Financial Statements

Table of Contents

Financial Statements

Consolidated Balance Sheet

As of September 30, 1998

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

Consolidating Statement of Net Cost

For the Year Ended September 30, 1998

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

Consolidating Statement of Changes in Net Position

For the Year Ended September 30, 1998

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

Consolidated Statement of Budgetary Resources

For the Year Ended September 30, 1998

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

Consolidated Statement of Financing

For the Year Ended September 30, 1998

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

Notes to Financial Statements

As of and for the Year Ended September 30, 1998

NOTE 1. Summary of Significant Accounting Policies

Basis of Presentation

As required by the Chief Financial Officers Act of 1990 (CFO Act) and 31 U.S.C. 3515 (B), the accompanying financial statements present the financial position, net cost of operations, and budgetary resources of the Patent and Trademark Office (PTO) of the United States. The books and records of the PTO serve as the source of this information.

These financial statements were prepared in accordance with the guidelines specified by the Office of Management and Budget (OMB) in Bulletin Number 97-01, Form and Content of Agency Financial Statements, as well as the accounting policies of the PTO. They may therefore differ from other financial reports submitted pursuant to OMB directives for the purpose of monitoring and controlling the use of the PTO's budgetary resources.

Reporting Entity

The PTO is a bureau of the U.S. Department of Commerce (DOC) promoting the use of intellectual property rights-patents, trademarks, and copyrights-as a means of achieving economic prosperity. The PTO administers the laws relevant to patents and trademarks and advises the Secretary of Commerce, the President of the United States, and the Administration on patent, trademark, and copyright protection, and trade-related aspects of intellectual property.

The PTO has four core business activities: processing patent applications, registering trademarks, disseminating information about patents and trademarks, and directing intellectual property policy. These activities not only give innovators, businesses, and entrepreneurs the protection and encouragement they need to turn their creative ideas into tangible products, but also provide protection for their inventions and trademarks.

The financial position, net cost of operations, and budgetary resources for these core business activities are presented in the accompanying financial statements. These statements include the accounts for salaries and expenses (13X1006), special fund receipts (revenues withheld) (135127), special fund expenditures (13X5127), and customer deposits (13X6542) which are under the control of the PTO. The Federal budget classifies the PTO under the Commerce and Housing Credit (370) budget function. The PTO does not have custodial responsibility, nor does it have lending or borrowing authority.

Budgets and Budgetary Accounting

The PTO has been fully fee-funded since FY 1993. Appropriated funds from general taxpayer revenues were gradually eliminated following the passage of the Omnibus Budget Reconciliation Act (OBRA) in 1990.

The OBRA established revenue withholding on statutory patent fees. Subsequent legislation
(a) removed the reference to a specific surcharge withholding of 69 percent, (b) required the PTO to withhold and deposit exact amounts of revenue, and (c) extended the revenue withholding through the end of FY 1998. These withheld revenues constitute offsetting receipts, and are deposited into a restricted special fund receipt account at the U.S. Department of the Treasury (Treasury). The PTO may use moneys from this account only as authorized by Congress, and only as made available by the issuance of a Treasury warrant. Excess moneys not appropriated to the PTO by Congress are retained in the restricted receipt account at the Treasury.

The PTO began FY 1998 with $141,529 thousand in the restricted special fund receipt account at the Treasury. During FY 1998, the PTO collected and deposited an additional $92,000 thousand in the account, ending the fiscal year with a total fund balance of $233,529 thousand. The PTO recognized the entire $92,000 thousand collected as exchange revenue on its Statement of Net Cost. The special fund receipt account currently has no liabilities, and the entire fund balance will remain restricted until Congress appropriates it.

Fees other than the restricted revenue withholding are offsetting collections subject to an annual congressional limitation, and are available to the PTO until expended. Funds authorized but not used in a given fiscal year are carried forward for use in future periods.

