The User's Perspective

May 2008

Making Fund Balance More Useful: GASB Proposes Near Total Revamp

            A previous issue of The User’s Perspective included an article discussing some issues that have negatively affected the usefulness of the fund balance information reported in state and local government financial statements. A subsequent article considered possible ways to improve fund balance reporting, which the GASB had published for public comment.

            After reviewing the feedback received from financial statement users, preparers, and auditors, the GASB developed a new approach for reporting fund balance information designed to deliver the information most needed by municipal analysts, legislative staff, citizen organizations, and others, and to make the information more comparable from government to government. The GASB has proposed the new approach to fund balance reporting in an Exposure Draft, Fund Balance Reporting and Governmental Fund Type Definitions, which it released on February 29. This article discusses how the proposal would change fund balance information in the future.

What Can Be Spent, and for What Purposes

            Fund balance is the difference between the assets and liabilities reported in the governmental funds balance sheet. Fund balance can be considered as amounts that represent resources available to support spending. The users of governmental financial information generally focus on fund balance information to identify resources that could be spent on programs or services they are interested in. For instance, a municipal bond analyst might want to determine how much money is available to make debt service payments. A taxpayer organization may be looking for amounts that could mitigate potential tax increases. A county legislator may be looking for resources to support projected spending in a particular department in the coming year’s budget.

            The GASB is proposing that the first distinction to be made in the reporting of fund balance is between its spendable and nonspendable portions. (See the illustrative fund balance section in Figure 1.) Some fund balance represents amounts that are not in a spendable form, such as inventory or certain long-term receivables, or that are not allowed to be spent, such as the principal of an endowment. These amounts would be reported as nonspendable fund balance.

Figure 1. Illustration of Proposed Fund Balance Section of a Governmental Funds Balance Sheet  
               The remaining spendable fund balance would be divided into four parts that correspond with the level of constraint (if any) placed on the purposes for which it may be used—restricted, limited, assigned, and unassigned.

            Restricted fund balance is considered to carry the firmest constraints because they are imposed externally. Restricted is defined as it is for net assets under GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. In other words, amounts are constrained to a particular purpose by another government (such as a federal grant for elementary education), a grantor, a creditor (perhaps through a bond covenant), or another external party, by constitution, or by a government itself through enabling legislation. Enabling legislation is a particularly stringent form of statute or ordinance that creates a new revenue source and imposes a legally enforceable constraint on how the revenue source can be used. For example, a state law may add half a percent to its sales tax and limit the use of that new revenue to financing environmental initiatives.

            Fund balance in the limited category represents amounts that have been constrained by a government itself using its highest level of decision-making authority. Such constraints may not feature the same level of enforceability as with restricted fund balance, but the resources they are imposed upon cannot be used for any other purpose unless the same level of decision-making authority is used to change or remove the constraint. Governments commonly pass statutes or ordinances that earmark a portion of existing revenue sources for a particular use; such amounts would likely be reported as limited fund balance.

            Assigned fund balance represents amounts that a government intends to use for a particular purpose. This category is similar to the current designated fund balance, but the GASB has proposed several criteria that would add rigor and comparability. For instance, if a government has amounts that meet the definition of assigned fund balance, it would be required to report them as such; by contrast, reporting of designated fund balance is optional. Further, the proposal clarifies who can express intended uses that would result in the reporting of assigned fund balance—either the governing body or another high-level body or official possessing the authority to do so.

            As can be seen in Figure 1, all fund balance outside of the general fund that is neither restricted nor limited is reported as assigned. This reflects the underlying belief that transferring resources to another fund inherently indicates an intention to use the resources for the purpose of that fund.

            In the general fund, the fourth and final category of fund balance is unassigned. This represents amounts that can be used for any purpose and carry no constraints whatsoever.

Level of Detail within the Categories

            The GASB’s proposal does not change the basic level of detail that governments should present—that is, major categories of restrictions and sufficient detail to reveal the specific purposes to which amounts are limited or assigned. However, the proposal would allow governments to determine whether to present the detail on the face of the balance sheet, in a separate note disclosure, or a combination of the two. The primary rationale for this option is to prevent the fund balance section from becoming so dense that it becomes harder to understand.

Rainy-Day Funds

            The GASB is proposing new guidance that would clarify how stabilization or “rainy-day” funds should be reported. Based on existing standards and proposed clarifications of the definitions of governmental fund types (see more on the latter below), it would be exceedingly rare for a stabilization fund to be reported as a separate fund unto itself. Rainy-day amounts are rarely, if ever, the product of a specific revenue source; rather, they tend to accumulate from surplus revenues in general. Consequently, they generally do not qualify to be reported in a special revenue fund (capital projects, debt service, and permanent funds clearly would not be appropriate places to report rainy-day amounts).

            The GASB proposal would allow rainy-day amounts to be reported in the general fund as restricted or limited if they meet the definitions of those categories of fund balance. Otherwise, rainy-day amounts would be included in unassigned fund balance. Governments would be required to disclose information about their stabilization arrangements, even if the relevant amounts do not qualify to be reported as restricted or limited. This information would include the authority under which the arrangement was established, requirements for additions to the stabilization amount, and the conditions under which the stabilization amount may be spent.

            If a government has formally adopted a minimum fund balance requirement, it would describe its related policy in the notes.


            Encumbrances represent amounts a government has committed to pay for goods or services that were not received prior to the end of the fiscal year. At present, governments generally report such amounts as reserved fund balance. However, an encumbrance is not a purpose and, therefore, would not be appropriately shown as a separate restriction, limitation, or assignment of fund balance. Encumbered amounts would already be included with other restricted, limited, or assigned fund balance based on the nature of the constraints, if any, placed on how they might be used and the purpose for which they have been encumbered. For governments that use encumbrance accounting, encumbrances would be disclosed in notes to financial statements in their entirety if existing standards for reporting significant commitments are applicable.

Definitions of Fund Types

            The proposal also seeks to achieve greater comparability of reported fund balance information by addressing the standards that govern what resources can be reported in the governmental funds. The GASB would do so by clarifying certain aspects of the definitions of types of governmental funds.

            The GASB would make it clearer that special revenue funds are intended to be created to report the proceeds of specific revenue sources that are restricted or limited and that comprise a significant portion of the fund’s resources. Governments would be required to disclose the purpose of each of their major special revenue funds (those displayed individually on the face of the balance sheet) and to identify the revenues and other resources authorized to be reported in them.

            The language of the proposed definitions for capital projects and debt service funds is revised to make them more consistent. The circumstances under which governments are required to report debt service funds also are clarified; these requirements already exist but have not been consistently applied.

Where the Project Goes from Here

            The Exposure Draft is available to be downloaded free from the GASB website, (a link below leads directly to the document). The deadline for providing comments on the proposed Statement is June 30, 2008. Comments can be submitted in writing via email or traditional mail. You also can present testimony at a public hearing scheduled for July 14, 2008, in Kansas City, Missouri. The hearing is being held in conjunction with the annual conference of the National Association of Counties. Details regarding how to submit comments or testify can be found on pages i–ii of the Exposure Draft.

Further Reading