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Fund Balance Reporting and Governmental Fund Type Definitions Statement No. 54 of the Governmental Accounting Standards Board Suzanne E. Smith, CPA November.

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Presentation on theme: "Fund Balance Reporting and Governmental Fund Type Definitions Statement No. 54 of the Governmental Accounting Standards Board Suzanne E. Smith, CPA November."— Presentation transcript:

1 Fund Balance Reporting and Governmental Fund Type Definitions Statement No. 54 of the Governmental Accounting Standards Board Suzanne E. Smith, CPA November 3, 2010

2 A History of Fund Balances NCGA (National Council on Governmental Accounting) Statement 1, Governmental Accounting and Financial Reporting Principles, established the fund balance classifications for governmental funds.

3 AICPA Government Accountability Brief “GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, is a sleeping giant….. When Statement No. 54 is implemented for years beginning after June 15, 2010, it could unleash the largest changes to governmental fund financial statements since the implementation of GASB Statement No. 54…..”

4 Problems with Statement 1 Fund Balance Reporting Classifications There were differences in how governments interpreted and applied the standards for fund balance reporting. Different interpretations of certain aspects of the definitions of governmental fund types reduced the comparability of governmental fund financial statements from government to government. The introduction of “restricted net assets” under GASB Statement No. 34 led to more confusion when comparing governmental funds balance sheets with the entity-wide statement of net assets.

5 What the new Statement No. 54 proposes to do: Improve the usefulness of financial statement information. Provide more clearly defined fund balance categories to reveal the nature and extent of constraints placed on a government’s fund balance. Clarify the existing governmental fund type definitions.

6 What Statement No. 54 Does… Statement No. 54 changes the way fund balances are reported in governmental funds. Statement No. 54 does not change the government-wide statement of net assets (Exhibit A) or Fiduciary Fund accounting (Exhibits E and F). Statement No. 54 changes the reporting requirements, not the recordkeeping requirements.

7 Effective Date Periods beginning after June 15, 2010 Fiscal Years ending June 30, 2011 CAFR Statistical Section – Retroactive is encouraged, but not required

8 Fund Balance Reporting “Fund balance for governmental funds should be reported in classifications that comprise a hierarchy based primarily on the extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent.” – GASB Statement No. 54 (paragraph 5) The constraints vary from “nonspendable” to “unassigned.”

9 Fund Balance – Old Standards What is fund balance? – The difference between fund assets and liabilities Reserved Fund Balance Unreserved Fund Balance – Designated – Undesignated

10 Example of Old Standards and Financial Statement Placement

11 Fund Balance – Old Standards Fund Balance Allocation Objective – To isolate that portion of fund balance that is not available for the following period’s budget. Factors that make resources unavailable for appropriation: – By the very nature of the asset can never be spent (prepaid assets, inventory, permanent fund corpus) – Because of the timing of cash flows, cannot yet be spent (e.g., long-term loans receivable) – Can be spent but not at the government’s discretion because the resources are externally restricted to a specific use. (e.g., Fund balance in Foresty Escrow, Unemployment Compensation, and Capital Projects funds)

12 Old Fund Balance Categories Reserved – a portion of fund balance not appropriable for expenditure or legally segregated for a specific use. Unreserved, designated – Indicates future plans for the use of resources; subject to change. Unreserved, undesignated – Remaining amount after accounting for all reserved and unreserved, undesignated amounts.

13 New Fund Balance Categories outlined in Statement No. 54 Nonspendable fund balance Restricted fund balance Committed fund balance Assigned balance Unassigned balance – Governments may not have all categories applicable to a given year.

14 New Fund Balance Definitions Nonspendable Fund Balance – Amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. – Examples: Inventories and prepaid items, the corpus (or principal) of a permanent fund. – May also apply to long-term receivables if the receivable is not restricted, committed or assigned.

