New Accounting Standard Coming for Governmental Entities

The purpose of Governmental Accounting Standards Board (GASB) Statement 54, Fund Balance Reporting and Governmental Fund Type Definitions, is to enhance the usefulness of fund balance information providing clearer fund balance classifications to be applied consistently and by clarifying the existing governmental fund type definitions.  Although GASB 54 is not effective until financial statement periods beginning after June 15, 2010, your organization can begin to plan ahead and determine how this statement will impact your upcoming financial reporting and budgeting processes.

Under GASB 54, fund balance classifications will be required to be reported based on a hierarchy that imposes constraints on the resources.  The new classifications of fund balance are as follows:

Nonspendable.  These are amounts that cannot be spent because they either are not spendable in form (i.e. inventories, prepaids, long-term receivables) or they are legally or contractually required to be maintained intact (i.e. principal of an endowment fund).

Restricted.  These are amounts that can be spent only for purposes stipulated by the constitution or externally imposed by creditors (i.e. debt covenants), grantors, or enabling legislation (i.e. TABOR). 

Committed.  These are amounts that can be used only for purposes determined by a formal action (i.e. resolution or ordinance) of the government’s highest level of decision making authority.  The committed amounts cannot be used for any other purpose unless the government removes or changes the specified use by taking the same type of action.  The formal action of the government’s highest level of authority that commits the amounts to a specific purpose should occur prior to the end of the reporting period, but the dollar amount committed may be determined in the subsequent period.  It is important to note that if the appropriate action was not taken prior to the end of reporting year the amounts cannot be reported as committed.

Assigned.  These are amounts that are intended to be used for a specific purpose but do not meet the criteria as restricted or committed.  Intent should be expressed by the governing body or a body (i.e. budget or finance committee) or official to which the governing body has delegated such authority.  The difference between assigned and committed is that the decision is not required to be made by the government’s highest level of decision-making authority, nor are there the same requirements to remove an assignment.  Except for the general fund, assigned fund balances include all remaining amounts, unless it is a deficit balance.

An appropriation of existing fund balance to eliminate a projected budgetary deficit in the subsequent year’s budget in an amount not greater than the projected excess of expected expenditures over revenues satisfies the criteria to be classified as an assignment of fund balance.

Unassigned.  This represents the residual classification.  Unassigned amounts will be reported only in the general fund, unless it is another governmental fund type that has a deficit fund balance.

Encumbrances

Encumbering amounts for specific purposes for which resources have been restricted, committed, or assigned should not result in separate display of encumbered amounts within those classifications.  Encumbered amounts for specific purposes for which amounts have not been restricted previously should be classified as committed or assigned (as appropriate) based on the criteria for these classifications.

  • Example 1: If the government’s highest level of decision-making authority allocated funding for the future purchase of a new fire truck prior to the end of the reporting year, that amount would be reported as committed as of the end of the reporting period.
  • Example 2:  If there are encumbrances resulting from the issuance of purchase orders as a result of normal purchasing activity they would be reported as assigned.

Financial Statement Presentation and Disclosures

Classifying Fund Balance Amounts

Amounts may be classified on the face of the financial statements in detail or in summary format.  If the amounts are summarized on the face of the financial statements, appropriate detail must be disclosed in the notes to the financial statements.  Regardless of how the information is presented (detail or summary with appropriate footnote disclosure) it must include the following: 1) he amounts for the two components of non-spendable fund balance, 2) the amounts for restricted, committed, and assigned fund balances and the identification of the major purposes within each category, and 3) unassigned fund balance.

Fund Balance Disclosure Requirements

Governments should disclose their fund balance classification policies and procedures in the notes to the financial statements.  Such disclosures should include:

  • The government’s highest level of decision-making authority and the formal action that is required to be taken to establish (and modify or rescind) a fund balance commitment
    • The body or official authorized to assign amounts to a specific purpose and the policy established by the governing body
    • Whether the government considers restricted or unrestricted amounts to have been spent when an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available and whether committed, assigned, or unassigned amounts are considered to have been spent when an expenditure is incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used
    • Encumbrances, if significant, should be disclosed in conjunction with other disclosures of significant commitments.

Governmental Fund Type Definitions

Special Revenue Funds

The most significant change was made to the special revenue fund type definition.  GASB 54 defines that a special revenue fund may be established only around one or more revenue sources that are restricted or committed to purposes other than capital projects or debt service.  The specific revenue sources, which should be a substantial portion of the fund’s revenues, should be reported as restricted or committed.  Additionally, the organization must disclose the purpose of each major special revenue fund and each revenue source or other resources.

Planning for GASB 54 Implementation

When implementing GASB 54, the government should apply the statement retroactively by restating fund balance for all prior periods presented.  However, fund balance information included in the statistical section can be reported prospectively.  Consider the following:

  • Does your organization have a fund balance policy?  The policy should address items such as the criteria for committed and assigned fund balances; the appropriate level of unrestricted fund balance to be maintained in the general fund; circumstances for which restricted, committed, assigned, and unassigned amounts will be spent down; and a policy for replenishing deficiencies.
  • Review the purposes and revenue sources of special revenue funds.  Do these funds fall within the new special revenue fund type definition?
  • Begin to classify Fund Balance amounts and be ready for the reporting and disclosure requirements.

Reprinted with permission from:
Kimberley K. Higgins, CPA
Partner- Assurance Services
Eide Bailly LLP
5299 DTC Blvd, Suite 1000
Greenwood Village, Colorado 80111-3329