GASB Statement 54 Fund Balance Reporting And Governmental Fund Type Definitions

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1 GASB Statement 54 Fund Balance Reporting And Governmental Fund Type Definitions 1

2 Objectives of Today s Discussion Give a brief overview of GASB 54 Overview of how the Statement affects governmental fund balance reporting Overview of spending prioritization and minimum fund balance policies Analysis and reclassification process Class exercise on conversion of Sample County, TN governmental funds and year end reporting LGDPC review of year end procedures related to Statement 54 2

3 Who is the GASB? Governmental Accounting Standards Board The Governmental Accounting Standards Board (GASB) is a independent, not for profit organization that was organized in 1984 Establishes standards of financial accounting and reporting for state and local governmental entities. Its standards guide the preparation of external financial reports of those entities GASB Statements are considered GAAP for TN counties 3

4 Who cares about the GASB? Numerous users of government financial statements care that GAAP is followed. This group is comprised, among others, of Underwriters of municipal bonds Municipal Bond Fund managers Individual investors in municipal debt (75% of buyers of municipal debt) Government Financial Managers State and local legislators 4

5 Why the concern about GAAP? Some users have voiced concerns over lack of disclosure of liabilities, liquidity and going concern of municipalities. Say there is lack of adequate disclosure Good reason for these concerns. Reasons include 5

6 Recession is exacerbating certain problems City Manager of Hamtramck, Michigan states that city will run out of money by this March. City is requesting Chapter 9 bankruptcy protection. At least 30 other Michigan cities may follow suit. California considering special election in June 2011 to let citizens vote for increase in state sales and property tax. Has projected deficit of 20% of general fund and $12 billion education funding shortfall And this is BEFORE the Recovery money runs out! 6

7 Prichard, Alabama defaulted on retiree pension payments in December 2010 and stopped mailing checks 7

8 Camden, NJ just laid off 1/2 of police & 1/3 of Fire Department in January

9 GASB just released Statement 62 and is about to release more Statement No. 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies Soon to be released Statement, Economic Condition Reporting: Fiscal Sustainability Soon to be released Statement, Government Combinations (i.e. consolidations) Do you see a trend in these new Statements? And the investment community is calling for MORE disclosures from state and local governments! 9

10 What does this all mean for Tennessee Counties? Be prepared for a great deal more financial disclosure and emphasis on your county s financial statement presentation if you are planning on issuing bonded debt in the future. 10

11 Summary of GASB Statement 54 Statement was approved by GASB in February 2009; released March 11, Intent of Statement is to enhance governmental fund balance reporting in order for financial statements to be more consistent and comparable (between similar government entities). 11

12 Issues that the GASB wanted to address with Statement 54 Improve the usefulness of fund balance reporting (what funds are actually available) To more clearly define GAAP for fund balance reporting, better direction in financial statement preparation Clarify meaning of governmental fund type definitions 12

13 Timeline for Implementation March 2010 July 2010 Spring 2011 June 30, 2011 Analyze SRFs, make budget committee aware of changes, do budget amend for EOY close Close old SRFs to General Fund when you close out FY Show the transfer in FY Fiscal year!!! Prepare policies and do initial conversion on spreadsheet Close FY 10 11, conversion to new fund balance classifications 13

14 Remember, GASB 54 only impacts the governmental funds! We are only concerned with the equity sections of the General Fund, special revenue funds, debt service funds, capital project funds and the permanent funds Statement 54 does not impact enterprise and internal service funds. Lets look at Statement 54 definitions of the governmental funds 14

15 General & Capital Project Funds General Fund (this includes GPS fund) should be used to account for and report all financial resources not accounted for and reported in another fund. Capital Project Funds used to account for and report financial resources that are restricted, committed or assigned to expenditure for capital outlay 15

16 Debt Service & Permanent Funds Debt Service Fund Used to account for and report financial resources that are restricted, committed or assigned to expenditure for principal and interest.should NEVER use this fund to directly purchase capital expenditures (per the definition of the fund) Permanent Funds should be used to account for and report resources that are restricted to the extent that only earnings, not principal, may be used for purposes that support the reporting government s program. 16

17 Definition of a Special Revenue Fund has changed (big impact) Special 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. The 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. 17

18 At budget time Think about the special revenue fund definition before you create a new fund Look at current SRF revenue streams to be sure they still meet the definition; if not, cost center them in general fund or budget a specific revenue source (i.e. tax levy, sales tax, etc.) Do not budget large transfers of unspecified revenue to from special revenue funds. A transfer from Fund 141 to Fund 151 for debt payment is permissible (contribution from discretely presented component unit) 18