15 New Fund Balance Definitions Restricted Fund Balance – Amounts that are restricted to specific purposes. Amounts may be restricted externally by creditors, grantors, contributors, or Imposed by law through constitutional provisions or enabling legislation. Enabling legislation authorizes the government to assess, levy, charged, or otherwise mandate payment or resources and includes a legally enforceable requirement that those resources be used only for the specific purposes stipulated in the legislation. (unspent grant funds, unspent bond proceeds, funds held in debt service accounts for debt payments)

16 New Fund Balance Definitions Committed Fund Balance – Amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the government’s highest level of decision-making authority. The authorization specifying the purposes for which amounts can be used should have the consent of both the legislative and executive branches of the government. The government’s intent to commit the fund balance to a specific purpose should occur prior to the end of the reporting period, but the amount, if any, which will be subject to the constraint, may be determined in the subsequent period.

17 New Fund Balance Definitions Assigned Fund Balance – Amounts that are constrained by the government’s intent to be used for specific purposes, but are neither restricted nor committed. (Cannot assign an amount if it would result in a deficit unassigned fund balance amount) Intent should be expressed by (a) the governing body itself or (b) a body or official to which the governing body has delegated the authority to assign amounts to be used for specific purposes.

18 New Fund Balance Definitions Unassigned Fund Balance – is the residual classification for the general fund. The general fund should be the only fund that reports a positive unassigned fund balance amount.

19 Why is unassigned fund balance reported only in the General Fund? Because unassigned fund balance represents amounts that are not constrained in any way, not even by an intention to use them for a specific purpose, the general fund is the only appropriate place to report this classification of fund balance.

20 Example of New Standards and Financial Statement Placement

21 New Fund Balance Classifications Current StandardNew StandardCurrent Categories Essentially what is now reservedNonspendable Restricted Committed Reserved for advances Reserved for inventory Reserved for prepaid items Reserved for capital projects Reserved for unemployment Reserved for forestry improvement Reserved for permanent fund purposes Essentially what is now unreserved, designated AssignedDesignated for capital improvements Designated for technology purchases Essentially what is now unreserved, undesignated UnassignedResidual amount in General Fund

22 Determining the Components of Fund Balance For most governments, determining the components of fund balance will be an annual exercise. Step 1: Determine the amounts that should be reported as non-spendable and restricted. Step 2: Determine amounts committed in all funds or assigned in general funds by reviewing the constraints placed on available resources and the government’s policies outlining the placing of such constraints.

23 Step 3 for non-general funds. Assigned fund balance is the residual classification after amounts have been classified as nonspendable, restricted or committed. However, if there is a negative balance after classifying amounts as nonspendable, restricted or committed, the fund would report a negative amount as unassigned. In this case there would be no amount reported as assigned. Step 4 for general funds. Unassigned fund balance is the residual classification after amounts have been classified as nonspendable, restricted, committed or assigned. Only general funds would report a positive amount as unassigned.

24 No funds should report a negative amount for restricted, committed or assigned fund balance.

25 Examples:

26 More Examples Special Revenue Fund What is the total fund balance? 1. Determine amounts nonspendable 2. Determine amounts restricted 3. Determine amounts committed 4. Remainder is assigned if positive and unassigned if negative Capital Projects Fund What is the total fund balance? 1. Determine amounts nonspendable 2. Determine amounts restricted 3. Determine amounts committed 4.Remainder is assigned if positive and unassigned if negative

27 Numbers applied Special Revenue Fund – Title I Special Revenue Fund – EEF Buildings and Buses Total Fund Balance at June 30 is $75,000. No amounts are nonspendable. $74,000 is restricted since it represents state revenues restricted for buildings and buses. No amounts are committed. (No formal board action) $1,000 is assigned since the business manager chose to allow the interest income to remain in the fund for the purpose of supplementing the state revenues for the specific purpose of improving buildings and buses. Total Fund balance at June 30 is Zero. No amounts are nonspendable, restricted, committed, assigned, or unassigned.

