CSMFO 2012 Annual Conference Implementing GASB 54 (Fund Balance Reporting)

1. CSMFO2012 Annual ConferenceImplementing GASB 54 (Fund Balance Reporting) Presentation by Gregory S. Allison, CPA UNC School of Government

2. Why Change? • Traditional focus of fund balance components on resources available for appropriation • New focus on two objectives • Indication of constraints of how resources can be spent • Identification of the sources of those constraints

3. Components of Fund Balance • Nonspendable • Restricted • Committed • Assigned • Unassigned

4. Nonspendable Fund Balance • Portion of fund balance/net resources not in spendable form or nonspendable for foreseeable future • Inventories • Prepayments • Long-term receivables • Portion of fund balance/net resources required to remain intact • Permanent fund principle

5. Restricted Fund Balance • Resources in a governmental fund subject to externally enforceable constraints on spending • Debt covenants • Grantors • Contributors • Enabling legislation (e.g., taxes raised for a particular purpose)

6. Committed Fund Balance • Formal legal constraints placed by the governing board • Formal action necessary to create OR rescind • Constraints have to be in place no later than the end of the fiscal period • Similar to a high level designation • Ability to rescind differentiates committed from restricted net assets

7. Assigned Fund Balance • Reflects a government’s intended use of resources (i.e., earmarking – neither restricted or committed) • Assignments may occur anytime before the issuance of financial statements • Assignment ability may be delegated by the board (commitments may not be) • Less formal • Default category for governmental funds except general fund (unless those amounts are negative)

8. Unassigned Fund Balance • Residual category for general fund • Reflects deficit fund balance for other governmental funds • Impossible to report positive assigned fund balance and negative unassigned fund balance • Assigned amount has to be eliminated before negative unassigned may be reported

9. Why do we need fund balance? • Volatility of revenues, expenditures, and the economic environment in general • Exposure to significant one-time outlays (e.g., disasters, capital needs, budget cuts) • Need for general fund to provide availability to other funds (or vice versa) • Liquidity needs • Commitment/assignment policies

10. Fund Balance Policy Sources • GFOA Best Practices • Local policies • Local laws/ordinances • State laws/ordinances

11. GFOA Best Practices • Appropriate Level of Unrestricted Fund Balance in the General Fund • Adopted 2002, updated 2009 • Recommends adoption of formal policy • Committee, assigned, and unassigned categories represent unrestricted fund balance • Focus of most policies will be the general fund • Recommends a minimum of no less than 2 months revenues or expenditures, regardless of size (~ 16%)

12. GFOA Best Practices (cont.) • Appropriate Level...(cont.) • Choice of revenue vs. expenditure should be based on most reliable/predictable measure • Laws or policies may actually dictate higher amounts • Some policies may focus on unassigned, rather than including commitments and/or assignments • Recognize the difference between GAAP and budgetary fund balance

13. GFOA Best Practices (cont.) • Replenishing Fund Balance in the General Fund • Adopted 2011 • Reiterates the two-month recommendation of unrestricted fund balance • Addresses how to replenish fund balance when minimum amounts are breached • Recommends governments adopt formal fund balance policy

14. GFOA Best Practices (cont.) • Replenishing...(cont.) • Identify purposes for which portions of fund balance are intended (e.g., working capital, stabilization, unexpected events) • Potentially identify sources of replenishment (e.g., non-recurring revenues, surpluses, excess resources in other funds) • Policy should reiterate that fund balance replenishment a priority when conditions allow (generally within one to three years)

15. GFOA Best Practices (cont.) • Replenishing...(cont.) • Factors that influence rate and time periods of replenishment • Budgetary reasons/volatility of revenues • Recovery from an extreme event • Political continuity • Financial planning horizons • Long-term forecasts and economic conditions • Milestones for replenishment • External financing expectations

16. Common Elements of a Fund Balance Policy • Policy purpose • General purpose • Applicability to funds • Definitions and classifications • Governmental fund structure (if policy extends past the general fund) • Fund balance components • Restricted vs. unrestricted • Specific policy

17. Fund Balance Policy Guidance • New questions in 2011/12 Comprehensive Implementation Guide • Z.54.23 (stabilization versus minimum fund balance) • Z.54.24 (levels of specificity required) • Z.54.25 (laws dictating minimum fund balance) • Z.54.29 (disclosure details related to minimum fund balance being violated)

18. Stabilization Funds • Represents formal arrangements “setting aside” funds for budget/revenue stabilization, working capital, contingencies, emergencies, etc. • May be restricted or committed • Funds can only be accessed under specified circumstances that are not considered routine • Minimum fund balance policies generally do not qualify

19. Selected Fund Balance Disclosures • Committed and assigned policies and procedures • Identify highest level of authority • Formal actions to commit • Policies that relate to assignment authority • Stabilization arrangements • Minimum fund balance policies • Only where governing bodies have formally adopted a policy (i.e., not if it is imposed upon the government)

20. Disclosures (cont.) • Order in which government considers restricted versus unrestricted amounts to be spent when both are available • Order in which committed, assigned, or unassigned amounts are considered to be spent • Any aggregate displays on B/S should be disaggregated in sufficient detail in notes

21. What about....??? • Encumbrances • No longer separately identifiable on the face of the financial statements • Still considered a component of either restricted, committed, or assigned • Restricted and committed amounts indirectly included in the calculations of the respective resources

22. What about...???(cont.) • Appropriation for subsequent year’s projected budget shortfall • Currently reflected as designated fund balance • Now will be reflected as an assignment • Formal action to create but no formal action to not use • Limited to the projected deficit

23. What about...???(cont.) • Stabilization amounts • Formal establishment of “rainy day” or “contingency” funds to only be used in specified circumstances • Categorized as restricted or committed • Circumstances are specific and non-routine (e.g., “emergencies” would not qualify) • Unassigned if not restricted or committed

24. Display Guidelines • Nonspendable can be displayed in the aggregate or by the two categories • Nonspendable in form • Required to remain intact • Restricted can be broken down by “major” restrictions or in the aggregate • Committed and assigned may be reported by “major” limitations or in the aggregate

25. Sample Balance Sheet Classifications Nonspendable (any governmental funds) Restricted for (any governmental funds) Committed to (any governmental funds) Assigned to (any governmental funds) Unassigned (General Fund only, used for negative residuals of other governmental funds)