gasb statement no. 54: fund balance and governmental fund types

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GASB Statement No. 54: Fund Balance and Governmental Fund Types

Joseph J. Welch, CPA PartnerPurvis Gray & Company LLP

Sarasota, Florida

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GASB #54, paragraph 55……. Those users want to know about the character of residual amounts. They want to know the extent to which the use of amounts reported in governmental funds is constrained and how binding those constraints are. Are they enforceable by parties external to the government? Does the government itself have the ability through some specified level of due process to remove or modify the constraints? Or are they less-binding or even nonbinding constraints that are simply indications of management's intent to use resources for specific purposes, with management having the power to change their intentions through a less rigorous process?

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Effective dateDisplay and disclosure– Starting for the fiscal period ending June 30, 2011. – Earlier application encouraged – (Too late)– Will need to address in FY11 Budget!

Statistical section– Retroactive implementation encouraged, but not

required (provide explanation if amounts not restated)

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Why GASB Statement No. 54?

To improve the consistency and usefulness of fund balance information…..

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Focus of classification

“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)

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What Does it Change/Clarify?

Fund balance presentation – fund level – governmental funds

Definitions for governmental fundsMay no longer be able to use certain

“activity-focus” special revenue funds

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What Else Does it Require?

Requires disclosure of your policies and procedures over committing or assigning fund balances – i.e., Who says it is (reserved) for this?

TRANSPARENCY of Fund Balances

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New Fund Balance Classifications

NonspendableRestrictedCommittedAssignedUnassigned

Essentially what is now

reserved

Essentially what is now unreserved

Essentially what is now designated

The classification hierarchy is “based primarily on the extent to which the government is bound to honor constraints on the specific purposes for which amounts…can be spent”

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Fund Balance Presentation – Old Method

Reserves = unavailable or legally restrictedLegally restricted reserves were not shown unless

they were “narrower than the purpose of the fund”In practice, generally meant an external restriction

(as opposed to self-imposed)Also included certain encumbrances (unavailable)Reserves could create a negative unreserved

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Fund Balance Presentation – Old Method

Unreserved = designated or undesignatedDesignations represented “management’s tentative

spending plans”Generally should reflect actual spending plans

approved by at least senior managementReflected self-imposed limitationsDesignations cannot cause unreserved/undesignated

to be negative

Fund Balance Presentation –New Method

NonspendableSpendable (header not used) – Classifications

reflect a hierarchy, indicating the relative strength of the constraints:RestrictedCommittedAssignedUnassigned

1. Nonspendable Fund Balance

Not in spendable formCannot ever be spent (e.g., supplies inventories)Cannot currently be spent (e.g., long-term loans

receivable and nonfinancial assets held for resale)Not spendable legally

Legally or contractually must be kept intact (e.g., principal of an endowment or revolving loan fund)

2. Restricted Fund BalanceSame definition used now for restricted net assetsConstraint on use must be legally enforceable, and

was either: Externally imposed by creditors, grantors, contributors,

or laws or regulations of other governments, orImposed through constitutional provisions or enabling

legislation

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2. Restricted Fund Balance

Imposed Through Enabling Legislation:The government can mandate a paymentFrom external resource providers.It includes a legally enforceable requirementThat the resources be used only for the specified

purpose

3. Committed Fund BalanceUse constrained by limitations that the government

“imposes upon itself” throughA formal action (e.g., statute, ordinance, probably

resolution) – before year-endOf the highest level of decision making authority (governing

board)Which can only be reversed by the same type of formal

action, And commits the resource to a “specified purpose.”

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Difference BetweenRestricted and Committed

Par. 74 – Basis for Conclusions:With restricted, there is an (implicit) “contract”

with the resource providers, that the resources will only be expended for the specified purpose

And it is legally enforceable – committed is notLegally enforceable may be a gray area – you

won’t be able to test it

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Difference BetweenRestricted and Committed

Legally enforceable means:The government can be compelled by an external party

– e.g., citizens, public interest groups, the judiciary – to use the resources for the specified purpose

The distinction on enabling legislation may be whether the purpose restriction was in the authorizing (e.g., impact fees) or enabling legislation (e.g., local fee or charge)

4. Assigned Fund Balance

Intended use of resources – general fund– Established by the governing body itself or by a

body or official delegated by the governing body– Less formality necessary than for a commitment– Action may be taken after YE, but before issuance

of financial statements– Subsequent years’ budget deficit

Residual category in SRFs, CPFs and DSFs (unless negative - unassigned)

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Difference BetweenCommitted and Assigned

Committed requires:The commitment be made by the governing bodyThe action be formal and reversible only by the same actionA specified purpose

Assigned really only for specified purposes in the general fund – allows for management’s intentions

In other funds, assigned is simply a residual for amounts that don’t meet the committed criteria

