The New Fund Balance and Changes to Governmental Fund Type DefinitionsIntroduction There is no single number in governmental accounting and financial reporting that attracts more interest and discussion than fund balance. Anyone who wishes to take full advantage of a government's financial statements to make informed decisions must gain a solid understanding of the components and terminology used to present fund balance. Preface In February 2009, the Governmental Accounting Standards Board (GASB) issued Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions. This important new standard has left unchanged the total amount reported as fund balance, but has substantially altered the categories and terminology used to describe its components. The new categories and terminology reflect an innovative approach that will focus, not on financial resources available for appropriation, but on "the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent." Fund Balance and its Components Accountants use the term fund balance to describe the difference between the assets and liabilities reported in a governmental fund. As an approximate measure of liquidity, fund balance is similar to the working capital of a private-sector business. The new standard includes up to five components of fund balance to be reported in financial statements for governmental funds:
Because circumstances differ among governments, not every government or every governmental fund will present all of these components. Nonspendable fund balance consists of assets that may be nonspendable from the vantage point of the current period:
Restricted fund balance describes a portion of fund balance that reflects resources that are subject to externally enforceable legal restrictions. Such restrictions typically are imposed by parties altogether outside the government:
Restrictions also can arise when the authorization to raise revenues is conditioned upon the revenue being used for a particular purpose (e.g. gasoline taxes restricted to use for road repairs and construction), pursuant to enabling legislation. Likewise, a government's own constitution or charter also may impose legal restrictions on the use of resources reported in a governmental fund. Committed fund balance describes the portion of fund balance that represents resources whose use is constrained by limitations that the government imposes upon itself at its highest level of decision making (normally the governing body) and that remain binding unless removed in the same manner. The underlying action that imposed the limitation would need to occur no later than the close of the reporting period. Assigned fund balance describes the portion of fund balance that reflects a government's intended use of resources. Such intent would have to be established at either the highest level of decision making, or by a body (e.g., finance committee) or an official designated for that purpose. Amounts in excess of nonspendable, restricted and committed fund balance in funds other than the general fund automatically would be reported as assigned fund balance. Unassigned fund balance describes excess general fund resources in excess of what can properly be classified in one of the four categories already described. Therefore, that surplus is presented as unassigned fund balance. Only the general fund can report a positive amount of unassigned fund balance. Conversely, any government fund in a deficit position could report a negative amount of unassigned fund balance. Fund Balance Policy Governments, like businesses and individuals, need some sort of financial "cushion" against the potential shock of unanticipated circumstances and events (e.g. revenue shortfalls, unanticipated expenditures). Often this cushion takes the form of a Fund Balance Policy that establishes a minimum level at which fund balance is to be maintained. The components of fund balance relevant to a fund balance policy are shown below.  To be truly comprehensive, a fund balance policy needs to address all of the following:
A practical alternative to a fund balance policy is a stabilization arrangement (also commonly referred to as rainy day funds or contingency funds) to provide the financial cushion otherwise offered by a fund balance policy. That is, resources are accumulated that may be used only in the event of contingencies. In most cases, the resources thus accumulated are classified as either restricted fund balance or committed fund balance, depending upon the force of the limitation placed upon their use. Authoritative accounting standards never permit stabilization arrangements to be reported as assigned fund balance. Changes to Governmental Fund Type Definitions GASB Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions provides new definitions for governmental fund types. The special revenue fund type was impacted the most by GASB 54. GASB now provides to following definitions for special revenue fund types: Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditures for specified purposes other than debt service or capital projects. The term proceeds of specific revenue sources establishes that one or more specific restricted or committed revenues may be initially received in another fund and subsequently distributed to a special revenue fund. Those amounts should not be recognized as revenue in the fund initially receiving them; however, those inflows should be recognized as revenue in the special revenue fund in which they will be expended in accordance with specified purposes. Special revenue funds should not be used to account for resources held in trust for individuals, private organizations, or other governments. The restricted or committed proceeds of specific revenue sources should be expected to continue to comprise a substantial portion of the inflows reported in the fund. Other resources (investment earnings and transfers from other funds, for example) also may be reported in the fund if those resources are restricted, committed, or assigned to the specified purpose of the fund. Governments should discontinue reporting a special revenue fund, and instead report the fund's remaining resources in the general fund, if the government no longer expects that a substantial portion of the inflows will derive from restricted or committed revenue sources. Governments should disclose in the notes to the financial statements the purpose for each major special revenue fund-identifying which revenues and other resources are reported in each of those funds. Effective Date and Transition The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2010. Early implementation is encouraged. Fund balance reclassifications made to conform to the provisions of this Statement should be applied retroactively by restating fund balance for all prior periods presented. Changes to the fund balance information presented in statistical section may be made prospectively, although retroactive application is encouraged. If the information for previous years is not restated, governments should explain the nature of the difference from the prior information. About Elizabeth ("Beth") Grimes  Elizabeth ("Beth") Grimes, CPA,is a partner of Bates, Carter + Co. and the leader of the firm's Governmental Services Team. She has over 16 years governmental auditing and consulting experience. Beth has taught courses for the Georgia Government Finance Officers Association and the Georgia Society of CPAs. She is a member of the Government Finance Officers Association and the Georgia Government Finance Officers Association. |
