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U.S. Department of Health and Human Services
Food and Drug Administration
Notes to Fiscal Year 2004
Consolidated Principal Financial Statements

Note  1   -  Summary of Significant Accounting Policies
Note  2   -  Fund Balances with Treasury
Note  3   -   Accounts Receivable, Net
Note  4   -   Cash
Note  5   -   General Property, Plant, and Equipment, Net
Note  6   -   Other Assets
Note  7   -    Environmental and Disposal Costs
Note  8   -    Federal Employee and Veterans’ Benefits
Note 9    -    Accrued Payroll and Benefits
Note 10  -     Accrued Grant Liability, Net
Note 11  -    Other Liabilities
Note 12  -    Commitments and Contingencies
Note 13  -    Leases
Note 14  -    Combined Statements of Budgetary Resources
Note 15  -    Custodial Activity

Note 1 – Summary of Significant Accounting Policies

A.  Reporting Entity

The Food and Drug Administration (FDA) is a separate operating division (OPDIV) and reporting entity of the Department of Health and Human Services (DHHS), and is a scientific regulatory agency.  FDA's primary objective is to protect and promote the health and well-being of consumers in the United States.  FDA's resources are organized into six "programs" as follows:  Foods, Human Drugs, Medical Devices & Radiological Health, Biologics, Animal Drugs & Feeds, and Toxicological Research.  In addition to its programs, FDA has separate budgets for buildings and facilities (construction and repair), GSA rental payments, other activities (policy and administrative), and special purpose (contingency and cooperative research and development agreements).

The agency currently maintains two general funds, a deposit fund, revolving fund, trust fund, and several special purpose funds.  All appropriations have been consolidated for the purposes of displaying the accompanying principal financial statements.  Supplementary information schedules following these notes present budgetary resources and costs by appropriation.  Appropriations reported as part of FDA's financial statements are as follows:

B.  Basis of Presentation

The financial statements have been prepared from the accounting records of FDA in conformity with accounting principles generally accepted in the United States of America (GAAP) and the form and content for entity financial statements specified by the Office of Management and Budget (OMB) in OMB Bulletin 01-09, Form and Content of Agency Financial Statements.  GAAP for Federal entities are the standards prescribed by the Federal Accounting Standards Advisory Board (FASAB), which is the official accounting standards setting body for the Federal Government. The consolidated statements are different from the financial reports, also prepared by FDA, pursuant to OMB directives, used to monitor and control the use of budgetary resources.  FDA has no material intra-entity transactions that need to be eliminated from the financial statements. 

C.  Basis of Accounting

FDA records transactions on the accrual accounting basis and budgetary basis.   Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash.  Budgetary accounting principles, on the other hand, are designed to recognize the obligation of funds according to legal requirements, which, in many cases, is prior to the occurrence of an accrual-based transaction.  Budgetary accounting provides a means to track the status of budgetary authority to help avoid over expending or over obligation of appropriations.  Budget authority is the authority to acquire goods and services and to make payments in accordance with applicable laws and regulations.  The recognition of budgetary accounting transactions is essential for compliance with legal constraints and controls over the use of Federal funds. 

D.  Budgets and Budgetary Accounting

Each of FDA's funds and appropriations is financed by a combination of sources.  These sources include direct appropriations from Congress, Congressional authorization to obligate collections, funding received from other Federal agencies, and receipts received through reimbursable agreements.  Recognition and measurement of budgetary resources, for purposes of preparing the Combined Statements of Budgetary Resources, is based on budgetary concepts and definitions provided by OMB Circular A-11, Preparation, Submission and Execution of the Budget.

FDA has Cooperative Research and Development Agreements (CRADA), where it has cooperative agreements with academia and private sector companies.  The purpose of CRADA is to strengthen research efforts and enhance the necessary resources required to achieve scientific objectives while simultaneously transferring new technology to the private sector for development and eventual use by the public.  The CRADA appropriation is a no-year type account, and funding is submitted to FDA by the partner for services, facilities, equipment, or other resources to support the research or development efforts outlined in the CRADA.  In FY 2004, FDA received approximately $1,532 ($1,900 for FY 2003) related to these agreements.