Basis of Accounting

Transactions are recorded on the accrual basis of accounting as well as on a budgetary basis. Budgetary accounting enables compliance with the requirements for and controls over the use of Federal funds. Under the accrual method, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to the receipt or payment of cash. The accompanying financial statements are presented on the accrual basis of accounting.

Under the authority of the CFO Act, the Federal Accounting Standards Advisory Board was established to recommend Federal accounting principles and standards to the Secretary of the Treasury, the Director of the OMB and the Comptroller General, co-principals of the Joint Financial Management Improvement Program (JFMIP). Specific accounting principles and standards agreed upon by the three co-principals are issued by the Director of the OMB and the Comptroller General. The Statements of Federal Financial Accounting Standards (SFFAS) constitutes generally accepted accounting principles (GAAP) for the Federal government. The accounting principles and standards applied in preparing these financial statements are in accordance with this Federal GAAP and the following hierarchy of accounting principles:

• Individual standards agreed to by the Director of the OMB, the Comptroller General, and the Secretary of the Treasury and published by the OMB and the General Accounting Office.
• Interpretations related to the SFFASs issued by the OMB in accordance with the procedures outlined in OMB Circular A-134, Financial Accounting Principles and Standards.
• Requirements contained in the OMB's Form and Content Bulletin in effect for the period covered by the financial statements.
• Accounting principles published by other authoritative standard-setting bodies and other authoritative sources (a) in the absence of other guidance in the first three parts of this hierarchy, and (b) if the use of such accounting principles improves the meaningfulness of the financial statements.

Revenues and Other Financing Sources

The PTO's user-fee rates are established by rule and law and, consequently, in some instances may not be based on full cost or market price. Since 1993, PTO funding has been primarily through the collection of user fees. Fees that are remitted with initial applications and requests for other services are recorded as exchange revenue when received, with an adjustment at year-end to defer revenues for services that have not yet been performed. Revenues withheld pursuant to the OBRA are also recognized as exchange revenue. Advance payments made by customers for services not yet requested are recorded as liabilities in customer deposit accounts until those services are ordered.

Property and equipment previously purchased with funds appropriated from general taxpayer revenues is recognized to the extent of depreciation expense as a financing source. The PTO's share of the cost to the Federal government of providing pension and other post-retirement benefits to eligible PTO employees is recognized as an imputed financing source.

The PTO also receives some financial gifts and gifts-in-kind from anonymous donors. These gifts are not of significant value and are not reflected in the PTO's financial statements. Most gifts-in-kind are used for official travel to further the attainment of the mission and objectives of the PTO. All such transactions are included in the consolidated Gifts and Bequests Fund financial statements prepared by the DOC.

Fund Balance with Treasury

The Financial Management Service (FMS) of the Treasury maintains commercial bank accounts for revenues collected. All moneys maintained in these accounts are transferred to the Federal Reserve Bank on the next business day following the day of deposit. In addition, some customer deposits are wired directly to the Federal Reserve Bank.

All banking activity is conducted in accordance with the directives issued by the FMS of the Treasury. The amount of unrestricted funds held by the Treasury that are available to pay current liabilities and to finance authorized purchases is limited each year by Congress. All disbursements are processed by the Treasury's Philadelphia Regional Finance Center.

Accounts Receivable

Governmental accounts receivable represent amounts due from non-Federal entities, most of which are due from former employees for the reimbursement of education expenses. The PTO recorded a $182 thousand allowance for uncollectible amounts to reduce the gross amount of accounts receivable to its net realizable value.

Intragovernmental accounts receivable represent amounts due from other Federal entities, of which $2,315 thousand is due to a financing agreement entered into during FY 1995 with the DOC to fund the Commerce Administrative Management System.

Cash

Most of the PTO's cash balance consists of undeposited checks for fees that were not processed at the balance sheet date due to the lag time between receipt and initial review. All such undeposited cash amounts are considered to be cash equivalents. Cash is also held outside the Treasury to be used as imprest funds for small purchases, local travel, and emergency salary advances. The cash balance includes undeposited checks of $15,965 thousand and an imprest fund of $15 thousand.

