NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity

The USPTO is an agency of the United States within the Department of Commerce (DOC). The USPTO 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.

These financial statements include the USPTO’s two core business activities that promote the use of intellectual property rights as a means of achieving economic prosperity - processing patent applications and registering trademarks. 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.

These financial statements report the accounts for salaries and expenses (13X1006), special fund receipts (revenue withheld) (135127), customer deposits from the public (13X6542), and customer deposits from other federal agencies (13F3885), which are under the control of the USPTO. The federal budget classifies the USPTO under the Commerce and Housing Credit (376) budget function. The USPTO does not have custodial responsibility, nor does it have lending or borrowing authority. The USPTO does not transact business among its own operating units, therefore, no intra-entity eliminations are necessary.

Basis of Presentation

As required by the Chief Financial Officers Act of 1990 and 31 U.S.C. 3515 (b), the accompanying financial statements present the financial position, net cost of operations, budgetary resources, and cash flows for the core business activities of the USPTO. The books and records of the USPTO serve as the source of this information.

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

Basis of Accounting

Transactions are recorded on the accrual basis of accounting as well as on a budgetary basis. Budgetary accounting allows for compliance with the requirements for, and controls over, the use of federal funds. Accrual accounting allows for revenue to be recognized when earned and expenses to be recognized when goods or services are received, without regard to the receipt or payment of cash. The accompanying financial statements are presented on the accrual basis of accounting. The accounting principles and standards applied in preparing these financial statements are in accordance with the accounting policies and practices summarized in this note and the following hierarchy of accounting principles:

• FASAB Statements and Interpretations plus AICPA and Financial Accounting Standards Board pronouncements if made applicable to federal governmental entities by a FASAB Statement or Interpretation;
  
  
• FASAB Technical Bulletins and the following pronouncements if specifically made applicable to federal government entities by the AICPA and cleared by the FASAB: AICPA Industry Audit and Accounting Guides and AICPA Statements of Position;
  
  
• AICPA Accounting Standards Executive Committee Practice Bulletins if specifically made applicable to federal governmental entities and cleared by the FASAB and Technical Releases of the Accounting and Auditing Policy Committee of the FASAB;
  
  
• Implementation guides published by the FASAB staff and practices that are widely recognized and prevalent in the federal government; and
  
  
• Other accounting literature published by authoritative standard-setting bodies and other authoritative sources (a) in the absence of other guidance in the first four parts of this hierarchy, and (b) if the use of such accounting principles improves the meaningfulness of the financial statements.

Budgets and Budgetary Accounting

Appropriated funds from general taxpayer revenue were gradually eliminated following the passage of the OBRA in 1990. The OBRA established revenue withholding on statutory patent fees. Subsequent legislation removed the reference to a specific surcharge withholding of 69 percent, required the USPTO to withhold and deposit exact amounts of revenue, and extended the revenue withholding through the end of FY 1998. This withheld revenue constitutes offsetting receipts, and was deposited into a restricted special fund receipt account at the U.S. Department of the Treasury (Treasury). The USPTO may use moneys from this account only as authorized by the Congress, and only as made available by the issuance of a Treasury warrant. Moneys not appropriated to the USPTO by the Congress are retained in the restricted receipt account at the Treasury. The U.S. Patent and Trademark Reauthorization Act, Fiscal Year 1999, as amended by Public Law 106-113, reset patent statutory fees without the OBRA surcharge. The USPTO has not collected or deposited any additional amounts in the restricted special fund receipt account since 1998. The special fund receipt account currently has no liabilities, and the entire fund balance will remain restricted until appropriated.

Fees other than the restricted revenue withholding are offsetting collections subject to an annual congressional limitation, and are available to the USPTO until expended. Funds authorized but not used in a given fiscal year are carried forward for use in future periods. Fees collected in excess of the annual congressional limitation are held for use in future periods as appropriated by Congress.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 could differ from these estimates. In FY 2001, due to better insights gathered through our Activity Based Cost Accounting (ABC) model, estimates used in the calculation of deferred revenue were revised. Based on information that tracks when costs are incurred, we were able to determine that a significant amount of costs occur after first action and before disposition.

Revenue and Other Financing Sources

The USPTO’s fee rates are established by rule and law and, consequently, in some instances may not represent full cost or market price. Since FY 1993, USPTO 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 revenue for services that have not yet been performed. Amounts remitted by customers without a request for service are recorded as liabilities in customer deposit accounts until services are ordered.

The USPTO’s share of the cost to the federal government for providing pension and other post-retirement benefits to eligible USPTO employees is recognized as an imputed financing source.

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

Entity/Non-Entity

Assets that an entity is authorized to use in its operations are termed entity assets, while assets that are held by an entity but are not available for the entity’s use are termed non-entity assets. With the exception of a portion of the Fund balance with Treasury, all of the USPTO’s assets are entity assets and are available to carry out the mission of the USPTO within existing budget constraints.

Fund Balance with Treasury

The Financial Management Service (FMS) of the Treasury maintains commercial bank accounts for the USPTO to deposit revenue 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, many 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. All disbursements are processed by the Treasury.

Accounts Receivable

Intragovernmental accounts receivable represent amounts due from other federal entities. Of total intragovernmental accounts receivable, $1,543 thousand as of September 30, 2001 and 2000 is due to a financing agreement that the USPTO and the DOC entered into during FY 1995 to fund the Commerce Administrative Management System.