E.  Assets

Entity assets are those assets which the reporting entity holds and has the authority to use in its operations.  Non-entity assets are assets the entity holds, but does not have authority to use. FDA has one non-entity asset for accounts receivable related to civil monetary penalties (CMPs) to report.  Therefore, assets reported on the financial statements are entity assets that FDA is able to use in its operations, except for accounts receivable related to CMPs as further described in Note 3 and 15.

Intragovernmental assets are those that arise from transactions with other Federal entities. 

Assets With the Public are those that arise from transactions with state or local government agencies, or the general public.

F.  Fund Balances with Treasury

Fund balances with Treasury are the aggregate amount of funds available to incur expenditures and pay liabilities.  FDA does not maintain cash in commercial bank accounts.  Although cash receipts are deposited with commercial banks which have been designated by the Secretary of the Department of the Treasury (Treasury) as official depositories to hold U.S. Government funds, the funds are electronically transferred to Treasury at the end of each business day.  Treasury processes receipts and disbursements, either directly or through the DHHS Payment Management System (PMS).

Fund balances with Treasury cash balances are reconciled monthly with balances reported by Treasury and adjusted at year-end to the reconciled Treasury balances.  Any discrepancies that may occur are primarily due to timing differences on transactions involving the DHHS PMS and DHHS Central Payroll systems.

G.  Accounts Receivable, Net

Accounts receivable consist of amounts owed to FDA by other Federal entities and the public. Intragovernmental accounts receivable are primarily related to amounts due from the Department of Justice (DOJ) for payments to DOJ by organizations for civil monetary penalties and amounts billed under interagency agreements.  Receivables arising from CMPs are recorded when the penalties are assessed by DOJ and FDA and a legally, enforceable debt is due.

Public accounts receivable primarily represent amounts due from organizations for CMPs not yet remitted to DOJ, all user fees billed in accordance with the Prescription Drug User Fee Act, Medical Device User Fee Modernization Act, Animal Drug User Fee Act, Mammography Quality Standards Act, and user fees related to FDA’s issuance of export certificates.  Amounts due for public receivables are stated net of an allowance for uncollectible accounts.  The allowance is based on past collection experience and an analysis of outstanding balances.  No allowance is established for intragovernmental receivables, as they are considered fully collectible. 

H.  Advances

It is FDA’s policy to advance funds to grant recipients so that recipients may incur expenses related to the approved grant.  Advances are only made within the amount of the recorded grant obligation and are intended to cover immediate cash needs.  Advances are reported net of accrued grantee expenditures, and an “Accrued Grant Liability, Net” is reported when accrued expenditures exceed advances as of September 30, as was the case September 30, 2003.  For September 30, 2004, however, advances exceeded expenditures thus resulting in “Advances to Grantees” on the Balance Sheet.  Other advances with the public are related to travel and emergency salary payments made to FDA employees and are reported in Note 6, "Other Assets." All advances are considered current assets.

I.  General Property, Plant and Equipment, Net (PP&E)

PP&E is capitalized at cost if the initial acquisition cost is $25 or more and if the asset has an estimated useful life of two years or more.  In accordance with Statement of Federal Financial Accounting Standards No. 10, Accounting for Internal Use Software, FDA implemented the DHHS-wide policy which requires internal use software be capitalized using a threshold of $1,000, and an estimated useful life of not less than two and no more than five years.  Capitalized costs include all direct and indirect costs.  Enhancements to existing internal use software are capitalized when the life cycle costs of the development stage are $1,000 or more, and they result in significant additional capabilities.

PP&E with an acquisition cost of less than the capitalization threshold is expensed when purchased.  The cost of PP&E acquired under a capital lease is the amount recognized as a liability for the capital lease at its inception.  PP&E acquired through donation is recorded at its estimated fair value.  The cost of PP&E transferred from other Federal entities is the net book value from the transferring entity.

PP&E is depreciated on a straight-line basis over the estimated useful life of the asset.  Land and land rights, including permanent improvements, are not depreciated.  Normal maintenance and repair costs are expensed as incurred.

Amounts disbursed for major construction and software projects that are ongoing at year-end are classified as construction and software in-progress.  Such expenditures are subsequently reclassified as depreciable PP&E upon project completion and acceptance.

