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Weekly UpdatesAt the end of February, the Governmental Accounting Standards Board (GASB) released an exposure draft (ED) that proposes to substantially change how fund balance is categorized. It also proposes guidance that would modify how some of the governmental fund types are used.
WHERE'S THE FIRE?
The term fund balance has long been used in state and local government accounting to describe the net difference between the assets and liabilities reported in governmental funds. That amount, in turn, has traditionally been divided into reserved and unreserved components, with the option of further distinguishing designated unreserved fund balance from undesignated unreserved fund balance.
Few would dispute that fund balance is the most-discussed single item that appears in a typical state or local government's financial statements. Indeed, the amount of fund balance is frequently regulated by law, regulation, or policy, and is subject to close scrutiny by rating agencies and others interested in a government's finances. So why the need for change?
First, the terms used to describe the various components of fund balance are not completely self-explanatory and have often been misunderstood by otherwise knowledgeable financial statement users. Second, research amply demonstrates that there is considerable (and unjustified) diversity in how those categories are applied in practice, which significantly diminishes comparability among governments.
The ED proposes to remedy these two problems by establishing clear guidelines for classifying the various components of fund balance and then describing those components in such a way as to be immediately understandable to a typical user of state or local government financial statements.
WHAT DO PEOPLE REALLY NEED TO KNOW?
The ED proposes to categorize fund balance to provide two essential pieces of information (see Exhibit 1).
Can the resources ever actually be spent? A government cannot actually "spend" inventory or prepaid rent.
Likewise, the corpus of an endowment must remain intact and can thus never be spent. The ED proposes to distinguish such non-spendable resources reflected in fund balance from the portion of fund balance that reflects resources which are, in fact, spendable, at least in the future, if not now.
Are there resources that can be spent only for specified purposes? Typically, a significant portion of a government's spendable resources can be spent only for specified purposes. The ED proposes to segregate this amount into three categories designed to reflect both the source and force of the constraint on spending.
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* Restricted spendable fund balance. This category would be used for the portion of spendable fund balance that reflects constraints on spending that are legally enforceable by outside parties (e.g., creditors, grantors, contributors, law, or regulations of other governments).
* Limited spendable fund balance. The ED proposes this category for the portion of spendable fund balance reflecting constraints that a government has imposed upon itself by formal action taken by its highest level of decision-making authority prior to the end of the reporting period. (1) The key difference between limited fund balance and restricted fund balance is that the latter is legally enforceable by outside parties, while the former is not.
* Assigned spendable fund balance. The ED proposes this term to describe the portion of spendable fund balance that reflects a government's intention to use resources for a specific purpose. Such an assignment would have to be made either by the governing body itself or by a subordinate high-level body or official delegated to make such assignments in accordance with policy established by the governing body (2)
That is, assigned spendable fund balance would reflect the governing board's intentions rather than those of management.
There would be no reason, of course, to report resources in a fund other than the general fund unless those resources were either restricted, limited, or assigned. Therefore, these are the only three categories of spendable fund balance that would be reported for governmental funds other than the general fund. Conversely, it is to be expected that the general fund will have additional resources that are not subject to any of these constraints. The ED proposes to describe this portion of fund balance in the general fund as unassigned spendable fund balance.
Many governments systematically set aside resources that can be spent only if certain specific circumstances occur (e.g., "rainy day funds," "stabilization funds").The ED proposes that such amounts be treated as either restricted spendable fund balance or limited spendable fund balance, depending upon the source and force of the constraint, and presuming that the specific circumstances in which spending would be permitted "would not be expected to occur routinely." Otherwise, such amounts would be reported simply as unassigned spendable fund balance in the general fund.
In current practice, a portion of fund balance is typically reserved or designated for outstanding encumbrances (e.g., outstanding purchase orders) to alert users that such amounts are not available for budgeting. The ED, however, as just explained, proposes to focus users' attention on constraints on the purpose for which resources can be spent, rather than on their budgetary availability. Accordingly, the ED proposes that encumbrances no longer be reflected as a component of fund balance, but instead be included as part of the required note disclosure for commitments, if significant.
How "special" do special revenue funds need to be? The ED proposes that henceforth, special revenue funds be used only for specific revenue sources that are either restricted or limited to spending for a specific purpose. Thus, surplus resources earmarked by the governing body for a specific purpose (i.e., not a revenue source) could no longer be accounted for in special revenue funds. All the same, the ED would allow governments to transfer earmarked resources to properly constituted special revenue funds, provided the original resources that served as the basis for establishing the fund remain significant.
When is a capital project a capital project? There are two related notions inherent in the term capital projects fund. It is not enough for spending to involve capital items (i.e., capital projects fund); those items must also be part of a project. In practice, it is not uncommon for governments to use capital projects funds to account for the acquisition of capitalizable items that are clearly not part of a project (e.g., buses, fire trucks, computer workstation equipment). The ED would make it clear that the use of the capital projects fund type is only appropriate for "acquisition or construction of capital assets that clearly comprise facilities" (e.g., buildings, building improvements, infrastructure assets), including ancillary items integral to such projects.
WHERE DO WE GO FROM HERE?
The GASB proposes that the guidance offered in the ED, if ultimately approved, take effect starting with fiscal years ending June 30, 2011. As usual, earlier implementation would be encouraged. The ED is available, free of charge, on the GASB's Web site at www.gasb.org. A public hearing on the topic will be held on July 14,2008, in Kansas City;, Missouri, in connection with the annual conference of the National Association of Counties.
Notes
(1.) "The Board considered whether this Statement should specify which formal actions of a government's highest level of decision-making authority were required to establish limitations but determined that it would not be practical to do so because of differences in the powers accorded to governments? (Governmental Accounting Standards Board, Fund Balance Reporting and Governmental Fund Type Definitions, exposure draft, February 29, 2008, paragraph 59.)
(2.) "Essentially, the Board's intention is that the assigned category include amounts that have been earmarked or set aside for a specific purpose by an authorized government body or official but that do not satisfy the criteria to be classified as restricted or limited. How intent should be expressed and communicated has not been specifically prescribed ...'" (Ibid., paragraph 65)
STEPHEN J. GAUTHIER is director of the Government Finance Officers Association Technical Services Center in Chicago, Illinois.
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