GASB Statement No. 46

1. GASB Statement No. 46 Net Assets Restricted by Enabling Legislation

2. Background • Statement 34 identifies three sources of restrictions on net assets—external parties, constitutional provisions, and enabling legislation • Enabling legislation is a type of legislation that authorizes the raising of a new revenue (i.e., it does not earmark existing revenues) and that contains a legally enforceable restriction on the purpose for which those revenues can be used

3. Objectives • Statement 46 is intended to address difficulties some governments were having interpreting the legal enforceability requirement • Statement 46 also specifies how net assets should be reported when the circumstances surrounding enabling legislation change

4. Legal Enforceability • Legal enforceability means that an external party—such as citizens, a public interest group, or the judiciary—can compel a government to abide by the restriction • Legal enforceability remains a matter of professional judgment, which may include reviewing determinations for similar legislation, obtaining the advice of legal counsel, or other actions

5. Legal Enforceability • Statement 46 emphasizes that restrictions should be reviewed on a case-by-case basis: • If a restriction is found to no longer be legally enforceable, a government may reevaluate the legal enforceability of similar restrictions, but should not necessarily conclude that all such restrictions are unenforceable • Prohibitions against one legislature binding a subsequent legislature generally are not, on their own, sufficient basis for determining a restriction is not enforceable

6. Changes in Circumstances • If new enabling legislation is passed to replace prior enabling legislation, or if resources are used for purposes not specified by enabling legislation, a government should review the legal enforceability of the restriction • Statement 46 specifies the conditions under which net assets should be reported as restricted or unrestricted and provides illustrative scenarios

7. Reporting Requirement • Statement 46 requires that the portion of net assets restricted by enabling legislation should be disclosed in the notes to the financial statements • The Exposure Draft proposed to require separate display of enabling legislation restrictions on the face of the statement of net assets, but the Board changed the requirement to disclosure in response to the public comments it received

8. Effective Date • Statement 46 is effective for periods beginning after June 15, 2005