Chapter 4. System Open Market
- Chapter 5. Federal Reserve Notes
- Chapter 6. Reporting Requirements
- Chapter 8. Special Topics
Chapter 5: Federal Reserve Notes
- 50.01 General
- 50.05 Denominations
- 50.10 Printing
- 50.20 Shipments
- 50.30 Application for Notes
- 50.40 Issuance
- 50.43 Sales of Notes by the Bureau of Engraving and Printing
- 50.45 Retirement
- 50.50 Redemption
- 50.60 Large Denomination Notes
- 50.65 Currency Destroyed by Treasury
- 50.70 Monthly Note Allocations
- 51.01 Notes Missing from New Packages of Currency
- 51.50 Statements of the Federal Reserve Agent
- 51.65 Reports to the Assistant Federal Reserve Agent
- 51.70 Accountability Records
This chapter discusses special accounting and reporting procedures applicable to Federal Reserve notes. The Federal Reserve Act requires that Federal Reserve notes be issued to a Reserve Bank through the Federal Reserve Agent, or through an Assistant Federal Reserve Agent appointed by the Agent, upon pledge of adequate collateral security by the Bank. Until 1977 the local assistant agents held stocks of unissued notes as a source of supply for the cash departments and issued the notes to the Banks upon receipt of application for specific amounts. The procedure was changed beginning in 1978 and the local stocks were discontinued along with the need for the Reserve Banks to apply for specific amounts or to earmark specific collateral. As part of the new procedure the Federal Reserve Agents designated a member of the Board of Governors' staff in Washington as Assistant Federal Reserve Agent to control the issuance of notes and to monitor the adequacy of collateral that is pledged by each Bank under a continuing agreement. The agreement, executed by each Bank and Agent, results in the pledge of specified assets that the Bank may own at any time plus whatever amount may be required out of the Bank's other eligible assets, including its participation in U.S. Treasury, Federal agency, and GSE debt securities held in the System Open Market Account. The specified assets consist of the Bank's gold and SDR certificates, loans under Section 13 of the Federal Reserve Act, and assets acquired under the provisions of Section 14. In December 1990, the Board revised procedures for collateralizing Federal Reserve notes, whereby assets denominated in foreign currencies that have been acquired under the provisions of Section 14 of the Federal Reserve Act may be pledged as collateral by the Federal Reserve Agent or Assistant Federal Reserve Agent in instances where other eligible assets are insufficient to secure Federal Reserve notes fully. In December 1999, the Federal Reserve Act was amended to broaden the range of discount window loans that may be used as collateral for Federal Reserve notes to include all loans to depository institutions. In October 2003, the Federal Reserve Act was further amended to allow all assets of the Federal Reserve Banks to be eligible as collateral for Federal Reserve notes and to specify that collateral is not required for currency held off-site on behalf of Federal Reserve Banks. A statement showing the amount of notes outstanding to each Bank, the notes requiring collateralization, and the various assets pledged as System collateral security is published weekly in the Board's H.4.1 release, and monthly in the Federal Reserve Bulletin.
General procedures for handling the cost of procuring Federal Reserve notes are addressed in the Federal Reserve Act, Section 16, which states, "The expenses necessarily incurred in executing the laws relating to 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." The costs incurred by the Bureau of Engraving and Printing (BEP) for printing Federal Reserve notes are invoiced monthly to the Board in accordance with their agreement. On a scheduled basis, the Board assesses the Reserve Banks for these costs based on each Bank's share of the total number of Federal Reserve notes outstanding on December 31st of the previous year. The Board collects the assessment from the Banks in the same month that it remits payment to the BEP. The Reserve Banks record these payments to the Assessment by Board of Governors - F.R. Currency Costs Account (330-150) as described in paragraph 12.45. See Accounting for Currency Costs at Appendix A.3 for additional discussion.
Seven denominations of Federal Reserve notes are issued currently. Before 1963 the issuance was limited to denominations of $5 and up. The $1 notes were authorized in 1963 as a replacement for $l silver certificates that were being discontinued because of the need for silver coinage; $2 notes were authorized at the same time but were not printed and issued until 1976. Larger denominations ($500, $1,000, $5,000, and $10,000) were first authorized primarily for interbank transactions by an amendment to the Federal Reserve Act in 1918. With demand for them shrinking, printing of these denominations was discontinued in 1946. The remaining inventories were delivered to Treasury for destruction in 1969 when it was determined that transactions for which the notes had previously been used could be met by other means, such as checks or $100 notes. Currently, circulating large denomination notes received in the normal course of business are destroyed.
The Director of the Bureau of Engraving and Printing, under the direction of the Secretary of the Treasury, is responsible for the printing of Federal Reserve notes. Each year, the Board places a printing order with the Director of the Bureau of Engraving and Printing based on the estimated need for new currency and inventory requirements. Thereafter, the Bureau of Engraving and Printing prepares a printing schedule, a copy of which is distributed to each Bank, and delivers the notes daily to a special vault pending shipment.
