Fund Balance Reporting

Users of governmental financial statements often want to know how much of the fund balances in the governmental-type funds is available for general-purpose spending. Constraints on amounts available for general-purpose spending may be caused by (a) the establishment of funds that limit spending to specific purposes and (b) laws, contracts and other arrangements that earmark portions of fund balances for specific uses. To increase the usefulness of fund balance information, GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (issued February 2009 and effective for financial statements for periods beginning after June 15, 2010), changes the way fund balances are reported in the fund financial statements and makes some changes in the definition of governmental-type funds.

The changes made by Statement No. 54 affect primarily the following parts of Introduction to Governmental and Not-for-Profit Accounting, 6th Edition: presentation of governmental funds balance sheets in Chapters 2, 5, 6, and 9; discussion of “Fund Balance Presentation” in Chapter 5 (pages 149-152); and discussion of “Budgetary Cushion” in Chapter 14. The ensuing paragraphs describe the more significant changes made by Statement No. 54.

Fund Balance Display by Hierarchy of Constraint

Statement No. 54 eliminates the distinction between “reserved” and “unreserved” portions of fund balance and also eliminates the caption “reserved for encumbrances.” Instead, Statement No. 54 establishes five classifications of fund balance within the governmental-type funds: nonspendable, restricted, committed, assigned and unassigned. The classifications are displayed on the balance sheet in descending order of constraint on the availability of the resources, based primarily on the extent to which the government is bound to honor the constraint on the specific purposes for which the fund balances can be spent. The remaining fund balance is identified as unassigned.

As a result of Statement No. 54, the fund balance section of the government fund balance sheet might be displayed as follows, provided the government’s fund balances meet the criteria for all five classifications: Major Debt Capital General Highway Service Projects Fund Fund Fund Fund Total
Fund balances: Nonspendable XXX XXX XXX Restricted XXX XXX XXX XXX Committed XXX XXX XXX Assigned XXX XXX XXX XXX XXX Unassigned XXX ____ ____ ____ XXX Totals XXX XXX XXX XXX XXX

Details within each classification (for example, by program, function, or activity) may be presented on the face of the balance sheet or in the notes.

The new classifications of fund balance correspond to the previous classifications approximately as follows: The nonspendable, restricted, and committed fund balances previously were classified as “reserved.” The classification “assigned” includes what was previously classified as “designated.” The classification “unassigned” corresponds to the previous “unreserved” portion of fund balance. See the ensuing section on “Reporting Encumbrances” for a discussion of encumbrance reporting.

Discussion of the Five Fund Balance Classifications

Comments on the five classifications of fund balance follow.

Nonspendable Fund Balance: Nonspendable fund balances are generally those that are not in a spendable form (such as inventories) or that are required to be maintained intact (such as the principal of an endowment fund). Perhaps the most common examples of nonspendable fund balances are those resulting from using the purchases method of accounting for materials, supplies, and prepayments, discussed in pages 160-161 of the text. Because the term “reserved” will no longer appear in the financial statements, the journal entry to record supplies inventory under the purchases method will be: