Note 1 - Organization and Summary of Significant Accounting Policies

(a) Basis of Presentation 

The financial statements have been prepared from the books and records of FTC, in accordance with the form and content requirements of OMB Bulletin 97-01, as amended, and FTC's accounting policies, as summarized in Note 1(b). These statements are different from the financial reports also prepared by FTC pursuant to OMB directives, used to monitor the use of budgetary resources.

In addition, the accompanying statements include information on the activities of the agency's consumer redress program. Independent agents contracted to administer the program under the oversight of FTC program offices maintain the financial records for consumer redress activity. The consumer redress program is subject to independent audit and review by the Office of Inspector General.

(b) Basis of Accounting

On October 19, 1999 the Council of the American Institute of Certified Public Accountants (AICPA) recognized the Federal Accounting Standards Advisory Board (FASAB) as the body designated to establish generally accepted accounting principles (GAAP) for Federal governmental entities under Rule 203, "Accounting Principles," of the AICPA's Code of Professional Conduct. The FTC financial statements are prepared in accordance with GAAP for Federal government entities.

Transactions are recorded on an accrual accounting basis as well as a 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 facilitates compliance with legal constraints and controls over the use of federal funds. The accompanying financial statements are prepared on the accrual basis of accounting.

(c) Reporting Entity

The FTC was created by the Federal Trade Commission Act in 1914. The FTC enforces a variety of federal anti-trust and consumer protection laws. The FTC seeks to ensure that the nation's markets function competitively, and are vigorous, efficient, and free of undue restrictions. The FTC also works to enhance the smooth operation of the marketplace by eliminating acts or practices that are unfair or deceptive. In general, FTC's efforts are directed toward stopping actions that threaten consumers' opportunities to exercise informed choice. Finally, the FTC undertakes economic analysis to support its law enforcement efforts and to contribute to the policy deliberations of the Congress, the Executive Branch, other independent agencies, and state and local governments when requested.

During fiscal year 1999, the FTC underwent a reorganization resulting in the following eight offices in seven regions: Northeast (New York, New York); Southeast (Atlanta, Georgia); Midwest (Chicago, Illinois); East Central (Cleveland, Ohio); West (San Francisco & Los Angeles, California); Southeast (Dallas, Texas); and Northwest (Seattle, Washington).

The accompanying financial statements include the accounts for appropriated funds and other fund groups described below for which the FTC maintains financial records, and for the consumer redress accounts for which the agency has management oversight.

General Funds These funds consist of salaries and expense appropriation accounts used to fund the agency operations and capital expenditures.

Deposit and Suspense Funds These funds are maintained to account for receipts awaiting proper classification, or held in escrow, until ownership is established and proper distributions can be made.

Receipt Accounts The FTC collects civil penalties and other miscellaneous receipts, which are not retained by the FTC. These receipts are deposited directly to an U. S. Treasury receipt account.

(d) Budgets and Budgetary Accounting

Congress annually passes appropriations that provide FTC with authority to obligate funds for necessary expenses to carry out mandated program activities. These funds are available until expended. The funds appropriated are subject to OMB apportionment of funds in addition to Congressional restrictions on the expenditure of funds. Also, FTC places internal restrictions to ensure the efficient and proper use of all funds. Prior to fiscal year 1996, Congress passed appropriations of one-year for FTC operations. These one-year funds are available for obligation for one year and are canceled and cannot be used for disbursements after five years have elapsed from the year in which the appropriation was available for obligation.

(e) Revenues and Other Financing Sources

The FTC received approximately 10 percent and 17 percent for 1999 and 1998, respectively, of the funding needed to support its operations through annual appropriations that may be used, within statutory limits, for operating and capital expenditures.

Additional amounts are earned through the collection of fees under the Hart-Scott-Rodino (HSR) Anti-Trust Improvement Act of 1976. This Act, in part, requires the filing of pre-merger notifications with the FTC and the Anti-Trust Division of the Department of Justice and establishes a waiting period before certain acquisitions may be consummated. The FTC retains one half of the HSR premerger filing fees collected. This fee revenue funded approximately 86 percent and 80 percent for 1999 and 1998, respectively, of the agency's operations. Revenue is recognized when earned, i.e. all required documentation under the HSR Act has been received by the agency. Fees not retained by the FTC are not reported as revenue and are maintained in a suspense fund until transferred to the Department of Justice.

The FTC also obtains funds through reimbursement for services performed for other Federal agencies, typically to provide technical assistance on anti-trust laws and competition policy. Revenue is recognized when the services have been provided under the reimbursable agreement.

