|Performance and Accountability Report Fiscal Year 2009
UNITED STATES PATENT AND TRADEMARK OFFICE NOTES TO FINANCIAL STATEMENTS
As of and for the years ended September 30, 2009 and 2008
Note 1. Summary of Significant Accounting Policies
The United States Patent and Trademark Office (USPTO) is an agency of the United States within the U.S. Department of Commerce. 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 three core business activities – granting patents, registering trademarks, and intellectual property protection and enforcement – that promote the use of intellectual property rights as a means of achieving economic prosperity. These activities give innovators, businesses, and entrepreneurs the protection and encouragement they need to turn their creative ideas into tangible products, and also provide protection for their inventions and trademarks.
These financial statements report the accounts for salaries and expenses (13X1006), special fund receipts (135127), customer deposits from the public and other Federal agencies (13X6542), Patent Cooperation Treaty collections (13X6538), and the Madrid Protocol Collections (13X6554) that are under the control of the USPTO. The Federal budget classifies the USPTO under the Other Advancement of Commerce (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, and 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 USPTO’s core business activities. The books and records of the USPTO serve as the source of this information.
These financial statements were prepared in accordance with accounting principles generally accepted in the United States (GAAP) and the form and content for entity financial statements specified by the Office of Management and Budget (OMB) in Circular A-136, Financial Reporting Requirements, as amended, as well as the accounting policies of the USPTO. Therefore, they may 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. The GAAP for Federal entities are the standards prescribed by the Federal Accounting Standards Advisory Board (FASAB), which is the official body for setting the accounting standards of the Federal Government.
Throughout these financial statements, assets, liabilities, revenues, and costs have been classified according to the type of entity with which the transactions are associated. Intra-governmental assets and liabilities are those from or to other Federal entities. Intra-governmental earned revenues are collections or accruals of revenue from other Federal entities and intra-governmental costs are payments or accruals to other Federal entities.
The USPTO is a party to allocation transfers with another federal agencies as a receiving (child) entity. Allocation transfers are legal delegations by one department of its authority to obligate budget authority and outlay funds to another department. A separate fund account (allocation account) is created in the U.S. Treasury as a subset of the parent fund account for tracking and reporting purposes. All allocation transfers of balances are credited to this account, and subsequent obligations and outlays incurred by the child entity are charged to this allocation account as they execute the delegated activity on behalf of the parent entity. Generally, all financial activity related to these allocation transfers (e.g. budget authority, obligations, and outlays) is reported in the financial statements of the parent entity, from which the underlying legislative authority, appropriations, and budget apportionments are derived. The USPTO receives allocation transfers, as the child, from the General Services Administration. Activity relating to these child allocation transfers is not reported in the USPTO’s financial statements.
Basis of Accounting
Transactions are recorded on the accrual basis of accounting, as well as on a budgetary basis. 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. Budgetary accounting allows for compliance with the requirements for and controls over the use of Federal funds. The accompanying financial statements are presented on the accrual basis of accounting.
Statement of Federal Financial Accounting Standard 27, Identifying and Reporting Earmarked Funds, requires separate identification of the earmarked funds on the Consolidated Balance Sheets (Net Position section), Consolidated Statements of Changes in Net Position, and further disclosures in a footnote (Note 10).
Earmarked funds are financed by specifically identified revenues, which remain available over time. These specifically identified revenues are required by statute to be used for designated activities, benefits, or purposes, and must be accounted for separately from the Government’s general revenues. At the USPTO, earmarked funds include the salaries and expenses fund (13X1006) and the special fund receipts (135127).
Statement of Federal Financial Accounting Standard 31, Accounting for Fiduciary Activities, requires that, starting in FY 2009, fiduciary activities will no longer be recognized on the financial statements, but will be reported on schedules in the notes to the financial statements (Note 15).
Fiduciary cash and other assets are not assets of the Federal Government. Fiduciary activities are the collection or receipt, and the management, protection, accounting, and disposition by the Federal Government of cash or other assets in which non-Federal individuals or entities have an ownership interest that the Federal Government must uphold. At the USPTO, fiduciary activities are recorded in the Patent Cooperation Treaty fund (13X6538) and the Madrid Protocol fund (13X6554).
Budgets and Budgetary Accounting
Total budgetary resources are primarily comprised of Congressional authority to spend current year fee collections. In FY 2009, the USPTO was appropriated up to $2,010,100 thousand for fees collected during the fiscal year. However, as the fiscal year progressed, fee collections were not being received as they had been anticipated. In FY 2008, the USPTO was appropriated up to $1,915,500 thousand for fees collected during the fiscal year. For the year ended September 30, 2009, the USPTO collected $26,724 thousand less than the amount apportioned through September 30, 2009. For the year ended September 30, 2008, the USPTO collected $36,205 thousand less than the amount apportioned through September 30, 2008.
