Fund Balance: New and Improved
There is probably no single item in a typical state or local government’s financial statements that attracts more attention than fund balance. In February 2009, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. This latest GASB standard will not affect the calculation of fund balance, but will fundamentally alter the various components used to report it.
Accountants use the term fund balance to describe the arithmetic difference between the assets and liabilities reported in a governmental fund (e.g., general fund). The categories currently used to present fund balance focus on whether resources are available for appropriation (i.e., budgeting). Thus, the traditional presentation of fund balance distinguishes unreserved fund balance (i.e., available for appropriation) from reserved fund balance (i.e., not available for appropriation).
Fund balance may not be available for appropriation (i.e., reserved) for a variety of reasons. Some resources of a governmental fund, by their very nature, cannot be spent (e.g., prepaid rent and inventories of supplies). Other resources may convert to spendable form only at a much later date (e.g., the long-term portion of notes receivable). Still other resources may be available for spending, but their use is externally restricted to a purpose narrower than the purpose of the fund in which they are reported.
In addition, governing bodies themselves frequently place their own limitations on how they will use resources otherwise available for appropriation (e.g., “earmarking”). Likewise, a government’s management may have tentative plans for all or a portion of those resources. In either case, a government has the option of indicating these tentative managerial plans and self-imposed limitations by presenting a portion of unreserved fund balance as designated.
This current approach to classifying fund balance is summarized in Exhibit 1.
Three considerations led the GASB to undertake its recent reexamination of the components used to report fund balance. First, the traditional terminology is not self-explanatory and has frequently led to misunderstandings. Second, governments often have applied the different categories inconsistently in practice. Finally, some have questioned whether the historic focus on availability for appropriation best serves the needs of financial statement users.
Focus. GASB Statement No. 54 will shift the focus of fund balance reporting from the availability of fund resources for budgeting to “the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent.”1
Components of fund balance. GASB Statement No. 54 establishes five components of fund balance. Because circumstances differ among governments, not every government or every governmental fund will report all of those components.
Constraints on how amounts can be spent are not really an issue for resources that are inherently nonspendable. Examples include inventories and prepaids; the long-term portion of loans receivable2; and nonfinancial assets held for resale.3 Still other resources cannot be spent because legal or contractual provisions require that they be maintained intact (e.g., the principal of an endowment). GASB Statement No. 54 directs that the portion of fund balance reflecting both be labeled nonspendable fund balance.
Not all limitations on how resources may be used have the same force. Some limitations are externally enforceable and lie beyond the power of the government to change unilaterally (e.g., restrictions imposed by a grant contract or a bond covenant). Other limitations are self-imposed, but would require formal action at the highest level of the government to remove (e.g., resources legally “earmarked” for a given project by the legislative body). Still other limitations are less binding and function more as a declaration of intent. GASB Statement No. 54 has created a separate category to accommodate each of these situations.
Restricted fund balance. The term restricted fund balance will encompass net fund resources subject to externally enforceable legal restrictions. It is no accident that the term restricted fund balance so closely resembles the term restricted net assets used in the context of government-wide financial reporting. In both cases, the restrictions concerned would be either 1) externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments, or 2) imposed by law through constitutional provisions or enabling legislation.4 Note that there is no need for the limitation to be narrower than the purpose of the fund.5
Committed fund balance. The term committed fund balance will be used to describe the portion of fund balance that represents resources whose use is constrained by limitations that the government imposes upon itself at its highest level of decision making (normally the legislative body) and that remain binding unless removed in the same manner. The underlying action that imposed the limitation would need to occur no later than the close of the reporting period. Note, once again, that there is no requirement that the limitation be narrower than the purpose of the fund.6
Assigned fund balance. The assigned fund balance category will cover the portion of fund balance that reflects a government’s intended use of resources. Such intent would have to be established at either the highest level of decision making, or by a body (e.g., finance committee) or an official designated for that purpose.7 Logically speaking, a government cannot assign resources that it does not have; therefore, the amount reported as assigned fund balance could never exceed total fund balance less its nonspendable, restricted, and committed components. Once again, note that there is no requirement that the limitation be narrower than the purpose of the fund.
Of course, the general fund, as the principal operating fund of a government, may have net resources in excess of what is properly categorized in one of the four categories just already described. If so, the surplus will be presented as unassigned fund balance. A positive amount of unassigned fund balance, however, will never be reported in a governmental fund other than the general fund, because GASB Statement No. 54 prohibits reporting resources in another fund unless they are at least assigned to the purpose of that fund. All the same, funds other than the general fund could report a negative amount of unassigned fund balance should the total of nonspendable fund balance, restricted fund balance, and committed fund balance exceed the total net resources of the fund.
The new components of fund balance are summarized in Exhibit 2.
Stabilization arrangements. Governments often establish “rainy day funds” or “contingency funds” to provide a financial cushion against unanticipated adverse financial or economic circumstances. The appropriate classification of such resources within fund balance depends on the specific nature of the arrangement.
On the one hand, if the use of the resources is limited in a way that is legally enforceable by an outside party, classification as restricted fund balance would be appropriate. On the other hand, if the limitation was imposed by the highest level of decision making and can only be removed by formal action equivalent to the action taken to impose it, the use of the committed fund balance classification would be appropriate. It would never be appropriate, however, to classify such resources as assigned fund balance.
