Notes to the Principal Financial Statements
For the Fiscal Years Ending September 30, 2003, and 2002 (in thousands)

Note 1. Significant Accounting Policies

Reporting Entity

AHRQ is an operating division (OPDIV) of the Department of Health and Human Services (HHS), which is a Cabinet agency of the Executive Branch of the United States Government. AHRQ, formerly known as the Agency for Health Care Policy and Research (AHCPR), was established in December 1989 under Public Law 101-239, Omnibus Budget Reconciliation Act of 1989, to enhance the quality, appropriateness, and effectiveness of health care services and access to these services. The Agency's mission is to promote health care quality improvement by conducting and supporting health services research that develops and presents scientific evidence regarding all aspects of health care. AHRQ is structured into the following nine major functions:

• Office of the Director.
• Office of Performance Accountability, Resources, and Technology.
• Office of Extramural Research, Education, and Priority Populations.
• Office of Communications and Knowledge Transfer.
• Center for Delivery, Organization, and Markets.
• Center for Financing, Access, and Cost Trends.
• Center for Outcomes and Evidence.
• Center for Primary Care, Prevention, and Clinical Partnerships.
• Center for Quality Improvement and Patient Safety.

The Office of HHS' Chief Financial Officer (CFO) provides Department-wide accounting policy oversight. The Division of Financial Operations (DFO) of the Program Support Center (PSC) provides the accounting and fiscal services, including the preparation of the financial statements, on a fee-for-service basis. DFO is considered part of AHRQ's management.

AHRQ maintains appropriated funds and a small trust fund. The appropriated accounts may include 1-year and indefinite authority. In addition, AHRQ also uses a number of receipt, deposit, and budget-clearing accounts. The financial statements report activity for the appropriated funds listed below. Also included are the related appropriation account symbols, which represent a health research and training function. AHRQ's programs are designated by OMB as falling under the health budget function category.

Appropriations

75X1700 Agency for Healthcare Research and Quality

75 1700 Agency for Healthcare Research and Quality

75X8512 Agency for Healthcare Research and Quality—Gift Fund

Basis of Accounting and Presentation

The financial statements of the Agency for Healthcare Research and Quality have been prepared to report the financial position and results of operations of HHS, pursuant to the requirements of 31 U.S.C. 351 (b), the Chief Financial Officers Act of 1990 (P.L. 101-576), as amended by the Reports Consolidation Act of 2000 (P.L. 106-531). They have been prepared from Departmental records in accordance with the form and content guidance of the Office of Management and Budget (OMB) Bulletin 01-09 and generally accepted accounting principles (GAAP) for the Federal government as prescribed by the Federal Accounting Standards Advisory Board (FASAB) and recognized by the American Institute of Certified Public Accountants (AICPA). These statements are therefore different from financial reports prepared pursuant to other OMB directives that are primarily used to monitor and control HHS' use of budgetary resources.

AHRQ uses both the accrual basis and budgetary basis of accounting to record transactions. Under the accrual method of accounting, revenues are recognized when earned, and expenses are recognized when incurred, without regard to receipt or payment of cash. The 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. The recognition of budgetary accounting transactions is essential for compliance with legal constraints and controls over the use of Federal funds. AHRQ also uses the cash basis of accounting for some programs with an accrual adjustment made by recording year-end estimates of unpaid liabilities.

Entity and Non-Entity Assets

Entity assets are assets that the reporting entity has authority to use in its operations. The authority to use funds in an entity's operations means entity management has the authority to decide how funds are used or management is legally obligated to use funds to meet entity obligations. Non-entity assets are held by the entity but are not available to the entity.

The financial statements do not report entity and non-entity assets separately on the face of the statement. The entity/non-entity, if any, would be detailed in Notes.

Fund Balance with Treasury

AHRQ maintains its available funds with the U.S. Department of the Treasury (Treasury). "Fund Balance with Treasury" includes appropriated, revolving, and trust funds available to pay current liabilities and finance authorized purchases, as well as funds restricted until future appropriations are received. Cash receipts and disbursements are processed by Treasury, and HHS' records are reconciled with those of Treasury on a regular basis. Note 2 provides additional information.

Investments

Trust fund balances are investments (plus the accrued interest on investments) held by Treasury. Federal law requires that trust fund investments that are not necessary to meet current expenditures be invested in "interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States."

