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GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions Presented by Christopher Telli, CPA Senior Manager BKD, LLP Presentation Objectives To provide an overview of

1 GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions Presented by Christopher Telli, CPA Senior Manager BKD, LLP Presentation Objectives To provide an overview of GASB 54 Introduce the new fund balance reporting requirements and governmental fund type definitions Discuss the changes to various definitions Explain disclosure requirements 2 1

2 Scope Applies to all governments that report governmental funds Not applicable to proprietary funds and will not effect the full accrual statements (government-wide statements) 3 Why GASB 54? Importance and wide-use of fund balance by diverse users Inconsistencies in presentation Inconsistencies in use of fund types (especially special revenue funds) Comparability issues between governments 4 2

3 Previous Standards vs. GASB 54 Consider a government that has earmarked for capital projects by the government itself in property tax revenue restricted to paying debt service of cash available for any purpose 5 Under The Previous Standards If the amounts constrained to specific purposes are reported in the general fund, they are shown as reserved GF SRF DSF CPF Non-major Funds Total Reserved for: Capital projects Debt service Unreserved 6 3

4 Under The Previous Standards If the amounts constrained to specific purposes are reported outside the general fund, they are shown as unreserved $300 7 Under The Previous Standards If the amounts constrained to specific purposes are reported outside the general fund, they are shown as unreserved $

5 New Fund Balance Classifications The classification hierarchy is based primarily on the extent to which the government is bound to honor constraints on the specific purposes for which amounts can be spent Nonspendable Restricted Committed Assigned Unassigned Essentially what is now reserved Essentially what is now unreserved Essentially what is now designated 9 Fund Balance Example Prior Fund Balance Classification GASB 54 Fund Balance Classification Reserved: Emergency Reserves Debt Service Restricted/Committed Restricted Designated for Subsequent Year s Expenditures Undesignated Assigned Unassigned 10 5

6 Nonspendable Fund Balance Not in spendable form, such as Inventories Long-term amounts of loans and notes receivable Property held for resale However, if the use of the proceeds from the collection of receivables or sale of the property is restricted, committed, or assigned, then the receivables or property should be reported in those categories Legally or contractually required to be maintained intact Corpus of a permanent fund 11 Restricted Fund Balance Same definition as for net assets in Statement 34 (as amended by Statement 46) amounts constrained to being used for a specific purpose by External parties (creditors, grantors, contributors, etc.) Constitutional provisions Enabling legislation 12 6

7 Committed Fund Balance Constraint on use imposed by the government itself, using its highest level of decision making authority Constraint can be removed or changed only by taking the same highest-level action Action to constrain resources should occur prior to end of fiscal year, though the exact amount may be determined subsequently 13 Assigned Fund Balance Amounts intended to be used for specific purposes Intent is expressed by The governing body High-level body or individual authorized by the governing body 14 7

8 Assigned Fund Balance All remaining amounts in governmental funds, other than the general fund, that are not restricted or committed are reported as assigned The act of transferring resources to another governmental fund is considered an assignment of those resources to the purpose of that fund 15 Assigned Fund Balance Amounts in the general fund that are intended to be used for a specific purpose Do not report an assignment if it would cause a deficit in unassigned fund balance 16 8

9 Assigned Fund Balance Appropriation of existing fund balance to eliminate a projected budgetary deficit in the next year s budget is an assignment of fund balance Limited to an amount no greater than the projected excess of expected expenditures over expected revenues 17 Unassigned Fund Balance Available for any purpose Reported only in the general fund, except in cases of negative fund balance Negative balances in other governmental funds are reported as unassigned 18 9

Under The New Standards The amounts constrained to specific purposes are reported in the same classifications regardless of the fund they are in 19

10 Under The New Standards The amounts constrained to specific purposes are reported in the same classifications regardless of the fund they are in 19 Under The New Standards The amounts constrained to specific purposes are reported in the same classifications regardless of the fund they are in 20 10

11 Stabilization Arrangements For the purposes of reporting fund balance, stabilization is considered a specific purpose. If criteria is met, report in the general fund as: Restricted Committed If criteria is not met unassigned (general fund) Could report in a special revenue fund if resources derive from a specific restricted or committed revenue source 21 Encumbrances Encumbrances should not be displayed separately within the restricted, committed, and assigned categories Amounts are classified as restricted, committed, and assigned based on the source and strength of the constraints placed on them encumbering those amounts does not further affect them Encumbrances, if significant, should be disclosed in conjunction with other disclosures of significant commitments 22 11