During FY 2003, FDA incurred a loss of $3,802 on the disposition of the CDER Corporate Database Redesign project.  The project was in the developmental phase, and costs were accumulated as required by SFFAS #10.  However, the funding had been exhausted, and management determined that the project would not be completed.  Therefore, the accumulated book value for the software was reduced to zero, and the loss recognized in FY 2003.

The General Services Administration (GSA), which charges rent based on commercial rental rates for similar properties, provides the majority of space and property that FDA occupies.  Therefore, the cost of GSA owned properties is not recorded in FDA’s financial statements.

J. Liabilities 

A liability for Federal accounting purposes is a probable and measurable future outflow or other sacrifice of resources as a result of past transactions or events.  Since FDA is a component of the U.S. Government, a sovereign entity, its liabilities cannot be liquidated without legislation that provides resources to do so.  Payments of all liabilities other than contracts can be abrogated by the sovereign entity.  Intragovernmental liabilities arise from transactions with other Federal entities.

Liabilities Covered by Budgetary Resources are those liabilities funded by available budgetary resources, including:  (1) new budget authority, (2) spending authority from offsetting collections, (3) recoveries of unexpired budget authority, (4) unobligated balances of budgetary resources at the beginning of the fiscal year, and (5) permanent, indefinite appropriation or borrowing authority.  The majority of liabilities covered by budgetary resources include amounts payable to vendors who have provided goods or services to FDA or for accrued payroll.

Liabilities Not Covered by Budgetary Resources are incurred when funding has not yet been made available through Congressional budget authority.  FDA recognizes such liabilities for employees' annual leave earned but not taken, amounts billed to FDA by the Department of Labor for Federal Employee's Compensation Act payments, capital leases, contingent legal liabilities, and environmental cleanup activities scheduled to begin beyond the current fiscal year being reported. 

K.  Accounts Payable

Accounts payable consists of amounts owed for goods and services received, progress in contract performance by others, and other miscellaneous payables.

L.  Resources Payable to Treasury

FDA records amounts equal to the asset accounts receivable for civil monetary penalties as non-entity liabilities payable to the Department of Treasury’s miscellaneous receipt account.

M.  Accrued Grant Liability, Net

DHHS Program Support Center (PSC) performs the daily grant accounting functions for FDA and reports the necessary information on a monthly basis to FDA for grant advances and expenditures.  Separate algorithms are used by DHHS to calculate accruals for "block" and "non-block" grant programs and related contracts. The algorithms, which have been approved by OMB and the General Accounting Office, compute average daily spending rates for each grant in order to estimate the portion of the unspent grant amount to be accrued at year-end.  Only non-block grants apply to FDA.

For non-block grants, grantees draw funds commensurate with their immediate cash needs which are recorded as advances.  Grantees submit quarterly reports summarizing expenditures paid.  The process adopted by DHHS to estimate a year-end grant accrual relies on historical spending patterns to predict unreported grantee expenditures.  The method separates the accrual into two components.  The first component represents the amount of expenditures expected to be reported by grantees for the fourth quarter ending September 30 excluding the expenses incurred but not reported (IBNR) which is discussed below.  It is calculated with a data regression model that uses historical grantee advance and expenditure data. 

To estimate the second component, IBNR expenses, DHHS gathered information on spending patterns of grantees to identify unreported expenses at fiscal year-end and determined that grantees typically had year-end IBNR expenses equal to approximately two weeks of annual expenditures.  Together, the estimated amount of expenditures expected to be reported by grantees for the fourth quarter ending September 30 and the estimated IBNR expenses represent the total amount reported as the accrued grant liability.

N.  Deferred Revenue

The passage of PDUFA III allowed FDA to accelerate the FY 2004 and FY 2005 billing and collection of advanced fees from the drug industry during FY 2003 and FY 2004.  The PDUFA fees collected in advance of FY 2004 and FY 2005 cannot be used until the new fiscal year, and therefore are considered unavailable until such time.