(f) Imputed Financing

FTC recognizes costs of pensions and other retirement benefits during employees' active years of service, but does not fully recognize the cost for the pensions, health benefits, or life insurance that employees receive once they retire. Consequently, an imputed financing source is recognized in the amount of $4,254,497 and $4,103,964 as of September 30, 1999 and 1998, respectively. The amount recognized is equal to the amount of current year unfunded pension and other retirement benefits costs which are subsidized by the Office of Personnel Management..

Associated costs are also included in the Statement of Net Costs. Factors used in the calculation of these benefit expenses were provided by the Office of Personnel Management in keeping with SFFAS No. 5, Accounting for Liabilities of the Federal Government.

(g) Fund Balances with the U.S. Treasury

With the exception of cash held in consumer redress custodial accounts by FTC's contracted agents, FTC does not maintain cash in commercial bank accounts. Cash receipts and disbursements are processed by the U.S. Treasury. Fund balances with Treasury are primarily appropriated funds that are available to pay current liabilities and finance authorized purchase commitments, and restricted funds which include deposit and suspense funds. The FTC's fund balances with Treasury are carried forward until goods or services are received and payment is made, or until such time as funds are returned to the U.S. Treasury.

(h) Accounts Receivable

Entity accounts receivables include amounts due from other Federal entities, and from current and former employees and vendors, for 1999 only. Non-Entity accounts receivable are for civil monetary penalties imposed as a result of the FTC's enforcement activities and for uncollected redress judgments. Since FTC does not retain these receipts, a corresponding liability is also recorded for these accounts receivable.

Opening judgment receivable balances reflect the FASAB standard for the recognition of losses using the collection criterion of "more likely than not". This criterion represents a more stringent criterion than used in the private sector under generally accepted accounting principles (GAAP). In Statement of Federal Financial Accounting Standards (SFFAS) No. 1, the Board states that it is appropriate to recognize the nature of federal receivables which, unlike trade accounts of private firms or loans made by banks, are not created through credit screening procedures. Rather, these receivables arise because of the assessment of fines from regulatory violations. In these circumstances, historical experience and economic factors indicate that these types of claims are frequently not fully collectible.

The FTC recognizes an allowance for uncollectible accounts receivable by individual account analysis based on the debtor's ability to pay, willingness to pay, and the probable recovery of amounts from secondary sources, including liens, garnishments, and other applicable collection tools.

(i) Advances and Prepayments

Payments in advance of the receipt of goods and services are recorded as advances and recognized as expense when the related goods and services are received. Advances are principally advances to FTC employees for official travel.

(j) Property and Equipment

Commercial vendors and the General Services Administration, which charges FTC a Standard Level Users Charge (SLUC) which approximates the commercial rental rates for similar properties, provide the land and buildings in which FTC operates.

Equipment is stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. All equipment with an acquisition value greater than $100,000 and a useful life of over two years is capitalized. Items purchased which do not meet these criteria are expensed. During fiscal year 1997, the FTC began capitalizing equipment in accordance with Statement of Federal Financial Accounting Standard Number 6, Accounting for Property, Plant and Equipment.

(k) Liabilities

Liabilities represent the amount of monies or other resources that are likely to be paid as the result of a transaction or event that has already occurred. Liabilities classified as not covered by budgetary resources are liabilities for which appropriations have not been enacted, and liabilities resulting from the agency's custodial activities (see Note 11). Also, the Government, acting in its sovereign capacity can abrogate FTC liabilities (other than contracts).

(l) Future Worker's Compensation and Accrued FECA

The FTC records an estimated liability for future workers' compensation claims based on data provided from the Department of Labor (DOL). FTC also records a liability for actual claims paid on its behalf by the DOL.

(m) Annual, Sick and Other Leave

Annual leave is accrued as it is earned and the liability is reduced as leave is taken. At year-end, the balance in the accrued annual leave account is adjusted to reflect the liability at current pay rates and leave balances. All annual leave is unfunded, and accordingly, is reflected, as a liability not covered by budgetary resources. Sick and other leave is expensed when incurred.

(n) Post-Retirement Health Benefits and Life Insurance

As required by SFFAS #5, Accounting for Liabilities of the Federal Government, the FTC is recognizing its share of the future cost of post-retirement health benefits and life insurance for FTC employees while they are still employed. OPM has provided the FTC with certain cost factors that estimates the true cost of providing the post retirement benefit to current employees. During fiscal years 1999 and 1998, the cost factors relating to health benefits were $2,731 and $2,529 per employee enrolled in the Federal Employees Health Benefits program, respectively. The total cost recognized during fiscal years 1999 and 1998 were $2,195,041 and $2,008,026, respectively.

