GASB 54 Implementation Fund Balance Reporting and Governmental Fund Type Definitions June 14, 2011

Agenda Review, Methodology & Examples of Fund Balance Classifications Fund Balance Policies vs. Stabilization Policies Restricted – Stabilization by State Statute Review & Examples of Fund Type Classifications Examples of Illustrative Statements Questions

Questions & Guidance Units will Need Classification of Funds How do I budget my Funds? Do I have to change how the funds are in my financial system? Fund type classifications can depend on a unit’s policies, so you could have clients with different results for similar funds. Classification of Fund Balance Spending policy will determine how fund balance will be classified. Different spending policies could result in different fund balance classifications Does my fund balance policy qualify under GASB 54 as committed? GASB 54 has potential to affect: MD&A, government-wide, fund statements, notes, supplemental statements and statistical schedules.

Impact of GASB 54 GASB 54 is Reporting Guidance o General Statutes have not changed – Capital Reserve Funds can still be budgeted. o You may or may not want to change how you budget. o Under earlier GASB a unit could not accumulate funds in a CIP o Under earlier GASB Capital Reserve was a Special Revenue Fund The Statement redefines some Fund Types Changes the focus of Fund Balance o Changes how we classify fund balance on Balance Sheet. o Does not change total fund balance amount.

Fund Balance - Classifications 1 GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions ClassificationDefinitionExamples Nonspendable“amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact.” 1 Inventories, long-term receivables, Cemetery Permanent Funds, long- term interfund balances (due to/from) Restricted“Fund balance should be reported as restricted when constraints placed on the use of resources are either: a)Externally imposed by creditors-debt covenants, grantors, contributors, laws or regulations of other governments; or b)Imposed by law through constitutional provisions or enabling legislation” 1 Restricted - Streets Restricted – School Capital Stabilization by State Statute

Restricted – Stabilization by State Statute GASB has redefined Governmental Balance Sheet Reporting Under GASB 54 “reserve by state statute” now qualifies as restricted This impacts Government-wide Net Asset Statement – as “restricted-stabilization by state statute” will be reflected on this statement. Note: Restricted by stabilization is not calculated on government-wide statement, but calculated from numbers on the balance sheet

Fund Balance - Classifications 1 GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions ClassificationDefinitionExamples Committed“Used for specific purpose pursuant to constraints imposed by formal action of the government’s highest level of decision-making authority” 1 Self-imposed limitations set in place prior to year-end, but can be calculated after year end. Limitation imposed at highest level and requires same action to remove or modify Ordinances that lapse at year-end do not meet the committed test Board passed a resolution to use $1,000,000 of fund balance towards the building of a cultural arts center.

Fund Balance - Classifications 1 GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions ClassificationDefinitionExamples Assigned“Amounts that are constrained by the government’s intent to be used for specific purposes, but are neither restricted nor committed” 1 Assignments can occur anytime before issuance of financial statements. Assignment ability can be delegated by the board. For governmental funds (exclusive of the general fund) this is the lowest level of positive fund balance. Governing body has appropriated fund balance. Governing body has budgeted $1M for a mental health hospital. County Mgr. may amend this up to $100,000.

Fund Balance - Classifications 1 GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions ClassificationDefinitionExamples UnassignedUnassigned fund balance is the lowest classification for the general fund. This is fund balance that has not been reported in any other classification. The general fund is the only fund that can report a positive unassigned fund balance. A capital project fund with a fund deficit.

Negative or Residual Fund Balance Amounts Restricted, committed or assigned should never be negative. Nonspendable, restricted or committed fund balance categories can reduce assigned/unassigned or create a negative unassigned fund balance classification. If nonspendable, restricted and committed amounts are more than total fund balance, then assigned is zero and unassigned shows the necessary negative amount.

Fund Balance Classifications – General Fund - Examples NonspendableExample #1 Restricted Committed Assigned Unassigned($20,000) Total Fund Balance($20,000) You have just realized that Powell Bill – Restricted for Streets in an amount of $11,000 has not been recorded yet. What would the new FB section look like?