The USPTO receives an apportionment of Category A funds from OMB, which apportions budgetary resources by fiscal quarter. The USPTO does not receive any Category B funds, or those exempt from apportionment.
Pursuant to the Patent and Trademark Office Fee Fairness Act of 1999 (35 U.S.C. §42(c)), all fees available to the Director under section 31 of the Trademark Act of 1946 are used only for the processing of trademark registrations and for other activities, services, and materials relating to trademarks, as well as to cover a proportionate share of the administrative costs of the USPTO.
Legislation was passed in July 2009 that allows the USPTO to use surplus funds from Trademark revenues to cover any shortfalls that may occur as the result of the decrease in Patent fee collections [H.R. 3114]. The authority to use these funds lasts until June 2010. Should such use of Trademark funds be necessary, the amount must be paid back to the Trademark organization no later than September 30, 2014. As of September 30, 2009, Trademark funds were not used for Patent operations.
In addition, the FY 2009 appropriation language restricted from obligation $5,000 thousand of offsetting collections until “the USPTO has completed a comprehensive review of the assumptions behind the patent examiner expectancy goals and adopted a revised set of expectancy goals for patent examination.”
The total temporarily unavailable fee collections pursuant to Public Law as of September 30, 2009 are $762,216 thousand. Of this amount, certain USPTO collections of $233,529 thousand were withheld in accordance with the Omnibus Budget Reconciliation Act (OBRA) of 1990, and deposited in a special fund receipt account at the U.S. Department of the Treasury.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of 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.
Revenue and Other Financing Sources
The USPTO’s fee rates are established by law and, consequently, in some instances may not represent full cost or market price. Since FY 1993, the USPTO’s 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 to defer revenue for services that have not been performed. All amounts remitted by customers without a request for service are recorded as liabilities in customer deposit accounts until services are ordered.
The USPTO also receives some financial gifts and gifts-in-kind. All such transactions are included in the consolidated Gifts and Bequests Fund financial statements of the U.S. Department of Commerce. 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 attain the USPTO mission and objectives.
Assets that an entity is authorized to use in its operations are termed entity assets, while assets that are held by an entity and are not available for the entity’s use are termed non-entity assets. Most of the USPTO’s assets are entity assets and are available to carry out the mission of the USPTO, as appropriated by Congress, with the exception of a portion of the Fund Balance with Treasury and cash as highlighted in Note 3.
Fund Balance with Treasury
The USPTO deposits fees collected in commercial bank accounts maintained by the Treasury’s Financial Management Service (FMS). 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. Treasury processes all disbursements. (Note 2)
Accounts receivable balances are established for amounts owed to the USPTO from its customers. The USPTO’s accounts receivable balances are comprised of amounts due from former employees for the reimbursement of education expenses and other benefits, amounts due from foreign intellectual property offices for the reimbursement of services provided, amounts due from other Federal agencies for the reimbursement of services provided, and other revenue-related receivables. This balance in accounts receivable remains as 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.
The USPTO has written off, but not closed out, $154 thousand and $60 thousand of accounts receivables that are considered not collectible as of September 30, 2009 and 2008, respectively. These offsets are established for receivables older than two years with little or no collection activity that have been transferred to Treasury, subsequently adjusting the gross amount of its employee-related accounts receivable to the net realizable value. The gross amount of the USPTO’s employee-related accounts receivable as of September 30, 2009 and 2008 was $424 thousand and $474 thousand, respectively.
Receivables due from foreign intellectual property offices as of September 30, 2009 and 2008 were $15 thousand and $58 thousand, respectively.
Intragovernmental receivables as of September 30, 2009 totaled $143 thousand.
Revenue-related receivables as of September 30, 2009 and 2008 totaled $10 thousand and $45 thousand, 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 USPTO has prepayments and advances with non-governmental, as well as governmental vendors.
Total prepayments and advances to non-governmental vendors as of September 30, 2009 and 2008 were $9,582 thousand and $5,398 thousand, respectively. The largest prepayments as of September 30, 2009 were $5,948 thousand for various hardware and software maintenance agreements. The largest prepayments as of September 30, 2008 were $1,556 thousand for various cooperative efforts with the National Inventors Hall of Fame, the International Intellectual Property Institute, and the World Intellectual Property Organization. Travel advances to personnel as of September 30, 2009 and 2008 were $13 thousand and $18 thousand, respectively.