28 More Examples Unemployment Compensation Fund Total Fund Balance $175,000 Required Fund Balance $200,000 Unassigned Fund Balance ($25,000) Bond Retirement Fund Total Fund Balance $100,000 Restricted Fund Balance $100,000

29 More Examples Permanent Fund – 16 th Section Principal Mississippi Power Grant Total Fund Balance: $1,500 Restricted: $1,500 Total Fund Balance: $2,000,000 ($25,000 represents investment income that will later be transferred) Nonspendable – Investments $1,975,000 Restricted (or committed) – $25,000

30 Fund Balance Disclosures Governments should disclose the following about their fund balance classification policies and procedures in the notes to the financial statements: – A. For committed fund balance: (1) the government’s highest level of decision-making authority and (2) the formal action that is required to be taken to establish (and modify or rescind) a fund balance commitment)

31 Fund Balance Disclosures B. For assigned fund balance: (1) the body or official authorized to assign amounts to a specific purpose and (2) the policy established by the government body pursuant to which that authorization is given.

32 Fund Balance Disclosures C. For the classification of fund balances: (1) 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 (2) 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 can be used.

33 The Order of Spending Basically the order in which a government assumes restricted, committed, assigned, and unassigned amounts are spent when amounts in more than one classification are available for a particular purpose.

34 A government policy on the order in which resources are to be expended is an important factor in how amounts are reported in fund balance. Under GASB Statement No. 34, governments were required to have a policy regarding whether it considers the use of restricted or unrestricted resources first when both are available for expenditure. Most school districts considered restricted resources to be spent first. This new statement calls for a policy now applied at the fund level for restricted and unrestricted (committed, assigned and unassigned) resources.

35 What happens if there is no policy? If a government does not establish a policy, the default approach assumes that committed amounts should be reduced first, followed by assigned amounts, and then unassigned amounts.

36 Reporting Encumbrances Encumbrances should not be reported on the face of the financial statements. Amounts encumbered for a specific purpose for which amounts have not been previously restricted, committed or assigned should be classified as either committed or assigned, based on the category criteria. Significant encumbrances at year-end should be disclosed in the notes to the financial statements as a commitment.

37 Details of Fund Balance Classifications Displayed in the Aggregate If nonspendable fund balance is displayed in aggregate on the face of the balance sheet, amounts for the nonspendable components should be disclosed in the notes to the financial statements. If restricted, committed, or assigned fund balances are displayed in the aggregate, the component details should be disclosed in the notes to the financial statements.

38 Fund Type Definitions Governmental fund types include the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds.

39 Old Definitions – Governmental Funds General Funds – to account for all financial resources except those required to be accounted for in another fund. Special Revenue Funds – to account for the proceeds of specific revenue sources that are legally restricted to expenditure for specified purposes. Capital Projects Funds – to account for financial resources to be used for the acquisition or construction of major capital facilities.

40 Old Definitions – Governmental Funds Debt Service Funds – to account for the accumulation of resources for, and the repayment of, general long-term debt principal and interest. Permanent Funds – to account for resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that support the school district’s programs.

41 General Fund – New Definition The general fund should be used to account for and report all financial resources not accounted for and reported in another fund.

42 Special Revenue Funds – New Definition Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. One or more specific restricted or committed revenues should be the foundation for a special revenue fund.

43 Special Revenue Funds – New Definition Those 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.

44 Special Revenue Funds – New Definition The restricted or committed proceeds of specific revenue sources should be expected to continue to make up a substantial portion of the inflows reported in the fund. Other resources (investment earnings and transfers from other funds) also may be reported in the fund if those resources are restricted, committed, or assigned to the specified purpose of the fund.

