GASB 54 Practical Application

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Berenice Copeland
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1 GASB 54 Practical Application Presented by Donna Collins Milestone Professional Services

2 GASB 54 Basics Clarified definitions of governmental fund types New classifications of Fund Balance Financial Statements changes Fund balance reclassifications made to conform to the provisions of this Statement should be applied retroactively by restating fund balance for all prior periods presented.

Clarified Definitions of Governmental Fund Types Special Revenue Fund Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or

3 Clarified Definitions of Governmental Fund Types Special Revenue Fund 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. One or more specific restricted or committed revenues should be the foundation for a special revenue fund.

4 Clarified Definitions of Governmental Fund Types Special Revenue Fund Example: Grant Fund Majority of revenue comes from federal grantor agency restricted revenues Match required comes from General Fund and is also restricted Interest earnings? Depends on whether restrictions are placed on those earnings pursuant to contract

5 Clarified Definitions of Governmental Fund Types Special Revenue Fund Those specific restricted or committed revenues may be initially received in another fund and subsequently distributed to a special revenue fund. If so, the revenue should not be recognized as revenue in the fund that initially receives.

6 Clarified Definitions of Governmental Fund Types Special Revenue Fund The restricted or committed proceeds of specific revenue sources should be expected to continue to comprise a substantial portion of the inflows reported in the fund. Example: Grants Advanced grants Reimbursement grants» If the project is not completed but the restricted revenue is completely spent» Close out of fund

7 Clarified Definitions of Governmental Fund Types Debt Service Fund Debt service funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest. Financial resources that are being accumulated for principal and interest maturing in future years also should be reported in debt service funds.

8 Clarified Definitions of Governmental Fund Types Capital Projects Fund Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets.

9 New Classifications of Fund Balance New classifications comprise a hierarchy based on the extent to which a government is bound to observe constraints imposed upon the use of the remaining resources.

10 New Classifications of Fund Balance Governments also are required to classify and report amounts in the appropriate fund balance classifications by applying their accounting policies that determine whether restricted, committed, assigned, and unassigned amounts are considered to have been spent. Disclosure of the policies in the notes to the financial statements is required.

11 New Classifications of Fund Balance Nonspendable Fund Balance includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact.

12 New Classifications of Fund Balance Nonspendable Fund Balance Not in spendable form Prepaids and inventories Property acquired for resale (if the proceeds are not restricted, committed or assigned) Long-term loans and notes receivable Iif the proceeds are not restricted, committed, or assigned) Advance to Other Funds in GF

13 New Classifications of Fund Balance Nonspendable Fund Balance Legally or contractually required to be maintained intact The corpus of a permanent fund Cemetery lots purchased

14 New Classifications of Fund Balance Restricted Fund Balance amounts that are restricted to specific purposes, pursuant to the definition of restricted in paragraph 34 of Statement 34, as amended by Statement No. 46, Net Assets Restricted by Enabling Legislation, should be reported as restricted fund balance.

15 New Classifications of Fund Balance Restricted Fund Balance Should be reported as restricted when constraints placed on the use of resources are either: a. Externally imposed by creditors (such as debt covenants), grantors, contributors, or laws or regulations of other governments; or b. Imposed by law through constitutional provisions or enabling legislation.

16 New Classifications of Fund Balance Committed Fund Balance Amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the government s highest level of decisionmaking authority should be reported as committed fund balance. Those committed amounts cannot be used for any other purpose unless the government removes or changes the specified use by taking the same type of action (for example, legislation, resolution, ordinance) to previously commit those amounts.

17 New Classifications of Fund Balance Committed Fund Balance Question: A city council has the ability to take three formal actions. It can pass ordinances (which become part of the city code), resolutions (which confirm and memorialize council decisions), and take other council actions. Because the city council is the highest level of decision-making authority, do all of those actions constitute commitments?

18 New Classifications of Fund Balance Committed Fund Balance No. Only the action that constitutes the most binding constraint should be considered a commitment for fund balance classification purposes. In this case, an ordinance is the highest level action and represents the most binding constraint and therefore would give rise to committed fund balance. GASB Implementation Guide Ques Z.54.51

19 New Classifications of Fund Balance Committed Fund Balance The formal action of the government s highest level of decision-making authority that commits fund balance to a specific purpose should occur prior to the end of the reporting period, but the amount which will be subject to the constraint may be determined in the subsequent period.

20 New Classifications of Fund Balance Assigned Fund Balance Amounts that are constrained by the government s intent to be used for specific purposes, but are neither restricted nor committed, should be reported as assigned fund balance (except for stabilization arrangements).

21 New Classifications of Fund Balance Assigned Fund Balance Intent should be expressed by (a) the governing body itself or (b) a body (a budget or finance committee, for example) or official to which the governing body has delegated the authority to assign amounts to be used for specific purposes.

22 New Classifications of Fund Balance Assigned Fund Balance Assigned fund balance includes all remaining amounts (except for negative balances) that are reported in governmental funds, other than the general fund, that are not classified as nonspendable, restricted or committed.

