When the Governmental Accounting Standards Board issued Statement 34, requiring government-wide accrual accounting and modified accrual accounting for governmental funds, it improved financial reporting enormously, but inevitably created some confusion.Part of that confusion was over one of the most widely used pieces of government financial information — fund balance. Grappling with vague definitions of “reserved” funds, state and local governments have been reporting restricted net assets and reserved fund balances inconsistently.
“There were problems with the way standards were being implemented, because they’re kind of vague,” explained GASB project manager Dean Mead, “and there was clearly a lack of understanding on the part of many constituents on how fund balance is supposed to be reported and what it means. Even if we were able to educate everyone so they understood what the statements required, the statements wouldn’t be giving the users what they needed.”
To clarify the rules, GASB has proposed a statement, Fund Balance Reporting and Governmental Fund Type Definitions, which would do away with the “reserved” component of fund reporting and create a “restricted” classification that would apply consistently across all of a government’s funds.
The proposed statement establishes a hierarchy based on the constraints placed on the use of resources reported in funds. The initial distinction would be between amounts that are spendable, such as cash, and unspendable, such as inventory. Spendable amounts could be classified as restricted, limited, assigned or unassigned. Individual governments would need to disclose the process through which constraints are imposed on limited and assigned amounts.
The proposal also provides guidance on classifying amounts earmarked for “stabilization,” commonly referred to as “rainy-day” amounts that appear on the face of the balance sheet. Governments will need to disclose just how rainy a day must be to spend the stabilization resources. In most cases, these amounts would have to remain in a government’s general fund.
The Commonwealth of Massachusetts has had no difficulty reporting its own fund balances consistently, according to Comptroller Eric S. Berman, who is also a member of GASB’s Governmental Accounting Standards Advisory Committee. But he appreciated the new clarity: “The proposal definitely clarifies the way that funds should be presented, and it’s a reasonable standard to implement, though some governments may have more trouble than others.” Changes in Massachusetts’s accounting, Berman said, will involve little more than moving existing information within financial statements.
GASB’s Mead said that the new standard would help do away with a practice that has been widespread in governmental reporting — financial officers taking resources from one fund and temporarily tucking them into another where they won’t be so visible.
“Financial officers confirmed for us that this was a common practice,” Mead said. “The flexibility of fund accounting and the lack of clarity in the relevant standards made it possible. They weren’t gaming the system. They were using the standards they had, which allowed them to move these resources between funds, which made it difficult for people to find resources that truly could have been used for any purpose.”
A preliminary views document issued by GASB in 2006 had suggested more radical changes to fund balance reporting. The board opted for a more conservative change — really not much more than a clarification — pending work on the conceptual framework project, which could result in significantly different guidance. The statement would be effective for financial statements for periods beginning after June 15, 2010, with earlier implementation encouraged.
The deadline for written comments on the proposal is June 30. GASB has scheduled a public hearing on the proposal for July 14 in Kansas City, Mo. Copies of the proposed statement are available at www.gasb.org.
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