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5. Unassigned Fund Balance

Only appropriate for:– The general fund–Negatives in other governmental funds - take

assigned to zero first

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Special Case - Encumbrances

(Only if they don’t lapse…)If Paid From Restricted, committed or

Assigned Revenues:–Put in that classification – don’t separately

stateIf Not Identifiable:–Could be committed or assigned

Recap - Classification of Fund BalanceNonspendable Form or legal limitation

Restricted Externally enforceable limitations

Committed Self-imposed limitations (not externally enforceable)

Assigned Intended use

Unassigned Residual

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Examples Gas Taxes – Restricted by law/reg. of other government Infrastructure surtax – same Bond money – restricted by external party (creditor) Grants – restricted by external party (grantor) Road impact fee – restricted by enabling ordinance – legally

enforceable Building permit fees – restricted by statute Alarm fees for police services – committed by enabling ordinance

– probably not legally enforceable Garbage collection fees – no requirement to spend – unassigned Parks fees – no requirement to spend on parks – unassigned

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Examples MSTU – statutorily must be spent in unincorporated area –

committed to public safety General fund grant match transferred into SRF per budget –

assigned (residual) General fund supplemental funding of road project – authorized

in budget and CIP – assigned b/c the budget/CIP can expire Balance in general capital projects – assigned, absent formal

governing board approval and specified purpose General fund allocation for a municipal pool – assigned Encumbrance to be paid from a restricted, committed or

assigned resource – restricted, committed or assigned (not separately stated)

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Examples Encumbrance (source unclear) – committed or assigned,

depending on who approved

Stabilization arrangement (rainy day fund) that meets the restricted criteria – restricted

Stabilization arrangement that meets the committed criteria – committed

Subsequent years’ budget deficit – general fund - assigned

Multiple Categories

A fund could have multiple categoriesWill need to adopt a “Flow Assumption”– Already have restricted v. unrestricted– Within unrestricted, identify liquidation order for:• Committed• Assigned• Unassigned

If no flow assumption, defaults to above order

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Fund Balance Presentation

Total by major classification (nonspendable, restricted, committed, assigned, unassigned)

Further detail on face permitted (or disclosed in Notes)

Disclosures

The process through which constraints are imposed for committed and assigned

And how they are modified or eliminated

“The reader should be able to identify residual balances and to what level they are constrained”– Cite the Ordinance/Policy– Name the Official’s position

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DisclosuresDetail breakdown of each classification (if not on face)Expand policy on flow assumptionFor stabilization arrangements – the authority, req’ts for

additions, conditions for spending, ending balance (even if not displayed)

Minimum fund balance policiesEncumbrances by major fund and total non-major (in

commitment note)Purpose of each major SRF and which revenues are

reported therein

Fund type definitions

Special Revenue Funds

“…to account for the proceeds of specific revenue sources … that are restricted or committed to expenditure for specified purposes (other than DSFs or CPFs).”

Old definition really just clarifiedBut may cause the disqualification of certain

“activity focus” SRFs

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Special Revenue Funds

Restricted or committed proceeds must comprise a “substantial portion of the inflows”

The proceeds must be recorded directly to this fund (not transferred in)

Capital Projects Funds

Old:– ...to account for financial resources to be used for

the acquisition or construction of major capital facilities…”

New:– ...to account for resources that are restricted,

committed, or assigned to expenditure for capital outlays”

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Debt Service Funds

...to account for resources that are restricted, committed, or assigned to expenditure for principal and interest”– When legally mandated, or– For financial resources being accumulated for

principal and interestCan be restricted, committed or assigned

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SRF’s That Don’t Meet the Definition

GASB prefers you move the activity to the general fund

Could move to an enterprise fund (change MF and BOA)

Could roll into another SRFCould adopt an ordinance/policy to commit

the resources (before FYE 11)

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Consistency with Government-Wide SONA

Fund restricted +/- accrual adjs = EW restricted

Fund committed/assigned/unrestricted (+ ISFs) +/- accrual adjs = EW unrestricted

Fund nonspendable (available) = “follow the rest of the fund”

Fund nonspendable (legally) = EW restricted

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Will GASG #54 Work?Improve the usefulness of governmental fund

balance informationCommon definition of restricted enhances

consistency and avoids confusion between fund level and EW

Clearer classification definitions enhances benchmarking

Needed info re: “level of constraints” on fund balance for users

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What to do TomorrowReview SRF’s for continued qualificationDo a practice run on prior year fund balances

for the new classificationsPrepare practice note disclosuresReview/shore up policies for committed and

assigned amounts, stabilization arrangementsGenerate PY info for the statistical section, if

you want to apply retroactivelyGet WPs ready for your auditors

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To Restrict or Not Restrict?

It is no longer a questionBe careful what you wish for

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The End

Joe Welch, PartnerPurvis Gray & Companyjwelch@purvisgray.com(941) 907-0350