Property and Equipment

The PTO's capitalization policies are summarized below:

Contractor costs for developing custom software are capitalized when incurred for the design, coding, and testing of the software. Software in Progress is not amortized until placed in service.

All other property and equipment acquisitions are expensed upon receipt. Fully depreciated assets purchased prior to October 1, 1996, may be written off against accumulated depreciation.

The buildings in which the PTO operates are leased from private concerns by the General Services Administration (GSA). Long-term leases are negotiated by the GSA and rent charges approximate to commercial rental rates are levied by the GSA and paid by the PTO. The lease arrangements with the GSA are considered operating leases.

Liabilities

The PTO records as liabilities all amounts or other resources that are likely to be paid as the direct result of events that have already occurred. Liabilities presented in the financial statements and classified as covered by budgetary resources comprise realized budgetary resources existing at the balance sheet date and unrealized resources available in the future. The realized resources are $13,263 thousand in FY 1998 unobligated balances and the unrealized resources are $108,316 thousand in unobligated balances from FY 1998 fee collections in excess of the amount apportioned by Congress, less a $71,000 thousand rescission directed by the FY 1999 appropriations bill. The net of these unobligated balances provides the PTO with $50,579 thousand of resources available for obligation on October 1, 1998.

The PTO cannot pay any liabilities unless funding is available and authorized by Congress. The government acting in its sovereign capacity can abrogate liabilities of the PTO arising from obligations other than contracts.

Postemployment Compensation

Claims brought by employees of the PTO for on-the-job injuries fall under the Federal Employees Compensation Act (FECA) administered by the Department of Labor (DOL). The DOL bills each agency annually as its claims are paid, but payment on these bills is deferred two years to allow for funding through the budget process. The PTO recorded a liability for $889 thousand for claims paid on its behalf during the benefit period July 1, 1996 through September 30, 1998.

Employees of the PTO who lose their jobs through no fault of their own may receive unemployment compensation benefits under the unemployment insurance program administered by the DOL. The DOL bills each agency quarterly as its claims are paid. The PTO recorded a liability for $28 thousand for claims paid by the DOL on the PTO's behalf for the quarters ended June and September, 1998.

Annual, Sick, and Other Leave

Annual leave and compensatory time are accrued as earned, with the accrual being reduced as leave is taken. An adjustment is made each fiscal year to ensure that the balances in the accrued leave accounts reflect current pay rates. Accrued annual leave and compensatory time are reported as covered by budgetary resources only for presentation in the Balance Sheet. No portion of this liability has been obligated. To the extent current or prior year funding is not available to pay for leave earned but not taken, funding will be obtained from future financing sources. Sick leave and other types of non-vested leave are expensed as taken.

Employee Retirement Systems and Benefits

Employees of the PTO participate in either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). The FERS was established by the enactment of Public Law 99-335. Pursuant to this law, the FERS and Social Security automatically cover most employees hired after December 31, 1983. Employees hired prior to January 1, 1984 can elect to join the FERS and Social Security or remain in the CSRS.

The financial statements of the PTO do not report CSRS or FERS assets, accumulated plan benefits, or any unfunded liabilities, if any, that may be applicable to its employees. The reporting of such liabilities is the responsibility of the Office of Personnel Management. While the PTO reports no liability for future payments to employees under these programs, the Federal government is liable for future payments to employees through the various agencies administering these programs. The PTO does not fund post-retirement benefits such as the Federal Employees Health Benefit (FEHB) Program and the Federal Employees Group Life Insurance (FEGLI) Program. The PTO also is not required to fully fund the CSRS pension liabilities. The financial statements of the PTO recognize an imputed financing source and corresponding expense that represents the PTO's share of the cost to the Federal government of providing pension and post-retirement health and life insurance benefits to all eligible PTO employees.