Statutory provisions require that services provided by FDA's Color Additive Certification Program be performed only upon advance payment of fees by those requesting certification services.  Related deposits on-hand are reported on the Balance Sheet as "other liabilities" and are recognized as revenue upon completion of testing of a manufacturer's sample.

O.  Accrued Payroll, Unfunded Leave, and Accrued Benefits

These liabilities represent salaries, wages, leave, and benefits earned by employees, but not disbursed as of September 30.  Annual leave is accrued as earned and reduced as used.  The balances of accrued annual and credit leave are analyzed and adjusted quarterly to reflect current pay rates.  Sick leave and other types of nonvested leave are expensed as taken but not accrued when earned.

P.  Federal Employee and Veterans’ Benefits

The liability for Federal Employee and Veterans' Benefits consists of the actuarial portions of future benefits earned by Federal employees and Veterans, but not yet due and payable.  These costs include pensions, other retirement benefits, and other post-employment benefits.  These benefit programs are administered by the Office of Personnel Management (OPM) and not by FDA, except as discussed below.  Therefore, FDA does not recognize the liability for pensions, other retirement benefits, and other post-employment benefits.  FDA does, however, recognize the imputed cost and imputed financing related to these benefits in the Consolidated Statement of Net Cost and the Consolidated Statement of Changes in Net Position, respectively.

FDA employs members of the Commissioned Corps, who have their own retirement plan.  Congress annually funds this plan with amounts as may be required through the enactment of the Departments of Labor, Health and Human Services, and Education, and Related Agencies Appropriations Acts.

Although FDA contributes toward the provision of pension benefits for eligible employees and makes the necessary payroll withholding, it does not account for the assets of the retirement plans.  FDA also does not have actuarial data with respect to accumulated plan benefits or the unfunded liability relative to its eligible employees.  These amounts are reported by the respective plan administrators and are not allocated to the individual employers.  OPM also accounts for all health and life insurance programs for retired eligible employees.

Pensions: Pensions provide benefits upon retirement and may also provide benefits for death, disability, or other termination of employment before retirement.  Pension plans may also include benefits to survivors and dependents, and they may contain early retirement or other special features.  Most FDA employees participate in the Civil Service Retirement System (CSRS) or the Federal Employee Retirement System (FERS).  Under CSRS, FDA makes matching contributions equal to 7.0 percent of basic pay.  For FERS employees, FDA contributes the employer's matching share for Social Security and contributes an amount equal to one percent of employee pay to a savings plan and matches up to an additional four percent of pay.  Most employees hired after December 31, 1983, are covered by FERS.  OPM reports on CSRS and FERS assets, accumulated plan benefits, and unfunded liabilities, if any, applicable to Federal employees.

Other Retirement Benefits (ORB): Retirement benefits other than pensions are all forms of benefits to retirees or their beneficiaries provided outside the pension plan.  Examples include health and life insurance.  Retirement health care benefits are the primary ORB expense.

Other Post-employment Benefits (OPEB): Post-employment benefits other than pensions include all types of benefits provided to former or inactive, but not retired, employees, their beneficiaries, and covered dependents.  Inactive employees are those who are not currently rendering services to their employers and who have not been terminated, but who are not eligible for an immediate annuity, including those temporarily laid off or disabled.  OPEB includes salary continuation, severance benefits, counseling and training, continuation of health care or other benefits, and unemployment and workers’ compensation benefits paid by the employer entity.

Q.  Obligations Related to Canceled Appropriations

Payments may be required of up to one percent of current year appropriations for valid obligations incurred against prior year appropriations that have been canceled.  As of September 30, 2004, there were no potential payments related to cancelled appropriations ($58 for FY 2003).

R.  Revenues and Other Financing Sources

Funding for FDA is classified as revenue or other financing sources.  Revenue is an inflow of resources that the Government demands, earns, or receives by donation.  Revenue comes from two sources: exchange transactions and nonexchange transactions.  Other financing sources include appropriations used, imputed financing sources, and transfers of assets between FDA and other Federal entities.