The Board's Division of Reserve Bank Operations and Payment Systems arranges for the shipments of Federal Reserve notes from the Bureau of Engraving and Printing to Federal Reserve offices in amounts sufficient to maintain inventories at agreed upon levels. The notes are shipped from the Bureau in the most economical quantities that can be arranged, considering the following: the facilities and the rates of the carrier, the capacity of the Federal Reserve offices to handle the shipments, the amount of insurance that can be provided, the printing schedule and availability of new notes at the Bureau, and unusual circumstances that sometimes warrant special shipments (such as armored carrier and airline strikes or the servicing of Reserve Banks moving into new buildings).
50.30 Application for Notes
The law requires that a Federal Reserve Bank make application to the Federal Reserve Agent for the notes required by the Bank. Unless otherwise instructed, the Reserve Bank may make such application on a continuing basis as set forth in the Currency Ordering System on the Web (WebCOS).
The notes are issued by the Assistant Federal Reserve Agent, normally on the day of shipment from Washington or Ft. Worth. When the Assistant Agent issues notes to the Bank through shipment from the Washington or Ft. Worth facility, the automated WebCOS indicates the denomination, dollar amount, District of issuance, and receiving office. The shipments should be taken into Bank cash on the date shown in the WebCOS, which is normally the day the shipment will be received. The notes should be credited to the account on FR 34 for Federal Reserve notes outstanding with the offset being reflected in Federal Reserve notes on hand or in transit. Amounts that are in transit at the close of business--i.e., have not been delivered by the courier--should be carried in a general ledger account entitled "Federal Reserve notes in transit."
Federal Reserve notes outstanding should be reflected only on the books of the head office and must agree with the records of the Assistant Federal Reserve Agent. The head office, normally the Cash Department, should originate the credit to Federal Reserve notes outstanding for shipments to the Branches based on the date shown in the WebCOS. The contra entry should be made to the usual clearing account on the Bank's books such as the Interoffice account or the account due from Branch, depending on internal accounting procedure. The Branch should include the shipment as Federal Reserve notes on hand (or in transit) on the same day and enter the credit to the head office, again following the usual payments procedure between offices within the District.
For shipments of notes between Districts, only the receiving office should use the in transit account when notes are not received the day they are shipped. The sending office should debit due from receiver and credit notes held on the day shipped. The receiving office should debit either notes held or in transit and credit ISA due to sender on the shipment date. Currently, Same Day Settlement is not used when one Federal Reserve Bank ships cash to another Federal Reserve Bank.
The fact that a shipment may be taken in and pouches not opened until the following day should not affect the general ledger entries. In the event of error in the contents of the pouches or, in exigent circumstances, the return by the courier of a shipment to BEP or Ft. Worth, or rerouting to another Federal Reserve office, adjusting entries may be necessary. These situations, though, are unusual and the Assistant Federal Reserve Agent should keep the Reserve Bank fully informed.
50.43 Sales of Notes by the Bureau of Engraving and Printing
Under a program initiated in 1981, the Department of the Treasury's Bureau of Engraving and Printing purchases Federal Reserve notes from Reserve Banks for sale to the public. The currency is sold in uncut sheets of 16 and 32 notes, over-the-counter and by mail, to meet demands for souvenirs of visits to the Bureau and for paper money collections. When purchasing the notes, the Bureau authorizes the Reserve Banks to charge the Treasury's general account for the face value of the notes plus the cost of printing. The authorization is contained in a modified Letter of Advice of Shipment (BEP Form 1907), an example of which is contained in the FR Note Accountability System (FR 5) User Guide.1
On the release date contained in the Letter of Advice, the Reserve Bank debits the Treasury's account for the total, credits the face value of the notes to Federal Reserve notes outstanding and credits the amount received for printing costs to the profit and loss account. (See paragraph 60.60.)
Any Federal Reserve Bank may retire its Federal Reserve notes by returning them to the Federal Reserve Agent. The amount of notes that are retired should be debited on the balance sheet to Federal Reserve notes outstanding and removed from the amount of notes on hand. The notes may be reissued to the Bank as determined by the Assistant Agent in Washington DC. However, it is not the practice to retire notes.
The law requires that unfit Federal Reserve notes be canceled, destroyed, and accounted for under procedures prescribed and at locations designated by the Secretary of the Treasury and that the credit for the unfit notes be apportioned among the Federal Reserve Banks as determined by the Board of Governors.