For those employees covered by the CSRS, the PTO makes contributions equivalent to approximately 8.5 percent of the employee's pay. For those covered by the FERS, the PTO makes contributions of approximately 10.7 percent.

All employees are eligible to contribute to a thrift savings plan. For those employees participating in the FERS, a thrift savings plan is automatically established, and the PTO makes a mandatory one percent contribution to this plan. In addition, the PTO makes matching contributions ranging from one to four percent for FERS-eligible employees who contribute to their thrift savings plans. No matching contributions are made to the thrift savings plans for employees participating in the CSRS. Employees participating in the FERS are covered under the Federal Insurance Contributions Act (FICA), for which the PTO contributes a matching amount to the Social Security Administration.

In FY 1998, the PTO's retirement plan contributions for CSRS and FERS participants were $28,157 thousand. The PTO's contributions to the Social Security Administration for FICA benefits were $11,931 thousand.

As required by the Federal Workforce Restructuring Act of 1994, the PTO contributed eighty dollars per position on the rolls as of March 31, 1998 to the Civil Service Retirement and Disability Fund.

Deferred Revenues

Deferred revenues represent fees that have been received by the PTO for requested services but will not be fully earned until the related service has been substantially completed. Two types of deferred revenues are recorded. The first type results from checks received with a request for service that were not yet deposited due to the lag time between receipt and initial review.

The second type of deferred revenue relates primarily to fees for applications that have been partially processed, and to collected issue fees for which the patent has not been issued.

Application fees that have undergone the initial processing phase but have not been reviewed by a patent examiner or trademark attorney are deferred, and revenues are recognized to the extent costs are incurred in the initial processing phase. The balance of application fees received is considered unearned.

Issue fees are earned over a ten-week processing cycle. Revenue is earned to the extent costs are incurred in the processing cycle, with the remaining issue fees considered unearned.

NOTE 2. Fund Balance with Treasury

At the end of FY 1998, the Fund Balance with Treasury consisted of the following:

(Dollars in thousands)

As discussed in Note 1, the FY 1999 appropriations bill directed Treasury to rescind $71,000 thousand of the PTO's resources. The $121,564 thousand of unobligated appropriated funds include the $71,000 thousand rescinded as of October 1, 1998.

NOTE 3. Property and Equipment

At the end of FY 1998, property and equipment consisted of the following:

(Dollars in thousands)

Class of Fixed Asset

NOTE 4. Deferred Revenues

Due to the unique funding structure of the PTO, budgetary resources do not cover a portion of unearned fees. As discussed in Note 1, a specified amount of the PTO's fees, earned or unearned, are withheld and deposited into a restricted special fund receipt account. These funds are not considered a resource until appropriated and made available by the issuance of a Treasury warrant. Also as discussed in Note 1, the FY 1999 appropriations bill directed the Treasury to rescind $71,000 thousand of the PTO's resources as of October 1, 1998. Consequently, the $71,000 thousand is not considered a budgetary resource to cover liabilities incurred as of September 30, 1998. In addition, the current patent fee structure sets low initial application fees following later with income from maintenance fees as a supplement to cover the full cost of the patent examination and issuance process. The combination of these unique funding circumstances requires the PTO to obtain additional budgetary resources to cover its liability for unearned revenue as of September 30, 1998. At the end of FY 1998, deferred revenues consisted of the amounts on the following page.

(Dollars in thousands)

Class of Deferred Revenue

NOTE 5. Actuarial Liability

The FECA provides income and medical cost protection to covered Federal civilian employees injured on the job, employees who have contracted a work-related occupational disease, and beneficiaries of employees whose death is attributable to a job-related injury or occupational disease. Claims incurred for benefits under the FECA for the PTO's employees are administered by the DOL and are ultimately paid by the PTO.