Exchange and Non-Exchange Revenue: Exchange revenues are those that derive from transactions in which both FDA and another party receive value, including revenue from (1)firms submitting applications to FDA for review of new human drugs, biologics, medical devices, and animal drugs, (2)owners or lessees of facilities which conduct breast cancer screening or diagnosis through mammography activities, (3)firms requesting certification that drugs or medical devices which they are exporting meet certain requirements, and (4)manufacturers of color additives.  These revenues are presented in FDA's Consolidated Statements of Net Cost and serve to reduce the reported cost of operations borne by the taxpayer.  Non-exchange revenue derives from the Government’s sovereign right to demand payment.  Non-exchange revenue is recognized when a reporting entity establishes a specifically identifiable, legally enforceable claim to cash or other asset such as interest receivable on delinquent debts.  It is recognized to the extent that the collection is probable and the amount is reasonably estimable.

Appropriations Used: Congressional appropriations are the primary funding source for FDA's programs.  For financial statement purposes, appropriations used are recognized as a financing source as expenses are incurred.  Under accrual accounting, operating expenses are recognized in the current period while expenditures for capital assets are not recognized as expenses until they are consumed.  Financing sources for these expenditures, which are derived from both current and prior year appropriations and operations, are recognized on this same basis.

Imputed Financing Sources: These sources are an "other financing source" that reflect costs incurred by one Federal entity and paid by another Federal entity.  These are also known as inter-entity costs.  OMB is limiting the inter-entity costs to be recognized by Federal agencies to the following: (1)employee’s pension benefits, (2) the health, life insurance, and other benefits for retired employees, (3) other post-employment benefits for retired, terminated, and inactive employees, which include severance payments, training, counseling, continued health care, and unemployment and worker’s compensation under the Federal Employees’ Compensation Act, and (4) losses in litigation proceedings to account for Treasury Judgment Fund transactions.  FDA includes applicable imputed costs in the Consolidated Statements of Net Cost, and an imputed financing source is recognized in the Consolidated Statements of Changes in Net Position.

Transfers-In/Out: Intragovernmental transfers of budget authority (i.e. appropriated funds) or of assets without reimbursement are recorded at the book value of the transferring entity.

S.  Contingencies

A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to FDA.  The uncertainty will ultimately be resolved when one or more future events occur or fail to occur.  A contingent liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is more likely than not, and the related future outflow or sacrifice of resources is measurable.

T.  Use of Estimates in Preparing Financial Statements

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from those estimates.

U.  Reclassifications

Certain FY 2003 balances reported previously have been reclassified to conform to FY 2004 financial statement presentation.

Note 2 - Fund Balances with Treasury

FDA’s undisbursed account balances are listed below by fund type:

Note 2

No restrictions on Fund Balances with Treasury exist at September 30, 2004 and 2003.

Note 3 - Accounts Receivable, Net

Accounts Receivable, Net consist of the following:

Civil Monetary Penalties

The FDA is authorized by the Food, Drug, and Cosmetic Act to assess and collect civil monetary penalties for violations in areas such as illegally manufactured, marketed, and distributed animal feeds and drug products.  CMP cases initiated by FDA General Counsel are submitted to the Department of Justice (DOJ) for final adjudication.  CMPs assessed by DOJ are collected and subsequently forwarded to FDA, net of a 3% fee.

CMP collections are considered FDA’s only non-entity asset because they are immediately forwarded to the Department of Treasury and cannot be used for FDA operations.  FDA penalties collected in FY 2004 total $51,016 ($398,481 for FY 2003) net of DOJ fees of approximately $1,496 ($11,954 for FY 2003).  Receivables arising from CMPs are recorded when the penalties are assessed by FDA/DOJ.  FDA has recorded intragovernmental accounts receivable totaling $20 ($20 for FY 2003) based on settlement agreements or court decisions against private entities who submitted payment to DOJ however FDA has not yet received the payment from DOJ as of September 30.  A corresponding non-entity custodial liability, Resources Payable to the Department of Treasury, of $420 ($49,219 for FY 2003) is recorded on the balance sheet. 

Note 4 - Cash

All cash on hand consists of petty cash funds and is considered an entity asset.  The petty cash funds are used for miscellaneous reimbursements for local travel, undercover criminal investigations, and other miscellaneous expenses.  The total balance of petty cash funds as of September 30, 2004 and 2003 is $155.