Fund Balance Classifications – General Fund - Answers You have just realized that Powell Bill – Restricted for Streets in an amount of $11,000 has not been recorded yet. What would the new FB section look like? NonspendableExample #1 Restricted$11,000 Committed Assigned Unassigned($31,000) Total Fund Balance($20,000)

Nonspendable Example #2 Restricted $20,000 Committed Assigned 5,000 Unassigned 10,000 Total Fund Balance $35,000 You have just realized that Powell Bill – Restricted for Streets in an amount of $11,000 has not been recorded yet. What would the new FB section look like? Fund Balance Classifications – General Fund - Examples

Fund Balance Classifications – General Fund - Answers NonspendableExample #2 Restricted$31,000 Committed Assigned$4,000 Unassigned$0 Total Fund Balance$35, You have just realized that Powell Bill – Restricted for Streets in an amount of $11,000 has not been recorded yet. What would the new FB section look like?

Fund Balance Classifications – General Fund - Examples NonspendableExample #3 Restricted Committed$5,000 Assigned Unassigned$15,000 Total Fund Balance$20, You have just realized that Powell Bill – Restricted for Streets in an amount of $11,000 has not been recorded yet. What would the new FB section look like?

Fund Balance Classifications – General Fund - Answers NonspendableExample #3 Restricted$11,000 Committed$5,000 Assigned Unassigned$4,000 Total Fund Balance$20, You have just realized that Powell Bill – Restricted for Streets in an amount of $11,000 has not been recorded yet. What would the new FB section look like?

Fund Balance Classifications – General Fund - Questions You have just realized that the Mgr. has authority to assign funds for a mental health center and after looking at the draft financial statements has decided to assign $11,000 for MH Center. What would the new FB section look like? NonspendableExample #5 Restricted Committed Assigned Unassigned($20,000) Total Fund Balance($20,000)

Fund Balance Classifications – General Fund - Answers You have just realized that the Mgr. has authority to assign funds for a mental health center and after looking at the draft financial statements has decided to assign $11,000 for MH Center. What would the new FB section look like? NonspendableExample #5 Restricted Committed Assigned Unassigned($20,000) Total Fund Balance($20,000)

Fund Balance Classifications – General Fund - Questions You have just realized that the Mgr. has authority to assign funds for a mental health center and after looking at the draft financial statements has decided to assign $11,000 for MH Center. What would the new FB section look like? NonspendableExample #6 Restricted$20,000 Committed Assigned$5,000 Unassigned$10,000 Total Fund Balance$35,000

Fund Balance Classifications – General Fund - Answers You have just realized that the Mgr. has authority to assign funds for a mental health center and after looking at the draft financial statements has decided to assign $11,000 for MH Center. What would the new FB section look like? NonspendableExample #6 Restricted$20,000 Committed Assigned$15,000 Unassigned$0 Total Fund Balance$35,000

Fund Balance Classifications – General Fund - Questions You have just realized that the Mgr. has authority to assign funds for a mental health center and after looking at the draft financial statements has decided to assign $11,000 for MH Center. What would the new FB section look like? NonspendableExample #7 Restricted Committed$5,000 Assigned Unassigned$15,000 Total Fund Balance$20,000

Fund Balance Classifications – General Fund - Answers You have just realized that the Mgr. has authority to assign funds for a mental health center and after looking at the draft financial statements has decided to assign $11,000 for MH Center. What would the new FB section look like? NonspendableExample #7 Restricted Committed$5,000 Assigned$11,000 Unassigned$4,000 Total Fund Balance$20,000

Fund Balance Classifications Bond Proceeds are normally restricted based on bond documents o Investment earnings and premiums are also restricted to same bond purposes. o If you have bond proceeds on hand, remember to reduce Fund Balance restriction by any liabilities to be paid using bond proceeds. Grants normally restricted by grant regulations o Investment earnings on grant funds are also restricted. o Matching funds are also restricted.