12 Level of Detail Level of detail requirements may be met by display or a combination of display and disclosure Nonspendable by type Restrictions by purpose Commitments and assignments in sufficient detail that major purposes are evident to reader 23 This level of detail is not required for display on the face of the balance sheet. Fund balance categories and classification can be presented in detail or in the aggregate if sufficient detail if provided in the notes to the financial statements. 12

13 Classification Totals Displayed Details Disclosed In The Notes 25 Classifying Residual Balances Example: The flow assumption for a special revenue fund is to use restricted amounts before unrestricted amounts and to use the default policy for its unrestricted fund balance If expenditures incurred exceed the amounts that have been restricted, committed, and assigned to a specific purpose, resulting in a negative residual amount for that specific purpose, then amounts assigned to other purposes in that fund are reduced to eliminate the deficit 26 13

14 What were the balances at the beginning of the year? Were additional amounts restricted, committed, or assigned? 14

15 How much was spent for each purpose? What happens to a negative balance? 15

16 Note Disclosures Description of authority and actions that lead to committed and assigned fund balance Government s policy and procedures regarding classifications Restricted and unrestricted fund balance Committed, assigned, and unassigned 31 Note Disclosures Spending prioritization policies (the flow assumption) Restricted vs. unrestricted Committed, assigned, unassigned Minimum fund balance policies 32 16

17 Special Revenue Funds Previous Definition: Special Revenue Funds To account for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are legally restricted to expenditure for specified purposes 33 Special Revenue Funds Statement 54 Definition: 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 34 17

Special Revenue Funds Restricted or committed specific revenue sources should comprise substantial portion of fund s resources on an ongoing basis But fund also may include other restricted,

18 Special Revenue Funds Restricted or committed specific revenue sources should comprise substantial portion of fund s resources on an ongoing basis But fund also may include other restricted, committed, and assigned resources Disclosure: purpose of each major special revenue fund and each revenue source or other resources authorized to be reported in each 35 Effect of SRF Clarifications Previous Standards Less restrictive More restrictive In Practice GASB

19 Capital Projects Funds 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 Intended to be used to report the acquisition or construction of capital assets that clearly comprise facilities (for example, buildings, infrastructure assets) rather than those that clearly do not (for example, buses, computer workstation equipment) 37 Debt Service Funds Debt service funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest payments Should be used to report resources if legally mandated Financial resources that are being accumulated for principal and interest payments maturing in future years also should be reported in debt service funds 38 19

20 Debt Service & Capital Projects Funds Text made consistent with other definitions Capital projects funds broadened from major capital facilities to capital outlays Should be clearer that debt service funds are required when Legally mandated Financial resources are being accumulated for principal and interest payments maturing in future years 39 Effective Date & Transition Periods beginning after June 15, 2010 Earlier application is encouraged Fund balance classifications should be applied retroactively by restating fund balance for all prior periods presented Changes to information in the statistical section may be made prospectively, though retroactive application is encouraged; if prior years are not restated, difference in information should be explained 40 20

21 Implementation Tips Analyze special revenue funds before year end to ensure compliance with new definition If necessary board must commit funds before year-end (even if amount unknown) Develop/update policies as necessary and work any changes into budget Prepare board members and other users 41 Implementation Guidance 2010/11 Implementation Guide, Chapter Z Question and Answer Format 44 Questions relating to GASB

22 Implementation Guidance (cont d) Z Q Paragraphs 22 and 25 of Statement 54 require that amounts for the two components of nonspendable fund balance those that are not in spendable form and those that are contractually or legally required to be maintained intact either be displayed on the face of the statement or disclosed in the notes. Are those components required to be separately classified as resources not in spendable form and resources contractually and legally required to be maintained intact? (Q&A2010- Z.54.6) A No. It is not necessary to separately classify the components using the Statement 54 descriptions as long as amounts for the two components are discernable. For example, rather than presenting Resources not in spendable form, governments could instead label that amount as Inventories and prepaid amounts 43 Implementation Guidance (cont d) Z Q Is a government required to report an amount for all the fund balance classifications? (Q&A 2010-Z.54.7) A No. Governments should report amounts as committed or assigned only if they have procedures to constrain the use of resources that satisfy the criteria for those classifications. Some special purpose governments, for example, may not have the ability to commit resources, and other governments may not have policies that are consistent with the assignment criteria. Other governments may have procedures that constitute assignment of resources but have not taken action to assign any resources. Accordingly, the classifications that a government reports and the policies that are in place will depend on the specific circumstances for the government 44 22

23 Implementation Guidance (cont d) Z Q What effect does the legal adoption of budget and appropriation documents for the subsequent year have on fund balance classification? (Q&A2010-Z.54.13) A An adopted appropriation ordinance, resolution, or similar legislation generally authorizes a government to spend budgeted revenues and other financing sources and, therefore, does not impose constraints on the use of existing resources. However, if a portion of existing fund balance is included as a budgetary resource in the subsequent year s budget to eliminate a projected excess of expected expenditures over expected revenues, then that portion of fund balance (in an amount no greater than is necessary to eliminate the excess) should be classified as assigned. The amount should not be classified as committed because the governing body does not have to take formal action to remove or modify that specific use the purpose assignment expires with the appropriation 45 Implementation Guidance (cont d) Z Q In the situation described in the preceding question, does the assignment of existing fund balance to cover a projected budgetary deficit carry over to the following year? (Q&A2010-Z.54.14) A No. The assignment terminates at the effective date of the next period s budget 46 23

24 Implementation Guidance (cont d) Z Q Paragraph 12 of Statement 54 requires that the formal action to commit an amount to a specific purpose should occur prior to the end of the reporting period. Does a similar provision apply to the action taken to assign fund balance amounts? (Q&A2010-Z.54.15) A No. The determination of the purposes, as well as the amounts for assigned fund balances can be made after the end of the reporting period 47 Implementation Guidance (cont d) Z Q Expenditures have been made in a capital projects fund from resources advanced from the general fund in anticipation of bond proceeds that will be restricted to the purpose for which those expenditures have been made. Should the capital projects fund report negative restricted fund balance? (Q&A2010-Z.54.16) A No. Paragraph 19 of Statement 54 provides that a negative balance should not be reported for restricted, committed, or assigned fund balance in any fund. In this example, the capital projects fund should report a negative unassigned fund balance 48 24

25 Implementation Guidance (cont d) Z Q Can assigned revenues or resources be reported in a special revenue fund? (Q&A2010- Z.54.31) A Yes. However, the fund is required to also include substantial restricted or committed revenues as its foundation. Assigned revenues or resources cannot be the foundation for establishing a special revenue fund 49 Implementation Guidance (cont d) Z Q If a governing body passes a resolution (the highest level of decision-making authority, in this case) to annually transfer amounts from the general fund to a separate fund to be used for a specified purpose, do those amounts qualify as committed revenues so that the separate fund can be reported as a special revenue fund? (Q&A2010-Z.54.34) A No. Transfers are not revenues. The transferred-in resources in this example do not provide the foundation of restricted or committed revenues required for a special revenue fund. The separate fund can, however, be reported as a special revenue fund if there are also substantial restricted or committed revenues recognized in that fund 50 25

26 Implementation Guidance (cont d) Z Q Paragraph 31 states that if a fund no longer qualifies as a special revenue fund its remaining resources should be reported in the general fund. Can those resources be reported as part of another special revenue fund with a similar purpose (for example, if both funds are transportationrelated)? (Q&A2010-Z.54.39) A Yes. Resources accounted for in a separate fund that does not meet the criteria to be reported as a special revenue fund can be reported as part of the general fund or as part of another fund with a similar purpose that does meet the criteria to be reported as a special revenue fund 51 Implementation Guidance (cont d) Z Q A government intends to purchase several movable storage facilities that will not meet its capitalization threshold. Can those acquisitions be made from a capital projects fund? (Q&A2010- Z.54.42) A Yes. Capital projects funds may include expenditures for items that are capital in nature but do not qualify for reporting as capital assets under the government s capitalization policy 52 26

27 Implementation Guidance (cont d) Z Q Is a debt service fund required to be used for all debt service activity? (Q&A2010-Z.54.44) A No. A debt service fund is required to be used when it is legally mandated or to account for resources that are being accumulated for principal and interest maturing in future years. The accumulation of resources is distinguished from the annual receipt and collection of resources that will be used to make the next principal and interest payments that come due. Setting aside resources in a bond and interest reserve account or establishing a sinking fund are examples of accumulating resources for future years debt service 53 Questions Contact Information Christopher Telli, CPA Senior Manager BKD, LLP 1700 Lincoln Street, Suite 1400 Denver, CO FAX: ctelli@bkd.com 54 27

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