Note 5 - General Property, Plant, and Equipment, Net

Balances for the major categories of FDA Property, Plant, and Equipment, Net are listed below:

Note 6 - Other Assets

Other Assets is comprised of the following:

The FDA, National Center for Toxicological Research (NCTR) and the Department of Energy, Bonneville Power Administration (BPA) entered into an interagency agreement in August 2003 that states that BPA will provide financing for the Energy Conservation Project (ECP).  The purpose of the interagency agreement is to finance energy conservation improvements at the Jefferson Laboratories in Jefferson, Arkansas to comply with Executive Order 13123.  Executive Order 13123 mandates that energy consumption be reduced 30% by the year 2005, and 35% by the year 2010.  BPA will fund into an escrow account $8,620 to be used for construction period costs including accrued interest at 5.88%.  In addition, NCTR will earn interest income at the rate of 0.75% on the balance in the escrow account during the construction period.  Beginning on January 1, 2005, NCTR will repay the loan in ten annual payments of $1,112 at the 5.88% interest rate.

Note 7 - Environmental and Disposal Costs

Environmental and Disposal Costs are the costs of removing, containing, or disposing of material or property that consists of hazardous waste at (1) permanent or temporary sites selected for closure or shutdown, (2) active sites undergoing renovations, and (3) active sites not scheduled for closure or renovation.  FDA's cleanup costs are primarily related to the closure and subsequent decommissioning of laboratory facilities related to its field and headquarters consolidation efforts.  In many instances, FDA has performed laboratory operations using various chemical, biological, and/or radiological materials in these facilities for over 30 years.  As a result of such use, the decommissioning of each building or facility is planned so the Federal government will take all actions required of it under the terms of the related lease and by all applicable federal, state, and local environmental laws. 

FDA’s estimated liability for government-related future cleanup of hazardous waste does not consider the effect of future new technology, laws, or regulations.  The method of assigning cost is based on estimated costs of similar remediation projects.  The following table presents FDA’s estimated cleanup cost liability as of September 30, 2004 and 2003:

Note 8 - Federal Employee and Veterans’ Benefits

The Federal Employees Compensation Act (FECA) provides income and medical cost protection to covered Federal civilian employees injured on the job; employees who have incurred a work-related occupational disease; and beneficiaries of employees whose death is attributable to a job-related injury or occupational disease.  The FECA program is administered by the U.S. Department of Labor, which initially pays valid claims and unpaid billings and is subsequently reimbursed from the Federal agencies employing the claimants. 

The actuarial liability for future workers’ compensation benefits is determined using a method that utilizes historical benefit payment patterns related to a specific incurred period to predict the ultimate payment related to that period.  Consistent with the past practice, these projected annual benefit payments have been discounted to present value using OMB's economic assumptions for 10-year Treasury notes and bonds.  The present value of these estimates was calculated using a discount rate of 4.88 percent in the first year and thereafter for FY 2004 (5.24 percent in the first year and thereafter for FY 2003).

To provide more specifically for the effects of inflation on the liability for future workers' compensation benefits, wage inflation factors (cost of living adjustments or COLAs) and medical inflation factors (consumer price index medical) are applied to the calculation of projected future benefits.  These factors are also used to adjust the methodology's historical payments to current year dollars.  The methodology also includes a discounting formula to recognize the timing of compensation payments per year instead of one lump sum per year.

This liability at September 30, 2004 and 2003, amounted to $19,812 and $22,397, respectively, and is considered a liability not covered by budgetary resources. 

Note 9 - Accrued Payroll and Benefits

Accrued Payroll and Benefits consist of the following:

Note 10 – Accrued Grant Liability, Net

Note 11 - Other Liabilities

Other Liabilities consist of the following:

All other liabilities are considered current except for the capital lease liability.  The portion of the total capital lease liability of $1,384 ($1,465 for FY 2003) considered current is $118 ($98 for FY 2003), and the remaining balance, $1,266 ($1,367 for FY 2003), is considered non-current.  See Note 13 for more information on capital leases.

Note 12 - Commitments and Contingencies

Commitments

FDA is committed for goods and services that have been ordered, but have not yet been delivered.  As of September 30, 2004 and 2003, FDA’s undelivered orders were $311,250 and $364,418, respectively.  The entire balance has been funded with budgetary resources received in FY 2004 and prior years. 