Accounts Receivable, Net

Accounts Receivable consists of amounts owed to AHRQ by other federal agencies and by the public. Intragovernmental accounts receivable arise generally from the provision of goods and services to other federal agencies and are considered to be fully collectible. Amounts due from the public are presented net of an allowance for loss on uncollectible accounts. The allowance for loss is established based on past collection experience and/or an analysis of the outstanding balances. Accounts receivable also includes interest due to HHS that is directly attributable to delinquent accounts receivable. Note 3 provides additional information on Accounts Receivable.

Advances to Grantees/Accrued Grant Liability

Advances to Grantees are cash outlays made by AHRQ to its grantees. An accrued grant liability occurs when the year-end grant accrual for AHRQ exceeds advances to grantees outstanding at year-end. Progress payments on work in process are not included in grants. AHRQ grants programs are classified as "Programs Subject to the Expense Accrual." For programs subject to the accrual, grantees draw funds (recorded as Advances to Grantees in HHS' accounting systems) as bills or salary payments come due. The grantees report actual disbursements quarterly and the amounts are recorded as an expense and a reduction to the advance balance in the accounting systems. At year-end, AHRQ uses actual grant payments when these data are available. When the data are not available, HHS employs a process to estimate the year-end grant accrual based on historical spending patterns to predict unreported grantee expenditures. The year-end accrual for these non-block grants equals the estimate of fourth quarter disbursements, plus an average of 2 weeks' expenditures for expenses incurred prior to cash drawdowns. Note 5 provides additional information on Advances to Grantees/Accrued Grant Liability.

General Property, Plant and Equipment, Net

General Property, Plant and Equipment (PP&E) consists of buildings, structures and facilities used for general operations, land acquired for general operating purposes, vehicles, and construction-in-progress. Other property consists of internal use software. The basis for recording purchased PP&E is full cost, which includes all costs incurred to bring the PP&E to a form and location suitable for its intended use. The cost of PP&E acquired under a capital lease is the amount recognized as a liability for the capital lease at its inception. The cost of PP&E acquired through donation is the estimated fair value when acquired. The cost of PP&E transferred from other federal entities is the net book value of the transferring entity. All PP&E with an initial acquisition cost of $25,000 or more and an estimated useful life of 2 years or greater are capitalized.

PP&E are depreciated using the straight-line method 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.

The capitalization threshold for internal use software costs for appropriated fund accounts is $1,000,000 or above. The capitalization threshold for internal use software for revolving funds is $500,000. Costs below the threshold levels are expensed. The software is depreciated for a period of time consistent with the estimated useful life used for planning and acquisition purposes. Note 4 provides additional information on general purpose property, plant and equipment.

Liabilities

Liabilities are recognized as amounts of probable future outflows or other sacrifices of resources as a result of past transactions or events. Since AHRQ 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.

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 year.
5. Permanent indefinite appropriation or borrowing authority.

Liabilities Not Covered by Budgetary Resources are incurred when funding has not yet been made available through Congressional appropriations or current earnings. AHRQ recognizes liabilities for employee annual leave earned but not taken, and amounts billed by the Department of Labor for Federal Employees Compensation Act (FECA) disability payments. Also included in this category is the actuarial FECA liability determined by Labor but not yet billed. For HHS revolving funds, all liabilities are funded as they occur.

Liabilities Covered by Budgetary Resources and Liabilities Not Covered by Budgetary Resources are combined on the balance sheet. Note 6 provides additional information.

Accounts Payable

Accounts Payable consists of amounts due for goods and services received, progress in contract performance, interest due on accounts payable, and other miscellaneous payables. Note 6 provides additional information.

Accrued Payroll and Benefits

Annual leave is accrued as it is earned by employees and is included in personnel compensation and benefit costs. An unfunded liability is recognized for earned but unused annual leave, since from a budgetary standpoint, this annual leave will be paid from future appropriations when the leave is used by employees. Rather than from the amount which had been appropriated to AHRQ as of the date of the financial statements. The amount of accrued annual leave is based upon current pay of the employees. Sick leave and other types of leave are expensed when used and not future liability is recognized for these amounts. Note 6 provides additional information.

Federal Employee and Veterans' Benefits

Federal Employee and Veterans' Benefits consist of the actuarial portions of future benefits earned by Federal employees and veterans, but not yet due and payable. These benefits include pensions, other retirement benefits, and other postemployment benefits. These benefits are normally administered by the Office of Personnel Management (OPM) and not by the Department of Health and Human Services, or any of the individual operating divisions of the Department. Therefore, AHRQ does not recognize any liability in the balance sheet for pensions, other retirement benefits, and other post-employment benefits. HHS 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.

