Academic journal article The Journal of Government Financial Management

FUND BALANCE REPORTING IN STATE AND LOCAL GOVERNMENTS: A Current Look from A User's Perspective

Academic journal article The Journal of Government Financial Management

FUND BALANCE REPORTING IN STATE AND LOCAL GOVERNMENTS: A Current Look from A User's Perspective

Article excerpt

In reviewing a balance sheet for a government's general fund, have you ever wondered what a "Fund Balance Reserved for Contingencies" really was? Is it the estimated loss from an unsettled lawsuit against a government? Is it instead the government's rainy day fund? How does it differ from a "Fund Balance Designated for Contingencies"? Would the meanings be different if they were reported in a special revenue fund or a capital project fund?

The purpose of this article is twofold. First, it will summarize the results of recent research sponsored by the Governmental Accounting Standards Board (GASB), as part of its fund balance project, to support deliberation on the project's issues. Second, the article provides a brief synopsis of the GASB's Invitation to Comment, Fund Balance Reporting and Governmental Fund Type Definitions, issued in October 2006, which was built on the research findings.

GASB's FUND BALANCE PROJECT

This project originated after completion of the financial reporting model project in 1999, growing from concerns that some financial statement users were unclear about the distinctions between reserved and unreserved fund balances and the relationship between reserved fund balances and restricted net assets. Subsequently, an issue regarding the determination of net asset restrictions related to enabling legislation developed during the initial phase of implementing Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments. The project was formally added to the GASB's technical plan for the final third of 2002 as a current research project.

Background research was conducted during September and October 2003, and board deliberations began in January 2004. In June 2004, the board determined that additional research on fund balance was necessary and decided to separate the net asset and fund balance issues into separate projects. The separate net asset project concluded in issuance of GASB Statement No. 46, Nef Assets Restricted by Enabling Legislation: an amendment of GASB Statement No.34, in December 2004.

Existing authoritative standards do address how fund balance should be reported; GASB standards state:

"In governmental accounting and reporting, use of the term "reserve" should be limited to indicating that a portion of the fund balance is not appropriable for expenditure or is legally segregated for a specific future use. When part of the fund balance is reserved, the remainder should be reported as Unreserved Fund Balance."

Fund balance designations may be established to indicate tentative plans for financial resource utilization in a future period, such as for general contingencies or for equipment replacement. Such designations reflect tentative managerial plans or intent and should be clearly distinguished from reserves. Such plans or intent are subject to change and may never be legally authorized or result in expenditures. Designations should be reported as part of the unreserved fund balance...(italics in original)

GASB standards leave open the question of who has the authority to establish a designation. One issue omitted from both references is whether a government has to report designations in its external financial reports if it has established any for internal purposes. A second issue is whether current available financial resources that have no legal restrictions on spending can be reported in governmental funds other than the general funds. One can argue that the above guidance, in conjunction with the current definitions of the different governmental fund types, implies that only resources with legal spending restrictions can be reported in a governmental fund other than the general fund. Others would counter that there is no explicit guidance that states only legally restricted resources can be reported therein.

Prior GASB research indicated that there was substantial variation in the information that governments actually report about fund balance in their governmental funds. …

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