A summary of long-term commitments for construction and software development projects over $5,000 per project is as follows:

Contingencies

FDA is party in various administrative proceedings, legal actions, and claims brought against it.  In the opinion of FDA management, legal counsel, and DHHS legal counsel, the ultimate resolution of these proceedings, actions, and claims will not materially affect the financial position or net costs of FDA.  These cases are administered and resolved by the U.S. Department of Justice and any amounts necessary for resolution are obtained from a special Judgment Fund maintained by the U.S. Department of the Treasury under title 31 United States Code, section 1304.  Unfavorable judgments do not result in claims against FDA directly.  Losses paid by the Judgment Fund on behalf of FDA do not require reimbursement. As of September 30, 2004, FDA was not required to accrue any legal contingent liability ($0 for FY 2003).

Note 13.  Leases

Future lease payments are as follows:

**  Future Lease payments are expected; however, dollar figures for GSA cannot be reasonably estimated.

As of September 30, 2004 and 2003, FDA had one personal property capital lease for a security system used at its Jamaica, NY field office.  The lease has 15 years remaining of its 20-year life.  Real property capital leases consist of two leases for a cooling tower at FDA’s Arkansas Regional Laboratory.  Both leases have a life of 10 years.  The total capital lease liability is considered unfunded as of September 30, 2004 and 2003. 

Operating leases for real property cover GSA and non-GSA leased assets.  Operating leases comprise the majority of FDA’s fiscal year 2004 and 2003 real property rental expense and have terms of more than two years.  GSA charges FDA rates that approximate commercial rates for comparable space.  FDA may elect to terminate these leases with 120 days notice to GSA at any time.  FDA has the authority to lease its own space for laboratories, testing materials, etc. because, in many cases, GSA does not own property that will satisfy the needs of FDA’s scientific and research activities.  For FY 2004, FDA had four (five for FY 2003) non-GSA operating leases consisting mostly of laboratories and office space.

Operating leases for personal property are for the rental of GSA vehicles at FDA’s headquarters and at its field offices.  As of September 30, 2004, FDA maintained approximately 1,225 (1,005 for FY 2003) vehicles leased from GSA.  GSA charges FDA rates that are less than commercial rates for comparable vehicles.  FDA may elect to terminate these leases within 120 days notice to GSA, at any time.

Note 14 - Combined Statements of Budgetary Resources

The Statement of Budgetary Resources (SBR) was prepared on a “combined” basis and does not contain intra-FDA eliminations, which may result in a distortion of reported total budgetary resources compared to actual budgetary resources received by FDA as a whole.

Salaries and Expenses (S&E), FDA’s largest appropriation, is a one year appropriation.  FDA has a number of “no-year” or “permanent indefinite” funds.  These funds are the Revolving Fund for Certification, Building and Facilities; and Cooperative Research and Development Agreements.  Permanent indefinite funds are available until they are no longer deemed necessary in supporting the agency’s mission.  FDA also has a multi-year appropriation to record collections and disbursements for patents and royalties.

FDA received 72.8% or $1,395,507 (72.9%, or $1,392,580 for FY 2003), of its total FY 2004 budgetary resources of $1,917,233 ($1,911,207 for FY 2003) through appropriations.  FDA’s S&E account was appropriated $1,386,962 ($1,382,702 for FY 2003), which accounts for 99.4% (99.3% for FY 2003) of the total appropriations received.  Permanent indefinite appropriations are available for FDA to accomplish its mission until expended or Congress enacts legislation to rescind or cancel remaining budget authority.

Other sources of funding included reimbursable programs and unobligated carryovers from prior years.  Reimbursable programs, which provide funds from other Federal or private entities in exchange for goods or services, account for about 20.2% of total FY 2004 (17.8% for FY 2003) budgetary resources.  Unobligated carryovers represent amounts of spending authority that have not been committed or earmarked for expenditure.  Carryovers represent about 11.8% of FY 2004 (11.6% for FY 2003) budgetary resources.