GASB Statement No. 54, paragraph 20, places serious limits on what qualifies as a stabilization arrangement for this purpose:
The formal action that imposes the parameters for spending should identify and describe the specific circumstances under which a need for stabilization arises. Those circumstances should be such that they would not be expected to occur routinely. For example, a stabilization amount that can be accessed “in an emergency” would not qualify to be classified within the committed category because the circumstances or conditions that constitute an emergency are not sufficiently detailed, and it is not unlikely that an “emergency” of some nature would routinely occur. Similarly, a stabilization amount that can be accessed to offset an “anticipated revenue shortfall” would not qualify unless the shortfall was quantified and was of a magnitude that would distinguish it from other revenue shortfalls that occur during the normal course of governmental operations.
Appropriated fund balance. Not infrequently, governments balance their budget by appropriating a portion of existing fund balance to bridge the gap between appropriations and estimated revenues. The portion of fund balance thus appropriated for the following year would properly be classified as assigned fund balance.
Flow assumptions. Frequently resources for a single project will come from multiple sources. For example, a city may elect to finance a new bridge partially from restricted grant proceeds (restricted fund balance), partially from earmarked revenues (committed fund balance), and partially from other available resources expressly set aside for the purpose (assigned fund balance). In that case, flow assumptions would be needed:
•When both restricted resources and other resources are to be used, how are outlays allocated to each (e.g., restricted resources presumed to be spent first? Spending presumed to occur on a pro rata basis?)?
•When committed, assigned, and unassigned resources are to be used, how are outlays allocated among the various categories?
Comparison of Old and New
Perhaps the best way to gain an understanding of the new fund balance categories is to contrast how certain specific items are reported today with how those same items will be reported in the future under GASB Statement No. 54.
Reserved fund balance. Currently, reserved fund balance comprises three elements:
•Resources that by their very nature cannot be spent (e.g., prepaid rent)
•Resources that are not yet available for spending (e.g., long-term portion of loans receivable)
•Resources externally restricted to a purpose narrower than the fund
The first of these elements will always be reported as nonspendable fund balance. The second element normally would be reported as nonspendable fund balance (i.e., unless there was a limitation on how the amounts eventually received could be used, in which case the classification would be restricted, committed, or assigned fund balance, as appropriate). The third element will be reported as restricted fund balance.
Designated unreserved fund balance. Currently this category comprises two elements:
•Limitations that the government places upon itself
•Tentative management plans
Net resources currently reflected in the first category will be reported in the future as either committed fund balance or as assigned fund balance, depending upon the source of the limitation. The latter will be reported as either assigned fund balance (if management is designated to make such assignments) or unassigned fund balance.
Undesignated unreserved fund balance. Today this residual category includes resources whose use is limited, but not for a purpose narrower than the purpose of the fund. Under GASB Statement No. 54, there is no requirement that a limitation be narrower than the purpose of the fund. Accordingly, items that are restricted, committed, or assigned simply for the purpose of the fund will be reported as restricted, committed, or assigned fund balance.
Also, reporting designated unreserved fund balance today is optional. Under GASB Statement No. 54, the use of the equivalent category (i.e., assigned fund balance) will be required. Therefore, many governments that today do not report designated unreserved fund balance will report as assigned fund balance a portion of what today is labeled simply unreserved fund balance.
Governments will need to implement GASB Statement No. 54 starting with the fiscal period that ends June 30, 2011. In the statistical section of the comprehensive annual financial report, retroactive implementation is encouraged, but not required. If a government declines to restate amounts from previous years in the statistical section, it will need to provide an explanation.
Stephen J. Gauthier is director of the Government Finance Officers Association’s (GFOA) Technical Services Center in Chicago, Illinois. This article was reprinted with permission of the GFOA, publisher of Government Finance Review, 203 N. LaSalle St., Suite 2700, Chicago, IL 60601-1210. (phone: 312.977.9700; fax: 312.977.4806; e-mail: GFR@gfoa.org; Web: www.gfoa.org). Annual subscriptions: $35. Editor’s note: Minor revisions were made to reflect New Hampshire government terminology.
1. GASB Statement No. 54, paragraph 5.
2. Assuming that there are not constraints on the use of the amounts eventually collected.
3. Assuming that there are not constraints on the use of the proceeds of the eventual sale.
4. The criteria for restricted net assets set forth in GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, paragraph 34, are identical to the criteria for restricted fund balance in GASB Statement No. 54, paragraph 8.
5. If the use of the amounts to be collected on long-term loans receivable and the amounts resulting from the sale of nonfinancial assets is subject to restrictions, then those items should be reflected in restricted fund balance, rather than in nonspendable fund balance.
6. If the use of the amounts to be collected on long-term loans receivable and the amounts resulting from the sale of nonfinancial assets is committed, then those items should be reflected in committed fund balance, rather than in nonspendable fund balance.
7. If the use of the amounts to be collected on long-term loans receivable and the amounts resulting from the sale of nonfinancial assets is assigned, then those items should be reflected in assigned fund balance, rather than in nonspendable fund balance.