FBWT Reconciliation and a Material Year-End Accrual
A defense working capital fund's September 30 trial balance shows Fund Balance with Treasury (FBWT) of $48,300,000. Treasury's records show $46,900,000. The difference includes $1,800,000 of deposits in transit, $450,000 of outstanding disbursements, and a $50,000 erroneous charge by Treasury that the activity has not disputed. In addition, the activity received $2,300,000 of maintenance services in September, but the invoice arrived on October 8 and was not recorded. The activity's materiality threshold for adjusting misstatements is $1,000,000. Prior-year financial statements were audited with an unmodified opinion. The auditor has asked for a reconciliation, a position on the accrual, and a judgment on whether the $50,000 item needs to be adjusted or disclosed. The fund's net position is $12,400,000, and the CFO wants the draft statements issued in 10 days.
1. Reconcile the agency's FBWT to Treasury's balance and identify any remaining difference. Show the calculation.
Read the worked answer
Start with Treasury's balance and adjust for items that explain why the agency's books differ from Treasury's records:
Treasury FBWT: $46,900,000 Add deposits in transit: +$1,800,000 Less outstanding disbursements: -$450,000 Add erroneous Treasury charge: +$50,000 Reconciled balance: $48,300,000
The reconciled amount equals the agency's FBWT, so there is no remaining unexplained difference. The deposits in transit are receipts the agency has recorded but Treasury has not yet posted. The outstanding disbursements are payments the agency has recorded but Treasury has not yet cleared. The $50,000 Treasury charge reduced Treasury's balance without a corresponding agency entry, so it is added back in the reconciliation.
The agency should still dispute the $50,000 charge with Treasury and pursue correction. The reconciliation proves the difference is understood; it does not make the erroneous charge a valid agency transaction. The reconciliation should be documented with Treasury records, agency accounting detail, and the dispute correspondence.
2. Determine the accounting treatment for the $2,300,000 maintenance services and explain the effect on the year-end statements.
Read the worked answer
The services were received in September, so the expense and liability belong in the current fiscal year even though the invoice arrived in October. Under accrual accounting, the activity should record a $2,300,000 accrued liability and a corresponding maintenance expense before the September 30 statements are issued. The entry is a debit to maintenance expense and a credit to accrued liabilities; it does not affect FBWT because no cash has moved.
If the accrual is omitted, expenses are understated by $2,300,000 and liabilities are understated by the same amount, which also overstates net position. The amount exceeds the $1,000,000 materiality threshold, so it is a material adjustment, not a disclosure-only item. The activity should also determine whether the underlying obligation was recorded when the order was placed; the accrual corrects the accounting records, but it does not substitute for a valid obligation against the correct appropriation.
Because the fund is a working capital fund, the expense also affects the cost of services and may influence future rate setting. The CFO should ensure the accrual is supported by the receiving report, contract, and vendor invoice before the statements are finalized.
3. The auditor asks whether the $50,000 Treasury error and the $2.3M accrual should be reported as adjustments or disclosures. What is your position?
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The $2.3M accrual should be recorded as an adjustment. It is a known, measurable liability for services received before year-end, and it exceeds the $1,000,000 materiality threshold. Recording it corrects an understatement of expenses and liabilities; disclosing it without recording it would leave the statements materially misstated.
The $50,000 Treasury error is below the materiality threshold, but it should still be corrected or disputed. In the reconciliation, it is an adding item that explains the difference between Treasury's records and the agency's FBWT. The agency should pursue a Treasury correction and document the item. If Treasury does not correct it before the statements are issued, the agency should evaluate whether a receivable or other adjustment is appropriate under its accounting policy; disclosure alone is not a substitute for correcting a known error if correction is practicable.
The auditor's concern is completeness and support. The response should provide the reconciliation, the accrual entry, the supporting receiving documentation, and the dispute file for the $50,000 charge. The activity should not use the $50,000 immateriality to avoid correcting the record, and it should not treat the $2.3M accrual as a mere subsequent event.