FDA has both Category A (apportioned over a time period) and Category B (apportioned by activity/project) obligations.  Category A obligations totaled $1,797,223 ($1,776,791 for FY 2003).  Category B obligations totaled $21,194 ($46,664 for FY 2003).

FDA has a Contingency Fund that was established in FY 1983 whereby funds are to be used for unusual direct costs of product emergencies.  The remaining balance of $1,160 was obligated in FY 2003 and the fund is not inactive.

FDA received $168,100 in funding in FY 2002 ($17,000 of which was rescinded), to remain available until expended, to support Counter Terrorism projects that recognize the important role FDA plays in protecting the public health.  The attacks of September 11, 2001 and subsequent national events resulted in an accelerated and intensified need for attention to activities related to counter terrorism.  FDA’s focus is in three key areas:  food safety, safe and effective medical products, and physical security.  The amount obligated for counter terrorism projects through FY 2004 was approximately $150,800.

FDA received $5,000 in funding in FY 2003, to remain available until expended, to support research related to food safety and security.  The Executive Office of the President transferred this amount and the Congress was notified as required by the Emergency Response Fund (PL 107-38).  Approximately $4,988 was obligated in FY 2004.

The Prescription Drug User Fee Act of 1992 (PDUFA) was re-authorized by the Prescription Drug User Fee Amendments of 2002 (Title 5 of the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, PL 107-188).  This change allowed FDA to accelerate the FY 2005 billing and collection of advanced fees from the drug industry during FY 2004.  The PDUFA fees collected in advance of FY 2005 cannot be used until the new fiscal year (October 1, 2004) and passage of an FDA appropriation, and therefore, are considered unavailable until FY 2005.  In FY 2004 FDA obligated $232,082 in fees.

The Federal Food, Drug and Cosmetic Act was amended to include the Medical Device User Fee and Modernization Act of 2002 (MDUFMA) by PL 107-250.  This act allows the FDA to collect fees for the review of most medical device applications.  In FY 2004 FDA obligated $23,875 in fees.

The Animal Drug User Fee Act (ADUFA) was enacted into law on November 18, 2003 (P.L. 108-130).  This act allows the FDA to collect fees for the expedited review of new animal drug applications.  This fee is modeled after the Prescription Drug User Fee Act.  In FY 2004, FDA obligated $1,083 in fees.

FDA has the authority to collect fees for the Mammography Quality Standards Act of 1992 and for the Export Reform and Enhancement Act of 1996.  These sources of funding are included as well as the unobligated carryovers from prior years.

Statement of Federal Financial Accounting Standard (SFFAS) No. 7, “Accounting for Revenue and Other Financing Sources” calls for explanations of any material differences between the information required by paragraph 77 of SFFAS 7 and the amounts described as “actual” in the “Budget of the United States Government” (also called the “President’s Budget”).  Paragraph 77 of SFFAS 7 calls for presentation of total budgetary resources available to a reporting entity, the status of those resources, and outlays of the reporting entity.

Chapter 11, Title 31, U.S. Code requires: "On or after the first Monday in January but not later than the first Monday in February of each year, the President shall submit a budget of the United States Government for the following fiscal year."  The FY 2006 President’s Budget, with actual numbers for FY 2004, has not yet been published, and therefore no comparisons can be made between FY 2004 amounts presented in the SBR with amounts reported in the “actual” column of the President’s Budget.  The FY 2006 President’s Budget is expected to be released on February 8, 2005, and may be obtained from the Office of Management and Budget or the U.S. Government Printing Office at that time.

The table below is a reconciliation of the FY 2003 Statement of Budgetary Resources to the President’s Budget.  It should be noted that the President’s Budget does not include the expired year activity and includes only the current year budgetary transactions.

Note 15 – Custodial Activity

Custodial activity primarily involves collections for civil monetary penalties assessed by the Department of Justice on behalf of FDA.  Penalties are assessed for violations in areas such as illegally manufactured, marketed, and distributed animal feeds and drug products.  Total CMP collections in FY 2004 were $51,016 ($398,481 for FY 2003).  CMP collections are immediately forwarded to the Department of Treasury when collected and cannot be used for FDA operations.  Also see Note 3. 

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