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GASB 54 – More Than Reclassifying Fund Balance

September 15, 2010

By Vanessa E. Rossitto, CPA

The components of the most talked-about attribute of a government financial statement are changing.  Say hello to five new categories of fund balance and four new fund definitions that will make all of our lives all a bit more complicated, but nothing that a little planning can't solve.

During March of 2009, the Government Accounting Standards Board issued GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, in order to help citizens and decision-makers better understand the constraints placed on fund balances.  The statement is intended to improve the usefulness of the amounts reported in fund balance by providing more structured classification.  The statement also clarifies the existing definitions of the general fund, special revenue funds, debt service funds and capital project funds.

The five new components of fund balance are as follows:

  • Nonspendable (inherently nonspendable)
    • Cannot be spent because of the form (i.e. inventory)
    • Must be maintained intact (i.e. principal of an endowment)
  • Restricted (externally enforceable limitations on use)
    • Can be spent only for the specific purposes imposed by grantors, creditors, contributors or laws and regulations
      of other governments
    • Can be spent according to laws through constitutional provisions or enabling legislation
    • Effectively, restrictions may be changed or lifted only with the consent of the resource providers
  • Committed (self-imposed limitations set in place prior to the end of the period)
    • Can be used only for the specific purposes determined by a formal action of the government’s highest level of decision-making authority
    • Requires formal action at the same level to remove the limitation
    • Formal action must be taken prior to the government’s year-end
  • Assigned(limitation resulting from intended use)
    • Intent can be expressed by the governing body or by an official or body to which the governing body designates the authority
    •  In government funds other than the general fund, the assigned fund balance represents the amount that is not restricted or committed which indicates that these resources are, at a minimum, intended to be used for the purpose of that fund
    • A government cannot assign resources that it does not have; therefore, the amount reported as assigned fund balance can never exceed total fund balance less its nonspendable, restricted and committed components
    • The portion of fund balance appropriated to balance the following year’s budget would be classified as assigned
  • Unassigned (residual net resources)
    • Total fund balance in the general fund in excess of nonspendable, restricted, committed and assigned fund balance
    •  If another government fund has a fund balance deficit, it will be reported as a negative amount in the unassigned classification in that fund
    •  Positive unassigned amounts will only be reported in the general fund

Encumbrances will no longer be explicitly reported other than in the notes.  If liquidation of the encumbrance is expected from restricted or committed resources, this is where the encumbered amounts will be reported.  Otherwise encumbrances will be reported within assigned fund balance.

Stabilization Arrangements

Governments sometimes 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.  If the use of these resources is limited in a way that is legally enforceable by an outside party, these amounts should be classified as restricted fund balance.  If the limitation is imposed by the highest level of decision-making authority, then these amounts should be classified as committed.  An assigned classification would not be appropriate for a stabilization arrangement.

Flow Assumptions

For most governments, determining the components of fund balance will be an annual exercise.  A government policy on the order in which resources are to be expended is an important factor in how amounts are reported in fund balance.  Total fund balance must be classified in to one of the five possible categories described above at the end of each year.  However, not all governments will have all five components of fund balance. 

Governments should review their policies and procedures to ensure outlays of funds are allocated correctly.  For example, should a municipality fund construction partially from grant revenues (restricted fund balance), partially from earmarked revenues (committed fund balance) and partially from other available resources (assigned fund balance)?  Flow assumptions are needed.  When both restricted and other resources are used, how are outlays allocated to each?  When committed, assigned and unassigned resources are used, how are outlays allocated among these categories?

Most governments currently disclose whether restricted or unrestricted resources are used first.  This policy now applies at the fund level for restricted, unrestricted, committed, assigned and unassigned resources.  If a government does not establish a policy, the default approach assumes that committed amounts should be reduced first, followed by the assigned amounts and then, lastly, unassigned. 

Fund Definitions

This standard changed the definitions of the general fund, special revenue funds, debt service funds and capital projects funds.  The changes to the general fund, debt service and capital project fund definitions are minor and should not have a significant impact on the nature or reporting of these funds. 

The change to the special revenue fund definition, however, could impact several governments.  The new definition reads as follows:

“Special revenue funds are used to account and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specific purposes other than debt service or capital projects.”

The key phrases in this new definition are “specific revenue sources” and “specific purposes.”  The foundation for the fund should be from a revenue source that is either restricted or committed.  That source should be expected to continue to represent a substantial portion of the inflows reported in that fund.  Transfers in from another fund are allowed, but cannot be the specific revenue source.  Should a special revenue fund not meet this definition, the government has two choices.  They can discontinue using the special revenue fund and transfer the assets into the general fund or they can report the fund with the general fund.  It should be noted that a government's internal reporting of a special revenue fund that does not meet this definition does not have to change, just the external reporting.  If the purpose of the fund has been exhausted, however, the government should consider transferring the residual monies into the general fund and classifying fund balance appropriately.

Changes – Plan before June 30, 2011

  • Governments will have to establish policies and procedures around calculating these five components of fund balance at year end.
  • Before year end, the body that possesses the highest level of decision-making will have to formally act upon committing fund balance should this be required.
  • A review of the government’s special revenue funds should be conducted in order to determine if they meet the new definition. 

Required Disclosures

The following items will need to be disclosed in the financial statements as a result of this new standard:

  • Specific Purposes Information – If not visible on the face of the balance sheet (i.e. amounts aggregated), specific purposes information should be disclosed in the notes to the financial statements
  • Committed fund balance– The highest level of decision-making authority and the formal action needed to establish, modify or rescind the commitment
  • Assigned fund balance– The body or official authorized to make assignments and the policy pursuant to which authorization is given
  • Flow assumption of spending- Restricted v. unrestricted.  Within unrestricted – committed, assigned or unassigned
  • Significant encumbrancesby major fund and non-major funds in the aggregate
  • Stabilization arrangements– Authority for establishing, requirements for additions, conditions for spending and the balance, if not separately displayed
  • Minimum fund balance policy– Description of the policy established (if any) by the government that sets forth the minimum amount
  • Major special revenue funds– purpose of each fund and which revenues or other resources are reported in each of those funds

Effective Date

Governments are required to implement this statement for fiscal years ending June 30, 2011.  Early application is encouraged.  Fund balance reclassifications should be applied retroactively by restating fund balance for all prior periods presented in the financial statements.  For those governments that include statistical tables in their financial statements, changes to the fund balance information presented for prior years is not required, although it is encouraged.   


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