During fiscal years 1999 and 1998, the cost factor relating to life insurance was 0.02% of basic pay for employees enrolled in the Federal Employee Group Life Insurance program. The total costs recognized for the years ended September 30, 1999 and 1998 were $8,604 and $8,026, respectively.

(o) Retirement Plans

Approximately 39 percent of FTC's employees participate in the Civil Service Retirement System (CSRS), to which FTC makes matching contributions equal to 7.25 percent of pay. On January 1, 1984, the Federal Employees Retirement System (FERS) went into effect pursuant to Public Law 99-335. FERS and Social Security automatically cover employees hired after December 31, 1983, while employees hired prior to January 1, 1984 may elect to either join FERS or remain in the CSRS. The FTC also contributes to FERS on behalf of its employees.

One primary difference between FERS and CSRS is the government contribution to the Thrift Savings Plan (TSP) that FERS employees receive. FERS covered employees may contribute up to ten percent of pay to the TSP plan. FTC automatically contributes one percent of basic pay, in addition to matching employee contributions up to an additional four percent of pay. CSRS covered employees may contribute up to five percent of earnings to TSP but do not receive a matching contribution. Employees participating in FERS are covered under the Federal Insurance Contributions Act (FICA) for which FTC contributes a matching amount to the Social Security Administration.

Although FTC contributes a portion for pension benefits and makes the necessary payroll withholdings, it is not responsible for contribution refunds, employee retirement benefits, or the retirement plan assets. Therefore, the FTC financial statements do not report CSRS and FERS assets, accumulated plan benefits, or unfunded liabilities, if any, which may be applicable to employee. Such reporting is the responsibility of the Office of Personnel Management (OPM).

However, as required by Statement of Federal Financial Accounting Standard (SFFAS) Number 5, Accounting for Liabilities of the Federal Government, beginning in fiscal year 1997, FTC began recognizing its share of the cost of providing a pension benefit to eligible employees. OPM has provided FTC with certain cost factors that estimate the true cost of providing the pension benefits to current employees. The cost factors range from 24.2% to 40% of basic pay for CSRS covered employees and 11.5% to 24.6% of basic pay for FERS covered employees during fiscal years 1999 and 1998. FTC recognized approximately $2,050,852 and $2,087,912 in pension expense during fiscal years 1999 and 1998, respectively (see Note 10).

(p) Net Position

FTC's net position is comprised of the following: 1. Unexpended appropriations represent the amount of unobligated and unexpended budget authority. Unobligated balances are the amount of appropriations or other authority remaining after deducting the cumulative obligations from the amount available for obligation and undelivered orders.   2. Cumulative results of operations represents the net results of operations since inception plus the cumulative amount of prior period adjustments, the remaining book value of capitalized assets, and future funding requirements.

(q) Comparative Data

Certain 1998 financial statement line items have been reclassified to conform to the current year's presentation.

Note 2 - Fund Balances with Treasury

Fund balances with Treasury consisted of the following at September 30, 1999 and 1998:

The restricted unobligated fund balance is related to expired authority and is only available for adjustments. The obligated balance includes accounts payable and undelivered orders that have drawn down on unexpended appropriations but have not yet decreased the cash balance on hand.

During fiscal years 1999 and 1998, the FTC returned $754,750 and $37,380, respectively to the U.S. Treasury from the expired appropriations 2940100 and 2930100.

Other Information Deposit and suspense funds amounting to $32,235,572 and $31,567,384 as of September 30, 1999 and 1998, respectively, stated above are not available to finance FTC activities and are classified as non-entity assets and a corresponding liability is also recorded.

Note 3 - Cash and Other Monetary Assets

Cash and other monetary assets held as entity assets consist of cash held in imprest funds. Cash and other monetary assets held as non-entity assets consist of deposits in transit for premerger filing fees and redress judgment amounts on deposit with FTC's distribution agents. A corresponding liability is recorded for these assets. Cash and other monetary assets consisted of the following at September 30, 1999 and 1998:

Note 4 - Accounts Receivable

Accounts receivable consisted of the following, as of September 30, 1999 and 1998:

For more detailed information on judgments receivable see Exhibit A.

Note 5 - Property, Plant, and Equipment, Net

Capitalized property and equipment, net of accumulated depreciation, consisted of the following as of September 30, 1999 and 1998:

Property and equipment are depreciated using the straight-line method. Depreciation expense was $84,179 for each of the fiscal years ending September 30, 1999 and 1998.