Revenue and Financing Sources

The United States Constitution prescribes that no money may be expended by a Federal agency unless and until funds have been made available by congressional appropriation. Thus, the existence of all financing sources is dependent upon congressional appropriation.

Appropriations. AHRQ's operating funds are appropriated by the Congress to the Department from the general receipts of the Treasury. These funds are made available to AHRQ for a specified time period, usually one fiscal year, multiple fiscal years, or indefinitely, depending upon the intended use of the funds. For example, funds for general operations are generally made available for one fiscal year; funds for long-term projects such as major construction will be available to the Department for the expected life of the project; and funds used to establish revolving fund operations are generally available indefinitely (i.e., no year funds). The Statement of Budgetary Resources presents information about the resources appropriated to AHRQ.

Exchange and Non-Exchange Revenue. AHRQ revenue is classified as either exchange revenue or non-exchange revenue. Exchange revenues are those that derive from transactions in which both the government and the other party receive value, including reimbursements for services performed for other Federal agencies and the public and other sales of goods and services. These revenues are presented on AHRQ's Consolidated Statement of Net Cost and reduce the cost of operations borne by the taxpayer. Non-exchange revenues result from donations to the government and from the government's sovereign right to demand payment, including taxes. Non-exchange revenues are not considered to reduce the cost of AHRQ's operations and are reported on the Consolidated Statement of Changes in Net Position.

With minor exceptions, all receipts of revenues by Federal agencies are processed through the Department of the Treasury central accounting system. Regardless of whether they derive from exchange or non-exchange transactions, all receipts that are not earmarked by congressional appropriation for immediate departmental use are deposited in the general or special funds of the Treasury. Amounts not retained for use by the Department are reported as transfers to other government agencies on the HHS Statement of Changes in Net Position.

Imputed Financing Sources. In certain instances, operating costs of HHS are paid out of funds appropriated to other Federal agencies. For example, by low the Office of Personnel Management pays certain costs of retirement programs, and certain legal judgments against HHS or it operating divisions are paid from the Judgment Fund maintained by Treasury. When costs that are identifiable to AHRQ and directly attributable to AHRQ's operations are paid by other agencies, the AHRQ recognizes these amounts as operating expenses of HHS. In addition, AHRQ recognizes an imputed financing source on the Consolidated Statement of Changes in Net Positions to indicate the funding of their operations by other Federal agencies.

Contingencies

A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to AHRQ. The uncertainty will ultimately be resolved when one or more future events occur or fail to occur. With the exception of pending, threatened or potential litigation, 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.

Use of Estimates in Preparing Financial Statements

Preparation of financial statements in accordance with Federal accounting standards requires AHRQ to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, as of the date of the financial statements. Estimates and assumptions also affect the revenues and expenses accrued and reported in the financial statements. Actual results may differ from those estimates.

Intragovernmental Relationships and Transactions

In the course of its operations, AHRQ has relationships and enters into financial transactions with numerous Federal agencies. The more prominent of these is the National Institutes of Health.

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Note 2. Fund Balance with Treasury

AHRQ's undisbursed account balances at September 30, 2003 and 2002 are listed below by fund type. Other funds include balances in deposit, suspense, clearing, and related non-spending accounts.

A. Fund Balance

	2004			2003
	Entity Assets	Non-Entity Assets	Total	Non-Entity Assets	Assets	Total
Appropriated	152,325	-	152,325	357,439	-	357,439
Trust Funds	1,541	-	1,541	1,016	-	1,016
Total	153,866	-	153,866	356,423	-	356,423

B. Status of Fund Balance with Treasury

		2004	2003
Unexpended Appropriations	Unobligated-Available	22,619	8,567
	Unobligated-Unavailable	2,787	14,170
Obligated Balance not yet Disbursed		128,460	333,686
Total		153,866	356,423

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Note 3. Accounts Receivable, Net

AHRQ's accounts receivable as of September 30, 2003 and 2002 are summarized below. AHRQ has no non-entity receivables.

