GASB re-examines Fund Balance Reporting and Definitions of Fund Types: the Governmental Accounting Standards Board is looking fo

In late October, the Governmental Accounting Standards Board (GASB) released an invitation to comment (ITC) document on Fund Balance Reporting and Governmental Fund Type Definitions. The new ITC suggests possible changes to the definitions currently used for certain governmental fund types to enhance comparability among governments. It also explores potential new approaches to categorizing and reporting the various components of fund balance to better meet the needs and expectations of financial statement users.

FUND-TYPE DEFINITIONS

In current practice, there is considerable diversity in how governments use special revenue funds, capital projects funds, and debt service funds.

Special revenue funds. Currently, a special revenue fund may be used:

Specific revenue sources. The current definition was intended to apply only to specific revenue streams. In practice, special revenue funds are not infrequently used for dedicated resources that do not necessarily share a common source. Furthermore, even if a special revenue fund has indeed been established to account for a specific revenue source, it is not clear whether the fund, once established, may also properly be used to account for other resources dedicated to that same purpose. The ITC suggests three approaches:

* Revenue source only. Limit the use of a special revenue fund to just those resources generated from the specific revenue source it was established to account for;

* Revenue source + matching funds. Also allow a special revenue fund to be used to account for matching resources that must be provided by the government itself under the terms of a grant contract;

* Revenue source + matching funds + other legally limited resources. Allow a special revenue fund to be used, not only for resources generated from the specific revenue source itself and from resources provided by the government to meet matching requirements, but also for resources otherwise legally limited to the same purpose.

The ITC uses the term legally limited to describe a limitation on the use of resources imposed by the government itself such that those resources" cannot be used for any other purpose unless the government removes or changes the limitation by taking the same action it employed to impose the limitation initially or by taking a higher-authority action."

Legally restricted. The current definition of a special revenue fund requires that resources reported in that fund be legally restricted to specified purposes. There is no question that this requirement is met if resource restrictions are externally imposed (e.g., creditors, grantors, contributors, laws or regulations of other levels of government) or result from constitutional provisions, charter provisions, or enabling legislation. There is debate, however, whether it is proper to use special revenue funds to account for resources that are merely legally limited (in the sense described earlier). The ITC considers how this issue might be resolved.

Specified purposes. The current definition of a special revenue fund also requires that the use of resources be legally restricted to expenditure for specified purposes. This criterion was intended to apply to restrictions on the object of expenditure (i.e., what can the resources be used for, e.g., transportation grant) rather than to other potential conditions that are sometimes be placed on resource use (e.g., resources available for general spending, but only once certain conditions have been met, such as "rainy day funds"). The ITC also considers how this issue might be resolved.

Capital projects funds and debt service funds. The current definitions of a capital projects fund and a debt service fund do not address the degree of limitation on resource use necessary to justify the use of those fund types. The ITC suggests two possibilities.

* Restricted and legally limited resources. One approach would be to change the definition of the fund types to explicitly limit their use to resources that are either (externally) restricted or (internally) legally limited to the purpose of the fund.

* Restricted and legally limited resources + resources intended for the same purpose. Another approach would be to change the definition of the fund types to allow their use, not only for restricted and legally limited resources, but also for resources that the government has otherwise publicly expressed its intent to use for the purpose of the fund.

FUND BALANCE

In current practice, fund balance is classified as either reserved or unreserved. Reserved fund balance is used to reflect net resources of the fund that either cannot be appropriated (e.g., inventories) or are legally segregated for a specific future use. Unreserved fund balance, in contrast, is not legally segregated for a specific future use and can be appropriated for any fund-related purpose. Furthermore, governments currently have the option of classifying a portion of unreserved fund balance as designated to indicate that it is intended to be used for a specific purpose.

The ITC notes as background that the terminology "legally segregated for specific use" was intended to apply to limitations on resource use rather than to physical separation. Likewise, the term "specific use" was intended to imply a use narrower than the purpose of the fund itself.

The ITC suggests that this traditional approach to the classification and reporting of fund balance might be modified or replaced by one of three approaches currently under study by the board.

Model A--Modified Traditional Approach. Model A proposes to retain the traditional terminology associated with fund balance, but to tighten the definitions used for the various components to improve comparability and understandability, as in Exhibit 1.

Model B--Focus on Availability for Appropriation. Model B proposes to drop the traditional categories of reserved and unreserved in favor of terms that clearly identify amounts as being either not available for appropriation or available for appropriation, as in Exhibit 2.

The ITC indicates that disclosure of the nature of the commitment would be required for any portion of fund balance classified as available for appropriation: committed to specific uses based upon the intended use of the resources (i.e., rather than upon a restriction or legal limitation).

Model C--Focus on Restrictions. Under Models A and B, resources that are (externally) restricted from the vantage point of the government as a whole are still reported as unreserved or available for appropriation, provided that the purpose of the restriction is as broad as that of the fund itself (e.g., a transportation grant reported in a transportation fund). In contrast, Model C would focus on providing readers with a clear view of all resources whose use is (externally) restricted, even if that use is not narrower than the purpose of the fund in which the resources are reported, as in Exhibit 3.

General observations. Note that all three models described in the ITC would report separately amounts that are not available for appropriation, either as (a portion of) reserved fund balance (Model A) or as not available for appropriation (Models B and C).The distinguishing features of the models might be summarized as in Exhibit 4.

RESPONSE PERIOD AND PUBLIC HEARING

An electronic copy of the GASB's ITC can be downloaded from its Web site (www.gasb.org). The comment deadline is January 31, 2007. A public hearing on the topic is scheduled for February 2, 2007, in New York City.

STEPHEN J. GAUTHIER is director of GFOA's Technical Services Center.

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