Accounts receivable from the public represent a very small portion of the USPTO’s assets as the USPTO requires payment prior to the provision of goods or services during the course of its core business activities. Public accounts receivable are mainly comprised of amounts due from former employees for the reimbursement of education expenses and other benefits.

The USPTO recorded a $13 thousand and $12 thousand allowance for uncollectible amounts to reduce the gross amount of its public accounts receivable to its net realizable value as of September 30, 2001 and 2000, respectively.

Advances and Prepayments

On occasion, the USPTO prepays amounts in anticipation of receiving future benefits. Although a payment has been made, an expense is not recorded until goods have been received or services have been performed. The largest prepayment is with the National Inventors Hall of Fame, a non-profit organization, with whom the USPTO entered into memorandums of understanding during FYs 1999 through 2001 for various cooperative efforts. In addition, the USPTO maintains deposit accounts with the Government Printing Office and the DOC to facilitate transactions of a recurring nature. The USPTO also advances funds to personnel for travel costs and expenses these amounts after travel has occurred.

Cash

Most of the USPTO’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 check amounts are considered to be cash equivalents. As of September 30, 2001 and 2000 the cash balance includes undeposited checks of $11,513 thousand and $19,953 thousand, respectively. Cash also is held outside the Treasury to be used as imprest funds. An imprest fund of $2 thousand and $15 thousand, respectively, was held as of September 30, 2001 and 2000.

Property and Equipment

The USPTO’s capitalization policies are summarized below:

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

Property and equipment acquisitions that do not meet the capitalization criteria are expensed upon receipt. Fully depreciated assets purchased prior to October 1, 1996, may be written off against accumulated depreciation.

Postemployment Compensation

Claims brought by employees of the USPTO for on-the-job injuries fall under the Federal Employees Compensation Act (FECA) administered by the U.S. 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. As of September 30, 2001, the USPTO recorded a $917 thousand liability for claims paid on its behalf during the benefit period July 1, 1999 through September 30, 2001. As of September 30, 2000, the USPTO recorded an $880 thousand liability for claims paid on its behalf during the benefit period July 1, 1998 through September 30, 2000.

Employees of the USPTO 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. As of September 30, 2001, the USPTO recorded a $53 thousand liability for the quarters ended June and September for claims paid by the DOL on the USPTO’s behalf. As of September 30, 2000, the USTPO recorded a $78 thousand liability for the quarters ended June and September.

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. 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 used.

Employee Retirement Systems and Benefits

Employees of the USPTO 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 who had five years of federal civilian service prior to 1984 and who are rehired after a break in service of more than one year may be able to elect to join the FERS and Social Security system or be placed in the CSRS offset retirement system.

The financial statements of the USPTO do not report CSRS or FERS assets or accumulated plan benefits that may be applicable to its employees. The reporting of such liabilities is the responsibility of the U.S. Office of Personnel Management. While the USPTO 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 USPTO 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 USPTO also is not required to fully fund the CSRS pension liabilities. The financial statements of the USPTO recognize an imputed financing source and corresponding expense that represents the USPTO’s share of the cost to the federal government of providing pension, post-retirement health, and life insurance benefits to all eligible USPTO employees.

For both FYs 2001 and 2000, the USPTO made contributions equivalent to approximately 8.5 percent and 10.7 percent of the employee’s basic pay for those employees covered by CSRS and FERS, respectively, based on OPM cost factors.

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 USPTO makes a mandatory one percent contribution to this plan. In addition, the USPTO 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 USPTO contributes a matching amount to the Social Security Administration.

For the period ended September 30, 2001 and 2000, respectively, the USPTO’s retirement plan contributions for CSRS and FERS participants were $40,638 thousand and $36,606 thousand. The USPTO also contributed $25,922 thousand and $23,350 thousand for the years ended September 30, 2001 and 2000, respectively, to the Social Security Administration for FICA benefits.

Deferred Revenue

Deferred revenue represents fees that have been received by the USPTO for requested services that have not been substantially completed. Two types of deferred revenue are recorded. The first type results from checks received, with requests for services, which 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.

As more information and experience is acquired about the patent and trademark processes, the deferred revenue calculation has been further developed. The deferred revenue calculation is a complex accounting estimate, which requires a detailed and comprehensive understanding of numerous business and administrative processes as well as an in-depth knowledge of workloads and inventories. As the ABC model improves, the calculation now includes the portion of costs associated with various stages of the application process. The calculation previously included deferred amounts of applications prior to reaching first action. Beginning in FY 2001, the calculation has expanded to include work that has reached first actions, but not been registered, abandoned, or allowed.

Comparative Data

The USPTO incurs costs that directly contribute to a business line but are centrally managed for efficiency. In FY 2000, these costs were displayed as an "allocated cost" in Note 10. However, it was determined in FY 2001 that although these costs are centrally managed, they are better displayed as a "direct cost". Therefore, the FY 2000 presentation has been changed to display only the support costs that do not directly contribute to a business line, thus are indirect in nature, as an "allocated cost". In addition, the "other services" cost category has been included in the "contractual services" cost category as it was determined that the nature of the costs in the "other services" category is consistent with the costs in the "contractual services" category. The FY 2000 Note 9 and 10 presentations also include a reclassification of costs from "maintenance and repairs" to "contractual services." In FY 2001, it was determined that the nature of some of the work performed on our major contracts would be more appropriately classified in the "contractual services" cost category. Reclassification of the FY 2000 presentation was necessary for comparative purposes.