19 New fund balance reporting Governmental fund balance category definitions will change Reserves, Designated and Undesignated no longer used. New governmental fund balance category definitions a. Nonspendable b. Restricted c. Committed d. Assigned e. Unassigned We must become familiar with these new terms. 19

20 Old format Typical County General Fund Balance Reserved for Encumbrances $ 1,698,254 Reserved for Alcohol and Drug Treatment 310,414 Reserved for Lit Tax Jail or Courthouse 529,300 Reserved for Sexual Offender Registration 1,680 Reserved for Computer System Register 434,329 Reserved for Other General Purposes 4,270 Unreserved 16,936,157 Total Fund Balances $ 19,914,404 20

21 New Format Typical General Fund Balance Nonspendable Prepaid Expenses $ 2500 Restricted for: General Government 203,184 Public Safety 620,330 Public Health & Welfare 22,333 Committed to: Finance 28,000 Administration of Justice 418,332 Assigned to: General Government 13,483 Agriculture & Natural Resources 12,745 Public Safety 102,5321 Unassigned 17,568,176 Total fund balances $ 19,914,404 21

22 Nonspendable Fund Balance Not in spendable form, examples are Inventory and long term receivables (unless the proceeds are restricted, committed or assigned) Legally or contractually required to be maintained intact like the Corpus of a permanent fund 22

23 Restricted Fund Balance Same Definition as for net assets in Statement 34 (as amended by Statement 46), i.e. amounts constrained to being used for a specific purpose by: External parties (state, federal, private donor, creditors) Constitutional provisions Enabling legislation (LEAP grants from state) What is legally reserved now in 101 &

24 Committed Fund Balance Constraint on use imposed by the county itself, using its highest level of decision making authority (resolution) Constraint can be removed or changed only by taking the same action Action (resolution) to constrain resources should occur prior to end of fiscal year, though the exact amount may be determined subsequently Difference between Committed & Restricted remember compelling external party 24

25 Assigned Fund Balance Amounts intended to be used for specific purposes (think old fund designations for a specific fee) Intent is expressed by governing body or A body (school board, budget committee) or official authorized by the governing body Residual amounts in governmental funds, other than the general fund or GPS, are (at least) assigned unless there is a deficit. If using fund balance to balance the budget, should assign that amount for budget stabilization. 25

26 Unassigned Fund Balance Normally will only be found in General Fund and General Purpose School Fund (the general fund of the school discreetly presented component unit) In case of a fund deficit, will show a negative unassigned fund balance, regardless of fund 26

27 What classification do I use? The layman s guide Unassigned: Your single and playing the field Assigned: You are in a dating relationship Committed: You re married (for better or worse) Restricted: Court ordered child support; you don t pay it, an outside party will compel you. Non spendable: That $50 that your brother in law borrowed three months ago and still has not paid you back 27

28 Reserve for Encumbrances Still will use encumbrance accounting for budgetary purposes & operations. However, a reserve for encumbrances should not be displayed separately with the restricted, committed, and assigned categories for external reporting. County Management will have to reclassify encumbrances at EOY as restricted, committed and/or assigned. It is permissible to do these reclassifying entries on a spreadsheet at EOY and give to the auditors to post However, management must be able to make determination what the classification will be. We will look more at this later in our class exercise 28

29 Step 1: Prepare your policies Statement 54 addresses two different policies: Minimum fund balance policy Spending prioritization policy Let s look at a sample policy for each of these... 29

30 Minimum Fund Balance Policy Governing body should formally adopt a minimum fund balance policy IF they follow one or chose to have one (paragraph 28) Policy should be disclosed in the notes to financial statements County does not have to have a written minimum fund balance policy if they do not follow one. If you want one, refer to the sample or review GFOA GAAFR (Blue Book) for more info. Remember, don t formally adopt any policy that you don t intend to follow. 30

31 Adoption of spending prioritization policies GASB 34 already required county management to have a policy to determine whether restricted or unrestricted amounts are spent first (where s yours?) Respondents to Statement 54 (paragraph 85) commented many governments do not have formal spending prioritization policies. GASB 54 sets default spending policy if a specific one is not adopted for unrestricted funds: committed, assigned, unassigned (paragraph 18) Can adopt the sample policy (or something similar) if you plan on actually using it. 31

32 Analyze Revenue Streams Review revenue streams in all governmental funds & determine what classification the major revenue streams fall into. Remember definitions of classifications Remember difference between committed and restricted definitions Remember definition of special revenue fund. Ask yourself, should this fund still exist? 32