The DOL estimated future workers compensation (FWC) liability by applying actuarial procedures developed to estimate the liability for FECA benefits. The actuarial liability estimates for FECA benefits include the expected liability for death, disability, and medical and miscellaneous costs for approved compensation cases.

The DOL method of determining liability uses historical benefit payment patterns for a specific incurred period to predict the ultimate payments for that period. Consistent with past practice, these projected annual benefit payments have been discounted to present value using the OMB's economic assumptions for ten-year Treasury notes and bonds. The DOL used a 5.60 percent interest rate assumption for discounting the calculation of the liability for the first year and each year thereafter.

In FY 1997, the FWC actuarial model was revised to include additional features that would provide a more accurate estimation of the FECA FWC liability. A wage inflation factor and a medical inflation factor were added and applied to the calculation of projected future payments, and a discounting formula was added to recognize the timing of actual compensation payments. The forward projection used by the model was also increased from 23 years to 37 years. All changes to the FWC actuarial model were treated prospectively. Based on information provided by the DOL, the DOC determined that the estimated liability of the PTO at the end of FY 1998 was $3,797 thousand. This entire liability is not covered by budgetary resources.

NOTE 6. Leases

The operating lease agreements negotiated by the GSA for the PTO's office buildings expire at various dates between FY 1999 and FY 2007. The PTO paid $50,042 thousand in rent during FY 1998. Under existing commitments at the end of FY 1998, the minimum lease payments through FY 2003 are as follows:

NOTE 7. Imputed Financing

The PTO recognizes an imputed financing source and corresponding expense to represent its share of the cost to the Federal government of providing pension and post-retirement health and life insurance benefits (Pension/ORB) to all eligible PTO employees.

The components of the imputed financing sources and corresponding expenses for FY 1998 are:

NOTE 8. Program or Operating Expenses

Program or operating expenses consists of both those costs that are directly charged to the business activities and those costs that are allocated to the business activities. The costs that are allocated to the business activities can be further distinguished by those costs that are centrally managed for efficiency, but can be directly controlled within the management structure of the business activities, and those costs that are indirect charges in support of the business activities that are controlled at a bureau-wide level. The designation of the allocated costs between those directly allocated to the business activities and those considered indirect are displayed in Note 9. Total program or operating expenses for
FY 1998, by expense category, consisted of the following:

(Dollars in thousands)

* Depreciation includes losses from dispositions and abandonments in the amount of $5,175 thousand.

NOTE 9. Program or Operating Expenses by Category and Responsibility Segment

The program or operating expenses for FY 1998, by expense category and responsibility segment, consisted of the following:

(Dollars in thousands)

NOTE 10. Commitments and Contingencies

Commitments

In addition to the future lease commitments discussed in Note 6, the PTO is committed under obligation for the purchase of goods and services that had been ordered but not yet received at fiscal year-end. Total undelivered orders for all of the PTO's activities were $224,242 thousand at the end of FY 1998, of which $222,772 thousand were unpaid.

Contingencies

The PTO is a party to various routine administrative proceedings, legal actions, and claims brought by or against it, including threatened or pending litigation involving labor relations claims, some of which may ultimately result in settlements or decisions against the Federal government. Management expects that it is reasonably possible that, as of September 30, 1998, up to approximately $2,555 thousand may be owed for awards or damages involving labor relations claims.

Judgment Fund

Certain legal matters to which the PTO is named a party may be administered and in some instances litigated and paid by other Federal agencies. These primarily relate to tort claims and contract disputes. Generally, amounts paid in excess of $2.5 thousand for Federal Tort Claims Act settlements or awards pertaining to these litigations are funded from a special appropriation called the Judgment Fund. During FY 1998 there were no payments from the Judgment on behalf of the PTO. Although the ultimate disposition of any potential Judgment Fund proceedings cannot be determined, management does not expect that any liability or imputed cost that might ensue would be material to the PTO's financial statements.

< Previous Page | Next Page >