GASB 54 – Fund Balance Classification Change in Focus o No longer communicates what fund balance will be used for or appropriated. o Now focuses on what constraints are placed on how resources within fund balance can be used. What statement will you use to communicate to management/governing body how much of the General Fund balance: o is obligated, o appropriated in next year’s budget, o is designated by board for working capital or compliance with the Board’s fund policy, o is available for the Board to appropriate?

Special Revenue Funds – New Definition Special Revenue Funds are proceeds of specific revenue sources that are restricted or committed Revenue source can’t restrict use to debt service or capital projects. The specific revenue “foundation” source that meets the test of restricted or committed cannot be a transfer from another fund.

Definitions Restricted “Externally imposed by creditors (such as debt covenants), grantors, contributors, laws or regulations of other governments; or Committed Highest level of authority – “cannot be used for any other purpose unless the government removes or changes the specified use by taking the same type of action”

What Fund Types Will Not Change Emergency Telephone System Fund will still be a special revenue fund The Restricting Revenue source (legislation) allows for uses other than capital projects or debt service. Most Likely Prepared Food and Occupancy Funds will remain special revenue funds The Restricting Revenue source (legislation) allows for uses other than capital projects or debt service. Boards of Education / Charter Schools o Scholarship Funds will continue as private purpose trust funds o Individual schools fund (club and activity funds) will still qualify as special revenue funds.

Capital Reserve Fund Capital Reserve funds restricted for capital or debt. (G.S ) Conclusion – Capital Reserve funds normally can’t be a special revenue fund. Capital Reserve will most likely be either in the general fund or capital project funds.

Capital Reserve Fund – General Fund If capital reserve funds are to be used for debt it should consolidated in the general fund for statement presentation. There is only one General Fund so any funds that are moved for reporting purposes into the general fund are consolidated not combined. Your report should not refer to subfunds of the general fund Capital Reserve Funds must still be budgeted and operated on your accounting system as separate funds. Cash in the Capital Reserve Funds presented in either the General Fund or possibly a Capital Project Fund in accordance with GASB 34 ¶ 99 should be reported as restricted cash. “Restricted assets should be reported when restrictions (as defined in paragraph 34) on asset use change the nature or normal understanding of the availability of the asset.”

Proper Presentation – Impacts Perception of Fiscal Health Pre - ConsolidationAB General Cash and investments $ 158,000 $ 458,000 $ 158,000 Taxes Receivable 7,700 Accounts Receivable 1,950 Inventories 14,200 Restricted Cash 300,000 Total assets $ 181,850 $ 481,850 Liabilities: Accounts Payable $ 43,600 Fund balances: Nonspendable: Inventories 14,200 Restricted: Stabilization by State Statute 35,430 Committed - Tax revaluation 300,000 Assigned: Subsequent years expenditures 5,000 Unassigned: 40, ,020 40,020 Total fund balances 138, ,250 Total liabilities and fund balances $ 181,850 $ 481,850 Consolidate - Tax Revaluation Fund with $300,000 of cash and Fund Balance. Is Presentation A or B correct? B is correct Answer Proper implementation of GASB 54 can have a significant effect on interpretation of a unit’s fiscal health and future management actions.

Capital Reserve Fund – Debt Service Funds accumulated in a debt service fund could have tax consequences as it relates to arbitrage/yield restriction calculations. Units with existing debt service funds might consider consolidation of a capital reserve fund; however, they need to make sure they have researched any possible tax consequences. GASB 54 should not cause a unit to set up a Debt Service Fund.

Capital Reserve Fund – Capital Project Fund If unit is to use capital reserve fund for a capital project they might want to reclassify their capital reserve fund to a capital project fund. Do you consolidate the capital reserve fund to an already existing capital project fund or do you reclassify capital reserve as a new capital project fund and combine it with any other existing capital project funds?