			Accounts Receivable, Principal	Interest Receivable	Accounts Receivable, Gross	Allowance	Net Receivables, Combined
2003	Intergovernmental	Entity	4,545	-	4,545	-	4,545
		Non-Entity	-	-	-	-	-
		Total, Intragovernmental	4,545	-	4,545	-	4,545
2002	Intragovernmental	Entity	800	-	800	-	800
		Non-Entity	-	-	-	-	-
		Total, Intragovernmental	800	-	800	-	800

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Note 4. General Property, Plant and Equipment, Net

The building occupied by AHRQ is provided by the General Services Administration (GSA). GSA charges AHRQ a Standard Level Users Charge (SLUC), which approximates commercial rental rates for similar properties. Major categories of AHRQ General Property, Plant and Equipment (PP&E) as of September 30, 2003, and 2002 are listed below.

	Depreciation Method	Est. Useful Lives	Acquisition Cost	Accumulated Depreciation	2003 Net Book Value	2002 Net Book Value
Equipment	Straight Line	3-20 yrs	661	(336)	325	375

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Note 5. Accrued Grant Liability

Grant advances are liquidated upon the grantee's reporting of expenditures on the quarterly SF-272 report (Federal Cash Transaction Report). In many cases, HHS receives these reports several months after the grantee actually incurs the expense, resulting in an understated grant expense in the financial statements. To mitigate this, HHS developed Department-wide procedures to estimate and accrue amounts due grantees for their expenses, both realized and accrued, through September 30, 2003 and 2002.

At fiscal year-end, when OPDIVs record the estimated accrual for amounts due to grantees for their expenses, if the amount of outstanding advances exceeds the amount of the accrual, the OPDIV reports an asset for "Advances to Grantees." Otherwise, the OPDIV reports a liability called "Accrued Grant Liability" equal to the amount that the accrual exceeds the outstanding advances. For additional information on this subject, see Note 1 under "Advances to Grantees/Accrued Grant Liability."

	2003	2004
Grant Advances Outstanding Before Grant Accrual	$32,475	$32,902
Less: Estimated Amount Due to Grantees	(47,183)	(40,126)
Net Grant Advances	$(14,708)	$(7,224)

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Note 6. Other Liabilities

Deferred revenue is for the provision of goods and services. AHRQ deferred revenues primarily relates to services agreed to in interagency agreements.

Workers' compensation benefits are the actuarial liability for future workers' compensation benefits that includes the expected liability for death, disability, medical and miscellaneous cost for approved compensation cases. The liability utilizes historical benefit payment patterns related to a specific incurred period. Consistent with past practices, these projected annual benefit payments have been discounted to present value using the OMB's economic assumptions for 10-year Treasury notes and bonds.

To provide more specifically for the effect 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 or CPIMs) are applied to the calculations' projected future benefits. These factors are also used to adjust historical payments to current year dollars. The compensation COLAs and CPIMs used in projections are as follows:

FY	COLA	CPIM
2004	2.30%	3.21%
2005	2.00%	3.54%
2006	1.83%	3.64%
2007	1.97%	3.80%
2008+	2.17%	3.91%

The table below summarizes other liabilities and whether they are covered by budgetary resources.

		Intragovernmental Liabilities			With the Public
		Covered by Budgetary Resources	Not Covered by Budgetary Resources	Total	Covered by Budgetary Resources	Not Covered by Budgetary Resources	Total
September 30, 2003	Accounts Payable	2,544		2,544	10,738		10,738
	Deferred Revenue	11,320		11,320
	Accrued Payroll and Leave	396		396	481	2,208	2,689
	Workers' Compensation Benefits (Actuarial FECA Liability)					569	569
	Total	14,260		14,260	11,219	2,777	13,996
September 30, 2002	Accounts Payable	2,467		2,467	12,463		12,463
	Deferred Revenue
	Accrued Payroll and Leave	359		359	1,435	2.010	3,445
	Workers' Compensation Benefits (Actuarial FECA Liability)					516	516
	Liability for Deposit Funds Collections				(679)		(679)
	Total	2,826		2,826	13,219	2,526	15,745

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Note 7. Obligations Related to Cancelled Appropriations

Payments may be required of up to 1 percent of current year appropriations for valid obligations incurred against prior year appropriations that have been cancelled. The total payments related to canceled appropriations are estimated to be $461 and $1,176 as of September 30, 2003 and 2002, respectively.

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AHRQ Publication No. 04-0054
Current as of August 2004

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Internet Citation:

AHRQ Annual Report on Research and Financial Management, FY 2003. August 2004, AHRQ Publication No. 04-0054. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/about/annrpt03/

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