Norwalk, Conn. - Governments have always found it difficult to properly report fund balances when the uses of various fund amounts were restricted in a number of ways. A dollar that couldn't be spent did not combine well with a dollar that could only be spent for a specific purpose, or a general fund dollar that could be spent without constraint.
Fund balances are not only a crucial bit of information for bond analysts, but also an indicator used by taxpayer associations, research groups, oversight agencies and legislators, all of whom are constantly scrutinizing governments for available liquid resources that can be used to pay long-term debt, reduce property taxes and expand government services.
Despite the widespread importance of fund balances, guidelines were unclear and definitions were vague or even absent. As a result, consistency of financial statement preparation and subsequent interpretation suffered.
To improve consistency and help reduce confusion, the Governmental Accounting Standards Board has issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions.
GASB project manager Ken Schermann said that the statement establishes definitions and sets a hierarchy of fund balance classifications based on the spending constraints that have been imposed on how the funds may be used. It also requires new disclosures about how amounts are classified.
"The standards that governed the reporting fund balance in the old model were subject to inconsistent application and different interpretation of terminology, so what readers thought they were seeing in fund balance classifications may not have been the case, depending on different application or interpretation or definition of the terms in those classification categories," Schermann said.
He explained that the new fund presentation will link more closely to the display in a government-wide financial statement because restricted net assets are mimicked by restricted fund balance - different numbers, perhaps, but the same notion.
Anne Ross, senior vice president of municipal bond specialist Roosevelt & Cross and the National Federation of Municipal Analysts' representative on GASB's advisory council, said that the new definitions would allow a better sense of monies available for spending.
"The NFMA is pleased that the fund balance reporting and governmental fund definitions have been clarified, and we feel that they have been reclassified in a way that promotes consistent application and understanding of the availability of fund balances," Ross said. "Before, we were unsure, by classifications that were given, whether or not the monies were truly available and could be liquidated on the spot, or if they were indeed restricted."
The new standard requires identification of funds that are considered unspendable because they are non-financial, such as funds associated with inventories. Other fund balances are categorized according to constraints upon them.
"Restricted" amounts are those constrained by external parties, constitutional provision or legislation. "Committed" amounts are those constrained by a government's highest level of decision-making authority. "Assigned" amounts are those a government intends to use for a particular purpose. "Unassigned" amounts are those that are not constrained at all and that are reported in the general fund.
Schermann said that the board also identified terms that were not consistently understood and thus were commonly misused or misinterpreted.
The standard also establishes the treatment of a common bone of contention, "rainy-day" or "economic stabilization" funds. Stabilization could be regarded as a specified purpose only if conditions that signal a need for stabilization are identified in sufficient detail. Likewise, legal minimum fund balances would need to be supported by explanations in notes to financial statements. Stabilization funds could be reported as restricted or limited fund balances in the general fund if they meet the other criteria for those classifications.
Schermann said that the new standard should not be difficult to adopt. "When you look at what the classifications are communicating, the extent to which governments are bound to observe constraints, governments should have been keeping track of those restraints all along. They simply weren't reporting it in this manner," he said. "The information's always been available to them. Now there's a standard that requires them to report it in a certain manner."
Stephen Gautier, the director of technical services of the Government Finance Officers Association, praised the statement for its definitions, its required disclosures and its direction.
"We were concerned that the board was moving toward limiting the use of capital project funds, which we did not feel was appropriate, and we are very appreciative that they were responsive to our concerns," he said.
The statement is effective for periods beginning after June 16, 2010, with earlier implementation encouraged.
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