All of the present size unfit currency in the $1-$100 denominations are to be regarded for initial accounting purposes as Federal Reserve notes. No sort is made of the Bank of issue. The amount of silver certificates and United States notes that are included in unfit currency are identified by formulae after the currency has been destroyed. After deducting such amounts and charging Treasury, redemption credit for the Federal Reserve notes is allocated among the Reserve Banks on the basis of percentages derived from the application of the following formula:
- A Federal Reserve Bank's share of unfit notes in the $1-$100 denominations delivered for destruction shall be the result of the division of (a) the net amount of the denomination outside the Bank at the beginning of the year by (b) the amount of the denomination outside all Federal Reserve Banks at the beginning of the year.
Unfit notes should be debited to Federal Reserve notes outstanding on the day the notes are destroyed. Branches should arrange for prompt advice to the head office of amounts that they process in order that reduction may be made currently on the head office books. Thus, all unfit currency processed within a particular District should be charged initially against that District's outstanding notes effective on the accounting day of destruction.
50.60 Large Denomination Notes
The large denominations, consisting of $500-$10,000 Federal Reserve notes, are sorted by Bank of issue and are eventually charged to the issuing Bank for debiting against Reserve notes outstanding. To minimize the number of accounting advices and facilitate control over amounts outstanding, however, all such notes delivered for verification and destruction by a Reserve Bank should be charged initially against that Bank's outstanding notes. The Division of Reserve Bank Operations and Payment Systems will thereafter arrange for settlements between Reserve Banks. Such settlements will normally be scheduled in June and December. The Cash Departments will be informed of the settlement at least a week in advance and should enter data on the "Large note clearing" screen in the FR5 system by the deadline indicated in the notification message sent by Board staff via electronic mail. If there were no large denomination notes redeemed during the period, zeroes should be entered in the total columns on the screen. Board staff will notify Reserve Banks via electronic mail to make entries to the Interdistrict Settlement account and to Federal Reserve notes outstanding to adjust for the allocation. Reserve Bank staff should retrieve the entries to be made on their Bank's books from the ISA adjustment screen in the FR5 system.
50.65 Currency Destroyed by Treasury
Unfit and mutilated currency processed by the Treasury in Washington, D.C. is functioned through the books of the Richmond Reserve Bank. On the day of redemption, Treasury will advise the Richmond Reserve Bank by wire of the amount for each denomination, including the Bank of issue for $500-$10,000 notes. The Richmond Reserve Bank will credit the Treasury's General Account for the total and debit notes outstanding.
The Federal Reserve Banks are responsible for reimbursement to the Treasury for retirement of Federal Reserve currency. Each quarter the Treasury forwards to the Board a voucher, indicating the actual cost for services performed relative to the retirement of Federal Reserve currency during the previous quarter. Board staff calculates the pro rata amount of each Reserve Bank's assessment based on the Bank's share of the number of notes comprising the System's net liability for Federal Reserve notes outstanding on December 31 of the previous year. Reserve Bank assessment entries will be processed via Same Day Settlement by the Richmond Reserve Bank according to information reported on to the Board.
50.70 Monthly Note Allocations
The amount of the unfit $1-$100 denominations charged against outstanding Federal Reserve notes during a month will be reallocated by the Division of Reserve Bank Operations and Payment Systems in the following month, using percentages prescribed by Treasury for determining silver certificates and United States notes and the formula adopted by the Board for allocating Federal Reserve note redemption credit.
Cash Departments report the number and face value (amount) of unfit notes destroyed by denomination each day to the Board by entering information in the FR Note Accountability System (FR5). The amount of the unfit notes destroyed is charged to Federal Reserve notes outstanding. After month-end, but no later than the fifth business day of the following month, a Reserve Bank cash department officer certifies the number and amount of notes destroyed reported on the "Monthly Notes Redeemed" screen in the FR5 system. Consistent with the Treasury Currency Operations Manual (TCOM) requirements for daily destruction certification, the Reserve Bank cash department officer may designate other individuals in management to certify monthly notes redeemed by issuing a memo to the file and notifying the RBOPS Accounting Policy and Operations Section. To maintain adequate separation of duties, certifying officers or their designees should not have BPS 3000 supervisory access. Data reported must agree with the total of the daily amounts reported destroyed by the cash departments for that month. Following the verification, the FR 5 system will combine the reports and subtract out the Treasury currency portion. The resulting totals for each denomination will be allocated to the Reserve Banks and an electronic mail advice will be sent to each Reserve Bank instructing them to retrieve the entries to be made to their books from the "ISA adjustment" screen in the FR5 system. Each Reserve Bank will make entries to the Interdistrict Settlement Account and to Federal Reserve notes outstanding to adjust for the allocation. The Richmond Reserve Bank will also charge Treasury's General Account for the amount of Treasury currency.