23 New Classifications of Fund Balance Assigned Fund Balance An appropriation of existing fund balance to eliminate a projected budgetary deficit in the subsequent year s budget in an amount no greater than the projected excess of expected expenditures over expected revenues satisfies the criteria to be classified as an assignment of fund balance.

24 New Classifications of Fund Balance Unassigned Fund Balance the residual classification for the general fund. the general fund should be the only fund that reports a positive unassigned fund balance amount. In other governmental funds, negative fund balance should be reported here First try to eliminate assigned fund balance If still negative, then report as unassigned

25 New Classifications of Fund Balance Policy Consideration If a government does not establish a policy for its use of unrestricted fund balance amounts, it should consider that committed amounts would be reduced first, followed by assigned amounts, and then unassigned amounts when expenditures are incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used.

New Classifications of Fund Balance Policy Consideration Stabilization amounts should be reported in the general fund as restricted or committed based on the source of the constraint on their

26 New Classifications of Fund Balance Policy Consideration Stabilization amounts should be reported in the general fund as restricted or committed based on the source of the constraint on their use. Stabilization arrangements that do not meet the criteria to be reported within the restricted or committed fund balance classifications should be reported as unassigned in the general fund.

27 FL UASM 2011 Changes Major Changes for 2011 New Equity Accounts Nonspendable Fund Balance Restricted Fund Balance Committed Fund Balance Assigned Fund Balance Unassigned Fund Balance

28 Financial Statements Changes Management s Discussion and Analysis If discussion is made to the change in fund balance from prior year, this section will need to address the restated fund balances. If a government s fund balance decreases below its minimum set by its Fund Balance Policy, it should be discussed in this section.

29 Financial Statements Changes Entity-wide Financial Statements For purposes of reporting net assets, Statement 34, paragraph 35, requires amounts that are "required to be retained in perpetuity" to be classified as "nonexpendable" within the restricted net asset category. For fund balance reporting purposes, however, those amounts should be classified as nonspendable rather than restricted.

30 Financial Statements Changes Entity-wide Financial Statements Restricted Fund Balance will not necessarily equal Restricted Net Assets Conversion items may change the balances Deferred revenue to unearned revenue Internal service funds possibly included in restricted net assets but not part of governmental total fund balances

31 Financial Statements Changes Fund Financial Statements Amounts for the two components of nonspendable fund balance may be presented separately, or nonspendable fund balance may be presented in the aggregate. If presented in the aggregate, amounts for the two nonspendable components should be disclosed in the notes to the financial statements.

32 Financial Statements Changes Fund Financial Statements Restricted, committed, and assigned fund balance may be displayed in a manner that distinguishes between the major restricted purposes, commitments, and assignments; or it may be displayed in the aggregate. If restricted, committed, or assigned fund balances are displayed in the aggregate, specific purposes information, should be disclosed in the notes to the financial statements.

33 Financial Statements Changes Fund Financial Statements First need to determine beginning fund balances for FY11 Look at the fund itself and determine what comprises its inflows. Are the majority of the revenues restricted? Most grants, law enforcement trust fund, CRAs Are the majority of the revenues committed? Impact fee funds, special assessment funds

34 Financial Statements Changes Fund Financial Statements For the general fund of a blended component unit that is reported as a special revenue fund of the primary government (example: CRA), the unassigned portion of that fund s fund balance should be reclassified as restricted, committed or assigned based on its use of resources by the primary government.

35 Financial Statements Changes Fund Financial Statements Encumbrances should be presented in the restricted, committed, or assigned fund balance classifications based on their level of authorization. Encumbrances are no longer a separate classification on the face of the statements.

36 Financial Statements Changes Notes to the Financial Statements For governments that use encumbrance accounting, significant encumbrances should be disclosed in the notes to the financial statements by major funds and nonmajor funds in the aggregate in conjunction with required disclosures about other significant commitments. The requirement is to disclose the total amount of encumbrances by major fund and nonmajor in the aggregate, if significant.

37 Financial Statements Changes Notes to the Financial Statements If fund balance classifications are presented in the aggregate on the face of the financial statements, disclosure of individual major components must be provided.

38 Financial Statements Changes Notes to the Financial Statements In the SSAP Stabilization arrangements Minimum Fund Balance policy

39 Financial Statements Changes Notes to the Financial Statements Governments should disclose in the notes to the financial statements the purpose for each major special revenue fund identifying which revenues and other resources are reported in each of those funds.

40 Financial Statements Changes Statistical Section Changes to the fund balance information presented in a statistical section may be made prospectively. If the information for previous years is not restated, governments should explain the nature of the differences from the prior information. Statistical Table 3 presents ending fund balances for governmental funds. Should be able to restate FY10 balances if you determine your beginning point for this year.

41 Summary There are several resources to review each year for changes in financial reporting GASB, GFOA, AICPA For many, the biggest change for this fiscal year will be GASB 54 Map out a methodology for calculating the new Fund Balance classifications and review with your auditors

42 Questions?

GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions

GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions September 13, 2010 Scott C. McIntire Melanson Heath & Company, P.C. smcintire@melansonheath.com Outline Overview Fund Balance - Current