45 A Look at Funds Currently Used Funds 1130, 1140, 1145, and Fund 1130 – Special Education Fund Fund 1140 – Alternative School Fund Fund 1145 – At-Risk Fund Fund 2711 – Vocational Fund Are the revenue sources in these funds restricted for specific purposes? Are “Add-on” Components of MAEP Funding restricted? What about Gifted and Transportation Add-on components?

46 A Look at Funds Currently Used If the state or federal resources in funds are truly “restricted,” then the funds should be special revenue funds. The state or federal revenue should be coded directly into these funds and not shown as a subsequent transfer from another governmental fund. Any remaining fund balance in these funds would be assigned fund balance at balance sheet date.

47 Final Analysis Add-on components for special education, alternative education, at-risk, gifted, and transportation will be reported in Funds 1130, 1140, 1145, and as a part of 1120 for gifted and transportation costs. The funds will be filled by interfund transfers from the District Maintenance Fund 1120 (general fund). The MAEP revenues in those funds is non-restricted revenues. Vocational add-on revenues will be accounted for in Fund 2711, along with the restricted revenues in the form of state and federal vocational resources. MAEP allocations for Fund 2711 should be reported as direct revenues of that fund and not as operating transfers from the District Maintenance Fund 1120 (general fund).

48 Special Revenue Funds 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 be derived from restricted or committed revenue sources. (Example: Some districts are still using Fund 2420 – Textbooks.)

49 Special Revenue Fund Disclosures 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.

50 Capital Projects Funds – New Definitions Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets.

51 Permanent Funds – New Definitions Permanent funds should be used to account for and report resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs - - that is, for the benefit of the school district or its programs. Permanent funds do not include private-purpose trust funds, which should be used to report situations in which the government is required to use the principal or earnings for the benefit of individuals, private organizations, or other governments.

52 Fund Balance Disclosures – Minimum Fund Balance If the school board has formally adopted a minimum fund balance policy, the policy should be disclosed in the notes to the financial statements. There would be no separate amount shown as committed or assigned for this disclosure on the face of the financial statements.

53 Stabilization Arrangements Some governments set aside amounts for use in emergency situations or when revenue shortfalls arise. The authority to set aside those amounts generally comes from statute, ordinance, resolution, charter, or constitution. When such arrangements exist, the amounts may be expended only when certain specific circumstances exist. Such circumstances should be identified and described in the formal action that establishes such arrangements.

54 Stabilization Arrangements Those circumstances should be such that they would not be expected to occur routinely. For purposes of reporting fund balance, stabilization amounts should be reported in the general fund as restricted or committed if they meet the criteria set forth in GASB Statement No. 54, paragraphs 8-11.

55 Stabilization Arrangements Such amounts would be restricted if they are imposed by law through constitutional provisions or enabling legislation. Such amounts would be committed if such constraints are imposed by formal action of the school board. This authorization should have the consent of both the legislative and executive branches of the district.

56 Stabilization Arrangements Stabilization arrangements that do not meet the criteria to be reported within the restricted or committed fund balance classifications should be reported as unassigned in the general fund.

57 What Do We Do Now? Consider your district’s use of Funds 1130, 1140, 1145, and 2711 and how MAEP revenue is recorded in those funds. Add newly required board policies. Revise general ledger codes for fund balance accounts. (Mississippi Department of Education) Any software changes for governmental funds balance sheet presentation. (New categories for presenting fund balance information on the governmental funds balance sheet)

58 General Ledger Code Changes

59 New Board Policies A policy to outline how the district commits a portion of fund balance for specific purposes, including the specific actions required to establish, modify, or rescind the fund balance commitment. The school board, along with district administration, must approve each commitment prior to the end of the fiscal year. Amounts may be determined after the end of the fiscal year.

60 New Board Policies A policy to assign fund balance, detailing (1) the body or official authorized to assign amounts to a specific purpose.

61 New Board Policies A policy on the order in which resources are to be expended. – Basically the order in which a district assumes restricted, committed, assigned, and unassigned amounts are spent when amounts in more than one classification are available for a particular purpose.


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