Capital Reserve Fund (CRF) – Capital Project Fund If unit has no other capital projects funds that relate to the purpose the CRF is to be used for, the unit might reclassify a CRF as a capital project fund for reporting purposes. A CRF can be consolidated into an existing capital projects fund if they have similar purposes. Example: A unit might have one capital projects fund for all its school projects & the CRF is restricted to school capital projects.

How Are Budget/Actual Statements Presented for Consolidated Funds? Example Capital Reserve Fund consolidated into a General Fund Budget/Actual for the General Fund o The general fund in our example would present the budget and actual for the legally adopted general fund in the budget/actual exhibit. o The current year actual amounts of the consolidated fund would show reconciling items back to the Revenue Expenditure and Changes in Fund Balance Statement. Budget/Actual for the Capital Reserve Fund The budget for the capital reserve fund must be presented in the financial statements. o The budget/actual would be presented after the notes & RSI following the detail general fund budget/actual statement or following the combining statements (supplemental section).

Tax Revaluation Funds G.S. 153A-150 requires Counties to set aside funds for tax revaluations. o Currently classified as special revenue funds o Can be annually budgeted or multi-year budget G.S. 153A-150 does not discuss the revenue source; therefore, the fund does not meet the criteria of restricted for classifying the fund as a special revenue fund. If unit had governing board identify a specific revenue source for tax revaluation fund it can remain a special revenue fund – otherwise it should be consolidated into the general fund. If tax revaluation is classified as a special revenue fund then the fund note will disclose the qualifying revenue source.

Grants, Economic Development and Other Current Special Revenue Funds All Special Revenue Funds will need to be examined to determine if they will continue as Special Revenue under GASB 54 guidance. 1.Meet the criteria of having a restricted or committed revenue source? The restriction must come from the source of funds; or The source of funds must be committed by the highest level of authority.

Grants, Economic Development and Other Current Special Revenue Funds 2.Does the source of funds allow funds to be used for purposes other than capital projects and debt service? If revenue source requires use of funds for either capital or debt then most likely not a special revenue fund If unit has an economic development fund and cash is being transferred to another unit who must use the funds for capital or debt, then the unit providing the funds will still be able to classify the funds as special revenue.

Grants, Economic Development and Other Current Special Revenue Funds Note: Those specific restricted or committed revenues that qualified the fund as special revenue can’t be shown as a transfer-in. Fund may still have additional revenues such as investment earnings and transfers. The foundation revenue must meet the committed restricted criteria. Example: The unit met the revenue source criteria by committing a portion of its property tax revenue to tax revaluation. The property tax revenue in the tax revaluation fund can’t be reported as a transfer-in. It must be recorded as a property tax revenue in the special revenue fund.

Implementation Issues What if your grants fund revenue sources change from year to year? You take the long-term view

Implementation Issues Changes in fund balance in order to comply with this statement should be applied retroactively by restating fund balance for all prior periods presented. Fund Balance information in the statistical schedules can be shown prospectively or retroactively.

Changes to Your Statements Management Discussion and Analysis Statutory calculation of Fund Balance Available should appear in the Financial Analysis section – LGC New fund balance classifications – MD&A, Exhibits, Combining Statements, Statistical Tables Possibly new fund structure for reporting purposes Example: Tax revaluation fund might be consolidated in the general fund Beginning fund balance restatements Reporting Stabilization by State Statute as Restricted Net Asset on GW statements

Changes to Your Statements Note Disclosures o Summary of Significant Accounting Policies – fund balance note – Normally Note 1 o Fund Descriptions – add descriptions for any consolidations, fund splits, changes in fund types, etc. o New fund balance components o Committed disclose government’s highest level of decision-making authority – majority approval of governing body o Assigned fund balance disclose what body or official is authorized to assign amounts and disclose policy that authorizes such action o Policies on order of spending fund balance amounts

Changes to Your Statements Note Disclosures – Note 1 o Minimum Fund Balance Polices formally adopted by the governing body o If unit has policy that meets the stabilization arrangements of GASB 54 as committed (very few) o Authority for establishing stabilization arrangement o Requirements for additions to the stabilization amount o Conditions under which amounts may be spent o Stabilization balance if not apparent on the face of the financial statements

