GASB 54: The New Fund Balance Reporting Requirements

GASB 54: The New Fund Balance Reporting Requirements Wednesday, July 22, 2009

GASB 54: The New Fund Balance Reporting Requirements

Marcia Taylor, CPA, CGFMRob Lent, CPA, CFE, CGFMWilly McKain, CPAWednesday, July 22, 2009

1Need for the ProjectFund balance widely recognized as one of most used elements in financial statementsWhat is available to be spent?What is available to pay debt or other long term obligations?

Issues with Fund Balance InformationLevel of actionPloppingConfusion on terminologyLack of comparabilityAvailable maskedIssues with Fund Balance Information

ObjectiveDo current reporting requirements adequately meet needs of users?

Assess financial flexibilityAssess liquidityClarify distinctions between reserved and un, reserved and net assets

Fund Definition ComponentFB affected by fundsLack of clarity?SRF what resources?CPF what projects?Activity versus revenue reporting

Issues for Project PlanDecisions made by usersTypes of informationComponentsDisplay (versus disclosure)Clarify fund definitionsHistory of ProjectDeliberations during MFBA1987-1992 resistance by users/preparers1999 Statement 34 proposed and withdrawnProject in 2002, research 2003Agenda December 2003 after 34 issuedAdditional research on FBNet Assets (46) issuedHistory of ProjectITC October 200695 responsesED April 200890 responses, 26 field testTask forceFinal February 2009

9Scope and effective dateScopeChanges how fund balance is presentedClarifies use of governmental fund typesEffective dateFiscal period ending 6/30/11Early implementation encouragedRetroactive reporting encouraged for statsNew GuidanceFund balance classificationFocus of classificationThe extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent (GASB #54, para 5)Components of fund balanceFive categoriesNonspendableRestrictedCommittedAssignedUnassignedNot all will always be presentNonspendable fund balanceNot in spendable formCannot ever be spentCannot currently be spentLegally or contractually required to be maintained intactCategories representing spending constraintsThree categoriesRestricted fund balanceCommitted fund balanceAssigned fund balanceNo requirement that constraint be narrower than the purpose of the fundRestricted fund balanceConstraints on purpose/circumstances of spending that are legally enforceable by outside partiesCreditorsGrantors and contributorsLaw or regulations of other governments Constitutional provisions/enabling legislationSame rules now used to classify restricted net assetsCommitted fund balanceConstraints on purpose/circumstances of spending imposed by government itselfFormal actionMeans will differ among governmentsHighest level of decision-making authorityBinding unless removed in the same mannerAction taken prior to the end of the reporting periodAmount can be determined at a later dateAssigned fund balanceIntent to use resources for a specific purposeGovernment bodySubordinate high-level body or official delegated to make such assignments in accordance with policy established by the governing bodyGoverning bodys intentions not managementsNever in excess of total fund balance less its nonspendable, restricted and committed componentsUnassigned fund balanceResidual balance reported in general fundThe use of some other fund type presumes that all of the resources reported in that fund are either restricted, limited, or assignedAlso used to report deficits in other fund typesComponents of fund balanceNonspendable fund balance (inherently nonspendable)Not in spendable form or requirement to maintain intactRestricted fund balance (Externally enforceable limitations on use)Outside partiesConstitutional provisions or enabling legislationCommitted fund balance (Self-imposed limitations)Formal action by end of periodHighest level of decision makingAssigned fund balance (Limitation resulting from intended use)Less formal actionHighest level of decision making or designated body or officialUnassigned fund balance (Residual net resources)Stabilization (rainy day) fundsResources that can be spent only if certain specific circumstances occurUse of special revenue fund for this purpose not permittedReport in general fundRestricted or committedPresumption that specific circumstances in which spending is permitted would not be expected to occur routinelyNever classified as assigned