Note 6 - Liabilities Not Covered by Budgetary Resources

Liabilities not covered by budgetary resources consisted of the following as of September 30, 1999 and 1998:

(a) Intragovernmental and With the Public

(b) Other Information

Civil Penalty Collections Due represents the contra account for accounts receivable due for civil monetary penalties which are transferred to the general fund of the Treasury upon receipt.

Amounts to be Disgorged to Treasury include amounts for reconciled statements of differences and miscellaneous receipts.

Undisbursed Premerger Filing Fees represent filing fees collected under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 that are held in suspense until distribution to the Justice Department or the FTC.

Undisbursed Redress includes redress in FTC's Treasury deposit account, or with FTC redress contractors.

Other consists primarily of deposits in transit and undisbursed cash in the suspense liability account for 1999 and 1998.

Future Workers' Compensation is the estimated liability for future workers' compensation claims based on data provided by the DOL. Refer to Note 1(l).

Accrued Annual Leave represents the liability not covered by budgetary resources for accrued annual leave of FTC employees. Refer to Note 1(m).

Note 7 - Net Position

Net position consisted of the following as of September 30, 1999 and 1998:

Note 8 - Commitments and Contingencies

Commitments FTC is committed under obligations for goods and services which have been ordered but not yet received (undelivered orders) at fiscal year end. Undelivered orders were $11,146,309 and $6,372,487 as of September 30, 1999 and 1998, respectively.

Contingencies The FTC is a party in various administrative proceedings, legal actions, and claims brought by or against it. In the opinion of FTC management and legal counsel, the ultimate resolution of these proceedings, actions and claims, will not materially affect the financial position or results of operation of the FTC.

Leases The FTC rents approximately 361,537 square feet of space in both commercial and government-owned properties for use as offices, storage and parking. Space leases for government-owned property are made with the General Services Administration (GSA). Leases of commercial property are made through and managed by GSA. The Commission has leases on three government-owned properties and 12 commercial properties. The FTC's current leases expire at various dates through 2002.

Rent expenditures for the years ended September 30, 1999 and 1998 were approximately $10 million each year. This amount is net of a GSA credit of approximately $1.8 million for each of the fiscal years 1999 and 1998, relating to the main headquarters building. Future minimum lease payments due under leases of government-owned property as of September 30, 1999 are as follows:

Future minimum lease payments under leases of commercial property due as of September 30, 1999 are as follows:

Note 9 - Exchange Revenue

The Federal Accounting Standards Advisory Board defines exchange revenue as inflows of resources to a governmental entity that the entity has earned. They arise from exchange transactions that occur when each party to the transaction sacrifices value and receives value in return. (Statement of Recommended Accounting Standards No. 7.) At the FTC, exchange revenue is recognized for premerger filing fees paid under the HSR Act. Filing fee amounts are set by law; in fiscal years 1999 and 1998, the statutory filing fee was $45,000 per qualifying filing. Amounts are earned when the premerger filing is accepted by the agency. Filing fees in the amount of $97,469,991 and $100,845,015 were earned during fiscal years ended September 30, 1999 and 1998, respectively.

Exchange revenue is also earned for services provided to other government agencies through reimbursable agreements. FTC recovers the full cost of services, primarily salaries and related expenses. Amounts are earned at the time the expenditures are incurred against the reimbursable order. During fiscal years 1999 and 1998, FTC earned $514,572 and $425,045 under agreements with the U.S. Agency for International Development to provide technical assistance on competition and antitrust laws to countries in the Former Soviet Union, Ukraine, Eastern Europe and South America. The FTC also earned $6,562 and $32,021 under miscellaneous reimbursable agreements with the Housing and Urban Development Agency and the U.S. Merit Systems Protection Board during fiscal years 1999 and 1998, respectively. An additional $63,451 was earned for miscellaneous reimbursable agreements with the Federal Communications Commission during fiscal year 1998 only.

Note 10 - Pension Expense

The Commission recognizes the full cost of providing future pension benefits to eligible employees while they are working. The excess of total pension expense over the amounts contributed by FTC and its employees must be financed by OPM. FTC recognizes an imputed financing source equal to this excess amount. Pension expense in 1999 and 1998 consisted of the following:

Note 11 - Custodial Activities

The FTC functions in a custodial capacity with respect to revenue transferred or transferable to recipient government entities or the public. These amounts are not reported as revenue to the FTC. The major components of the FTC's custodial activities are discussed below.