51.01 Notes Missing from New Packages of Currency
New currency is delivered by the Bureau of Engraving and Printing in 4000-note packages. Losses resulting from notes missing from these packages are borne by the Bureau. When the Bureau reaches a determination regarding missing currency, the Bureau will forward a check payable to the Reserve Bank covering the amount. The Letter of Advice accompanying the check will be addressed to the Vice President in charge of the Cash Department at the Reserve Bank and will include a listing of the serial numbers and denominations of the notes. The Bureau will send copies of the letter to (1) the Assistant Federal Reserve Agent in Washington, D.C. and (2) the Deputy Assistant Commissioner, Banking and Cash Management, Financial Management Service. The Assistant Federal Reserve Agent in Washington, D.C. and the Reserve Bank will make entries on their respective records depending on the circumstances, as outlined below. In each case the offsetting entry will be reflected in the charge against Treasury's General Account for the Bureau's check.
- Deficient packages shipped to depository institutions: For notes that were reported missing in the new packages received by depository institutions, the Reserve Bank will credit the institution and debit Profit and loss. A credit will then be made to Profit and loss.
- Deficient packages held by Bank: For deficient packages that are in Reserve Bank cash, the Reserve Bank will credit Federal Reserve Notes: Held by Bank and Branches and debit Profit and loss. A credit will then be made to Profit and loss.
- Deficient packages held by Agent: For notes that are missing in packages held by the Assistant Federal Reserve Agent, the packages will be issued to the Reserve Bank at the face value as if all notes were present. Upon receipt of such packages, the Reserve Bank will credit Federal Reserve Notes: Held by Bank and Branches by the amount of the shortage and debit Profit and loss. A credit will then be made to Profit and loss.
- Notes missing from inventory at Bureau of Engraving and Printing: For all unissued notes (in either note or sheet form) which the Bureau determines to be missing from its inventories, the Assistant Federal Reserve Agent will issue the notes as shown on the Bureau's Letter of Advice. The Reserve Bank will record two entries: first, credit Federal Reserve notes outstanding and debit profit and loss; and second, credit profit and loss and debit to the Treasury general account.
51.50 Statements of the Federal Reserve Agent
Section 16 of the Federal Reserve Act requires that each Federal Reserve Agent make daily reports to the Board of Governors on issues and withdrawals of Federal Reserve notes; in addition, the Board requires a monthly report in considerable detail. The reports are prepared by the Assistant Federal Reserve Agent in Washington. The daily report, conforming to FR 5, should show the amount of Federal Reserve notes received from the Treasury, on hand, and outstanding, and the classification of collateral security held against Federal Reserve notes. The Assistant Agent should communicate to each Bank daily, for verification by the Bank against its balance sheet, the amount of Federal Reserve notes outstanding as shown on the FR 5 database. The District balance for Federal Reserve notes outstanding is computer-generated upon acceptance of all head office and Branch data.
The monthly report, conforming to FR 44, should show by denomination the cumulative data for issues of notes, notes on hand, notes returned for destruction and credit, and amount outstanding at the end of the month. The amounts reported should agree where applicable with data reported on form FR 5 after taking into account large and small notes clearings, which are reflected on the FR 44, but are not reflected on form FR 5. The report is sent by the Assistant Federal Reserve Agent to the Department of the Treasury, Financial Management Service, Government-wide Accounting, Cash Accounting Division and to the Office of Compliance.
51.65 Reports to the Assistant Federal Reserve Agent
The Assistant Agent in Washington receives information daily from Board Divisions, from Treasury and from the Reserve Banks. The data from the Reserve Banks include the amount of unfit notes redeemed for the day by denomination and office, and must be received by the Board by 10:00 p.m. EST daily. Other reported information is covered by instructions from the Assistant Agent. These include a report by the Division of Reserve Bank Operations and Payment Systems of changes in the gold and SDR certificate accounts, a report by the Federal Reserve Bank of New York of changes in holdings of securities in the System Open Market Account, and letters of advice of purchases of uncut sheets of notes by the Bureau of Engraving and Printing and of purchases of notes by the U.S. Treasurer.
51.70 Accountability Records
Under an agreement with and at the request of the Treasury, the Division of Reserve Bank Operations and Payment Systems maintains the official accounts for Federal Reserve notes that are held in Washington by the BEP, at Federal Reserve offices, by Federal Reserve Agents and that are outstanding to the Reserve Banks. Records with respect to notes printed and delivered to vaults at BEP are derived from advices received from the Production Division of the Bureau; records on currency released to Federal Reserve Agents or the Banks from shipment advices; and records on currency destroyed from FR 5 database as reported by each cash department followed by a certified monthly summary. The monthly summary should be reported by each Office by the fifth business day of the month following the end of the report period to permit early verification and subsequent certification by the Division to the Treasury. The Division also uses these records as a basis for certifying Federal Reserve note accounts to the Audit Departments at Reserve Banks and others.
1. FR 5 User Guide is available online in the FR 5 System. Return to text