EncumbrancesNote disclosure (commitments)Categorization for display purposes dependent on nature of constraintNew GuidanceGovernmental fund type definitionsFund type definitionsSpecial revenue fundsCapital projects fundsSpecial revenue fundsHistoryDesigned for specific revenue sources that are legally restricted to expenditure for specified purposesOften used for resources that have been earmarked, regardless of source.Four issues in practice1. Specified purposes aloneTwo criteria in old definitionSpecific revenue sourcesSpecific purposesIs compliance with the specified purposes criterion sufficient?Not uncommon in practiceSometimes no specified revenue sources, only specified purposes2. Transferred resourcesAre governments free to transfer in additional resources for same purpose as the specific revenue source?3. Legally restrictedInclude resource restrictions imposed by the government itself?4. PurposeIs a constraint on the circumstances in which resources can be spent equivalent to a constraint on the purpose for which they can be spent?Stabilization arrangementsResolution (GASB 54)New definitionSpecial revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.1. Specified purposes sufficient?NoThe term proceeds of specific revenue sources establishes that one or more specific restricted or committed revenues should be the foundation for a special revenue fund.2. Free to transfer in additional resources for same purpose?YesOnly so long as the government expected the core revenue source(s) to comprise a substantial portion of the inflows reported in the fund.3. Include resource restrictions imposed by the government itself?Yes, if the resources qualify as committed fund balance4. Is constraint on circumstances equivalent to constraint on purpose?Yes (i.e., stabilization arrangements)Prior definition: capital projects fundsto account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds or in trust funds for individuals, private organizations, or other governments).One issue limited to capital facilities?ResolutionNew definitionCapital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets).Not limited to capital facilitiesGeneral fundPrior definitionTo account for all financial resources except those required to be reported in another fundNever intended to limit the ability to use another fund type voluntarilyUse required only when a primary government is incorporating the general fund of a blended component unitTerm required dropped from the definitionDisclosureCommitted fund balanceGovernments highest decision-making authorityFormal action required to establish, modify or rescind a commitmentAssigned fund balanceBody or official authorized to make assignmentsPolicy established by the governing body pursuant to which that authorization is given.Disclosure (cont.)Flow assumptionsWhether restricted or unrestricted resources are considered to be spent first when both are available for the same purposeOrder in which committed, assigned, and unassigned resources are considered to be spent when they are available for the same purposeDisclosure (cont.)Stabilization arrangementsAuthority for establishingRequirement for additionsConditions that need to be met for spending to be permitted.Minimum fund balance requirementsDescription of the policy that sets forth the details of the requirement, including the action taken to establish it.Disclosure (cont.)Special revenue fundsFor each major special revenue fundPurpose of the fundRevenues and other resources reportedQuestion 1Which of the following would be reported as restricted fund balance?

Prepaid rentEndowmentBoth (A) and (B)None of the aboveQuestion 2Which of the following would never be a positive balance in a special revenue fund?

RestrictedLimitedAssignedUnassignedQuestion 3How would a limitation on spending imposed by a resource contributor be categorized?

RestrictedCommittedAssigned(A) or (B)Question 4The governing body of a city with a 6/30 FYE votes early in July to require that specified resources be spent only for a specified purpose. How should that constraint be reflected in fund balance?

RestrictedCommittedEither (A) or (B)None of the aboveQuestion 5What is the key difference between restricted and committed?

DurationFormEnforceabilityFocus on availabilityQuestion 6Assigned fund balance is designed to reflect the intent of:

ManagementGoverning bodyEither (A) or (B)Question 7How may a stabilization (rainy day) fund be reported?

Special revenue fundRestricted (general fund)Committed (general fund)Assigned (general fund)Either (B) or (C)Question 8The basis for establishing a special revenue fund should be:

Earmarked resourcesRevenue sourcesEither (A) or (B)Question 9A capital projects fund may be established to account for the acquisition of which of the following?

Fire trucksBuilding improvementsEquipmentNone of the aboveAll of the aboveQuestion 10The term nonspendable fund balance essentially covers the same items encompassed by the traditional term reserved fund balance.

TrueFalsePractitioners Approach to implementing GASB 54Need to Read and understand the GASB 54 pronouncementRecommended reading the GFOA book by Stephen Gauthier: The New Fund BalancePractitioners Approach to implementing GASB 54Have to understand the new Fund balance components and what the rules are for each category to make sound judgment on their classifications.Need to know the action steps necessary to obtain appropriation authorization for amounts to be presented in the correct category.Practitioners Approach to implementing GASB 54Another challenge we are creatures of habit and now have to let go of the current fund balance terminology we have become so familiar with and accustomed to:I. ReservedII. UnreservedDesignatedUndesignatedPractitioners Approach to implementing GASB 54Have to now learn the new Components of Fund balance:I.NonspendableII.Restricted III.CommittedIV.Assigned V.UnassignedPractitioners Approach to implementing GASB 54Helpful Reminder:Nobody Really Cares About UsI.NonspendableII.Restricted III.CommittedIV.Assigned V.UnassignedPractitioners Approach to implementing GASB 54Mt. Lebanon 2007 & 2008 examples of Fund balance under current rules and then recast to convert to the new GASB 54 categories.

Allegheny County example of 2007 fund balance to new GASB 54 standard.Marcia, Rob & Willy

Thank You!

Questions?Sheet1GeneralSpecial RevenueCapital ProjectsDebt ServiceTotalFund Balance: Reserved: Capital projects20100500170 Public safety2500025 Equipment5025750150 Debt service0003030 Unreserved: Designated: Capital projects10020030 Public safety initatives25300055 Library gifts0450045 Undesignated15050100210

Total fund balances28025015530715

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