Total prepayments and advances to governmental vendors as of September 30, 2009 and 2008 were $3,480 thousand and $2,591 thousand, respectively. The largest governmental prepayments include the USPTO deposit accounts held with the U.S. Government Printing Office to facilitate recurring transactions. Deposit accounts held with the U.S. Government Printing Office as of September 30, 2009 and 2008 were $1,671 thousand and $1,491 thousand, respectively.
Most of the USPTO’s cash balance consists of checks, electronic funds transfer, and credit card payments for deposits that are in transit and have not been credited to the USPTO’s Fund Balance with Treasury. As of September 30, 2009, $2,698 thousand were in transit due to the lag time between deposits in commercial bank accounts and the confirmation received from Treasury. Of this balance, $954 thousand were non-entity deposit account assets. As of September 30, 2008, $2,729 thousand were in transit due to the lag time between deposits in commercial bank accounts and the confirmation received from Treasury. Of this balance, $772 thousand were non-entity deposit account assets, $141 thousand were Patent Cooperation Treaty assets, and $12 thousand were Madrid Protocol Account assets.
The cash balance also 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, 2009 and 2008, the cash balance includes undeposited checks of $532 thousand and $1,628 thousand, respectively. Of these balances, $34 thousand were non-entity Patent Cooperation Treaty Account assets as of September 30, 2008.
Cash is also held outside the Treasury to be used as imprest funds. An imprest fund of $1 thousand was held as of September 30, 2009 and 2008.
Property, Plant, and Equipment, Net
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. (Note 4)
Property, plant, and equipment acquisitions that do not meet the capitalization criteria are expensed upon receipt. The USPTO does not defer to a future period maintenance on property, plant, and equipment.
Claims brought by USPTO employees 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 approximately two years to allow for funding through the budget process. As of September 30, 2009, the USPTO had a $1,622 thousand liability for estimated claims paid on its behalf during the benefit period July 1, 2007 through September 30, 2009. As of September 30, 2008, the USPTO had a $1,791 thousand liability for estimated claims paid on its behalf during the benefit period July 1, 2006 through September 30, 2008.
USPTO employees 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, 2009 and 2008, the USPTO liability was $149 thousand and $159 thousand, respectively, for estimated claims paid by the DOL on behalf of the USPTO.
Annual, Sick, and Other Leave
Annual leave and compensatory time are accrued as earned, with the accrual being reduced when leave is taken. An adjustment is made each fiscal quarter 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 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.
Accrued leave as of September 30, 2009 and 2008 was $67,512 thousand and $60,060 thousand, respectively.
Employee Retirement Systems and Post-Employment Benefits
USPTO employees 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 elect to join the FERS and Social Security system or be placed in the CSRS offset retirement system.
The USPTO’s financial statements do not report CSRS or FERS assets, accumulated plan benefits, or liabilities applicable to its employees. The reporting of such amounts is the responsibility of the U.S. Office of Personnel Management (OPM), who administers the plans. While the USPTO reported 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 financial statements recognize an expense, which represents the USPTO’s share of the costs to the Federal Government of providing pension, post-retirement health, and post-retirement life insurance benefits to all eligible USPTO employees. The USPTO appropriation requires full funding of the present costs of post-retirement benefits, such as the Federal Employees Health Benefit Program (FEHB) and the Federal Employees Group Life Insurance Program (FEGLI), and full funding of the CSRS and FERS pension liabilities. While ultimate administration of any post-retirement benefits or retirement system payments will continue to be administered by various Federal Government agencies, the USPTO is responsible for the payment of the present value associated with these costs calculated using the OPM factors. (Note 9)
For the years ended September 30, 2009 and 2008, the USPTO made current year contributions through agency payroll contributions and quarterly supplemental payments to OPM equivalent to approximately 19.1 percent and 18.2 percent of the employee’s basic pay for those employees covered by CSRS, based on OPM cost factors, respectively. For the years ended September 30, 2009 and 2008, the USPTO made current year contributions through agency payroll contributions and quarterly supplemental payments to OPM equivalent to approximately 11.5 percent and 11.2 percent of the employee’s basic pay for those employees covered by FERS, based on OPM cost factors, respectively.
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 contribution to this plan equal to one percent of the employees’ compensation. In addition, the USPTO makes matching contributions ranging from one to four percent of the employees’ compensation 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 also covered under the Federal Insurance Contributions Act (FICA), for which the USPTO contributes a matching amount to the Social Security Administration.
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, accompanied by 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. The deferred revenue calculation is a complex accounting estimate, dependent upon numerous business and administrative processes, workloads, and inventories. (Note 6)
The USPTO does not have any liabilities for environmental cleanup.
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