Changes to Your Statements Note Disclosures – Detail fund balance note-placed before joint venture note o If fund balance categories are displayed on the aggregate then detail disclosure is required in the notes o Encumbrances for the each major fund and nonmajor in aggregate – they can not be on the face of the statement o Chart with detail fund balance information for the General Fund: o Minimum - Inventories, Prepaids, New RSS, Powell Bill, Appropriated Fund Balance o Additional - no problem o Numbers used in this disclosure are taken from the Basic Financial Statements – Governmental Balance Sheet – General Fund

Changes to Your Statements Possible Changes to the Combining Statements Possible changes to individual budget/actual schedules Statistical Tables – Retroactively or prospectively o We anticipate that most will show retroactively o Prospectively – unit must show two schedules for governmental fund balance statistical tables – one pre-54 and post-54

Stabilization vs. Fund Balance Policies Amounts that meet the stabilization requirements of GASB 54 can be classified as committed, otherwise they will be classified as unassigned. (paragraph 21) Unit Fund Balance Policies do not meet the definition of restricted since NC does not have a state statute that address unit fund balance policies – restricted must be external to the unit Can a unit create a policy that meets stabilization and commitment requirements of GASB 54? Yes - however it would probably be very hard to have a board formally adopt such as policy: Formal Action Identify specific circumstances that must exist before funds can be used – circumstances that would not be expected to occur routinely “in an emergency” or “anticipated revenue shortfall” do not meet the test Normally there would be requirements for source of stabilization funding and when and how additions to stabilization amount s need to be made or replenished Revenue Stabilization - Working Capital – Contingencies – Emergency Fund – Etc.

Illustrative Statements 1.Determine if previous classified special revenue funds will remain special revenue under GASB 54 or whether they will be reclassified or consolidated into another fund. 2.Prepare budget actual statements for all funds with legally adopted budgets 3.Determine the source of funds in fund balance from the operating statement and spending policy – this will include the current change in fund balance as well as the beginning fund balance. 4.Classify the fund balance based on step # 3 above – including calculation of Stabilization by State Statute

Grants Fund REVENUES Restricted intergovernmental 1,000,000 Investment earnings 7,000 Total revenues 1,007,000 EXPENDITURES Current: Human services 1,500,000 Capital outlay 25,000 Total expenditures 1,525,000 Excess (deficiency) of revenues over expenditures (518,000) OTHER FINANCING SOURCES (USES) Transfers from other funds-Match 1,000,000 Transfers from other funds - unassigned revenues 250,000 Net change in fund balance 732,000 Fund balances, beginning - Fund balances, ending $ 732,000 Spending Policy – county funds spent last Q.How would the $732,000 of fund balance be classified under 54? Spending Policy – county funds spent first Q.How would the $732,000 of fund balance be classified under 54? Examples of Spending Policy Affect on Fund Balance

Grants Fund REVENUES Restricted intergovernmental 1,000,000 Investment earnings 7,000 Total revenues 1,007,000 EXPENDITURES Current: Human services 1,500,000 Capital outlay 25,000 Total expenditures 1,525,000 Excess (deficiency) of revenues over expenditures (518,000) OTHER FINANCING SOURCES (USES) Transfers from other funds-Match 1,000,000 Transfers from other funds - unassigned revenues 250,000 Net change in fund balance 732,000 Fund balances, beginning - Fund balances, ending $ 732,000 Spending Policy – county funds spent last Q. How would the $732,000 of fund balance be classified under 54? A. $250,000 – assigned and $482,000 as restricted Spending Policy – county funds spent first Q. How would the $732,000 of fund balance be classified under 54? A. $732,000 would be classified as restricted. Examples of Spending Policy Affect on Fund Balance

Questions and Answers All Illustrative statements will be updated for GASB 54 Questions?

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