33 Ending fund balance classification? Remember equation: Beginning fund balance + revenues expenditures = ending fund balance Is there restricted grants in the fund that were not totally expended during the fiscal year? What is the size of the ending fund balance? Remember materiality with ending fund balance classifications. Special revenue fund should have a committed or restricted ending fund balance (unless there is a fund deficit). 33

34 Example: Debt Service Fund Main revenue: Property tax (60%), Wheel tax by referendum (35%), interest earnings (5%) Property tax restricted; Wheel tax restricted; interest earnings committed Total annual revenue $1,000,000 Default spending policy (spend restricted downward) Ending fund balance ($400,000) Ending fund balance classification restricted of $400,000 (remember materiality when considering the small amount ($50,000) of committed 34

35 Example: Solid Waste Special Revenue Fund Main revenue: Property tax (10%), Sales tax budgeted by commission (80%) investment earnings and sale of scrap (10%) Property tax restricted; Sales tax budgeted by commission committed, investment earnings and sale of scrap committed Total annual revenue = $1,000,000 Default spending policy (restricted downward) Ending fund balance = $600,000 Ending fund balance classification Committed of $600,000 35

36 In the 101 & 141 Funds Most local revenue streams will be unassigned in these two funds (remember the definition of a general fund). These funds typically have majority of fund balance classified as unassigned. Will still have to track the legal reserves that are required by state statute and reclassify for external financial reporting 36

37 About Assigned Fund Balance Should not be used to just earmark nonrevenue specific funds. Examples of an assignment: adoption fees in general fund assigned to animal control equipment purchases; jail commissary revenue assigned to inmate GED program expenses. Can use in general funds if balancing annual budget with fund balance. 37

38 End of Year Procedures Analyze legal reserves and reclassify on subsidiary ledger Management s choice to post the reclassified reserves onto general ledger or just post to dead balance sheet for external financial reporting Allow GL to close (just like now) to in all funds and then reclassify on dead balance sheet for external reporting Encumbrance accounting will continue on GL for budgetary purposes (but not external reporting) 38

39 End of Year Encumbrances Scrutinize year end encumbrances as normal for validity. Reclassify encumbrances per Statement 54 on subsidiary worksheet. If encumbrance is related to restricted revenue, then reclassify to restricted fund balance by function. Encumbrances in general funds (other than restricted) will probably generally be assigned (i.e. delegated authority) Do not reclassify an encumbrance to a less restrictive classification than the rest of the fund balance (example if drug control fund has 100% restricted fund balance, you would not reclassify encumbrances to assigned fund balance) Post reclassified encumbrances to dead balance sheet 39

40 Remember Before closing, be sure that you have eliminated all no longer in use accounts on your GL. Have supporting documentation (subsidiary ledger) for your reserves and encumbrances & their reclassification Understand WHY you made the adjustments. GASB 54 may seem difficult since there is no one size fits all answer, a lot of management decisions needed and counties across the state have same fund types with different revenue streams in them Remember materiality when doing this, don t get too deep in the grass and lose reason. 40

41 Clear as mud? Lets take a break and then do a class exercise together 41

42 15 minute Break and then Class Exercise!!!! 42

43 Class Exercise Sample County, Tennessee Governmental Funds: General, Ambulance, Solid Waste, Highway, General Debt Service, General Purpose School, School Federal Project, Central Cafeteria & Extended School Program. County also has a School Capital Project Funds. Spending prioritization policy is restricted to unassigned Sample County has no adopted minimum fund balance policy 43

44 Sample County Example Analyze Revenue streams in governmental funds Analyze & reclassify reserves on subsidiary ledger Analyze fund balances (other than legal reserves) at end of year Analyze and reclassify year end encumbrances on subsidiary ledger Post assignments in general funds if necessary Post adjustments to dead balance sheet for external reporting purposes 44

45 What if I have a fund deficit! Reclassify to negative unassigned fund balance regardless of governmental fund The commission balanced the general and general purpose funds budget with fund balance! Post that amount to assigned fund balance for external reporting (not GL). 45

46 Have questions/need help? You re welcome to stay around after class if you have county specific questions Call CTAS and/or county audit if you have accounting related questions Resources are available on line, actual GASB Statement and comprehensive implementation guide available as well. Comments from LGDPC 46

GASB 54 Practical Application

GASB 54 Practical Application Presented by Donna Collins Milestone Professional Services GASB 54 Basics Clarified definitions of governmental fund types New classifications of Fund Balance Financial Statements