(a) Pre-Merger Filing Fees

All Hart-Scott-Rodino (HSR) premerger filing fees are collected by the FTC pursuant to section 605 of P.L. 101-162, as amended, and are divided evenly between the FTC and the Department of Justice. The collected amounts are then credited to the appropriations accounts of the two agencies (FTC's "Salaries and Expenses" and DOJ's "Salaries and Expenses, Antitrust Division"). During fiscal years 1999 and 1998, respectively, FTC collected $194,939,982 and $201,690,031 in HSR fees. Half of this amount, $97,469,991 in 1999, and $100,845,015 in 1998, was held for transfer to DOJ. As of September 30, 1999 and 1998 collections not transferred to DOJ total $26,628,753 and $27,022,518, respectively.

(b) Civil Penalties and Fines

Civil penalties collected in connection with the settlement or litigation of the FTC's administrative or federal court cases are collected by either the FTC or DOJ as provided for by law. DOJ assesses a fee equivalent to three percent of amounts collected before remitting them to the agency. The agency then deposits these collections into the U. S. Treasury. In 1999 and 1998 collections by DOJ remitted directly to Treasury on FTC cases amounted to an additional $4.2 million and $500,000, respectively, which are not reflected in the financial statements.

(c) Redress

The Commission obtains consumer redress in connection with the settlement or litigation of both its administrative and its federal court cases. The Commission attempts to distribute funds thus obtained to consumers whenever possible. If consumer redress is not practical, the funds are paid (disgorged) to the U. S. Treasury. Major components of the program include eligibility determination, disbursing redress to claimants, and accounting for the disposition of these funds. Collections made against court-ordered judgments totaled $21,631,516 and $17,812,538 during fiscal years 1999 and 1998, respectively.

The sources of these collections are as follows:

(d) Accrual Adjustments

These adjustments represent the difference between the agency's opening and closing accounts receivable balances. Accounts receivable are the funds owed to the agency (as a custodian) and ultimately to consumers or other entities. See Exhibit A for computation of accrual adjustments to the Statement of Custodial Activity.

(e) Receiver Accounts and Other Accounts

Receiver and other accounts primarily consist of funds collected by receivers and passed through to consumers during the year.

(f) Contractor Fees Net of Interest Earned

Collections against monetary judgments are often deposited with one of the agency's three redress contractors until distributions to consumers occur. Funds are deposited in interest bearing accounts, and the interest earnings are used to fund administrative expenses. Contractor expenses for the administration of redress activities and funds management amounted to $958,581 and $1,427,482 during the years ended September 30, 1999 and 1998, respectively.

Interest earned was $683,065 and $1,215,109 during fiscal years 1999 and 1998, respectively, with the difference of $275,516 and $212,373 representing expenses in excess of earnings.

(g) Change in Liability Accounts

Liability accounts contain funds that are in the custody of the agency or its agents, and are owed to others (consumers, receivers for fees, and/or the Department of Justice.) See Exhibit B for the computation of liability account changes.

(h) Current Year Judgments

A judgment is a formal decision handed down by a court. For the purposes of this financial statement, judgments include amounts that defendants have agreed, or are ordered, to pay, for the purpose of making restitution to consumers deemed to have been harmed by the actions of the defendant(s) in the case. In fiscal years 1999 and 1998, the agency obtained monetary judgments against defendants totaling $140 million and $55 million, respectively.

In addition to the $140 million in judgments received during fiscal year 1999, another $48.9 million in refunds was ordered to be paid by defendants.

(i) Treasury Referrals

Monetary judgments six months or more past due are referred to the Department of Treasury for follow up collection efforts in keeping with the Debt Collection Improvement Act of 1996. Treasury's Debt Management Services (DMS) administers the program, and deducts 18 percent from amounts ultimately collected for its fee. Collections net of fees are returned to the FTC for distribution to either consumers, in the form of redress, or to the general fund of the Treasury as disgorged amounts. In fiscal years 1999 and 1998, $608,356 and $361,732 (net of fees) was collected based on FTC referrals. The DMS will not accept cases where defendants are in bankruptcy or a foreign defendant is involved.

The FTC does not refer cases to DMS while they are in receivership. During 1999 and 1998, $22,913,153 and $26,826,963 were referred to the DMS for collection.

(j) Adjustments to the Allowance

Adjustments to the allowance for redress represents amounts formally written off during the year in the amount of $41,525,198 and adjustments to the provision for uncollectable  amounts of $73,724,464.

Exhibit A

FEDERAL TRADE COMMISSION
Notes to Statements of Custodial Activity
Change in Liability Accounts
September 30, 1999 and 1998

Exhibit B

Federal Trade Commission
Notes to Statements of Custodial Activity
Change in Liability Accounts
September 30, 1999 and 1998