Project Pages

Fund Balance Reporting

Primary Objective: The objectives of this project are to assess whether existing reporting requirements related to fund balance adequately meet the needs of financial statement users and to consider potential changes to improve the usefulness of fund balance information. Clarification of terms within governmental fund type definitions will also be addressed.

Status: Statement No. 54, Fund Balance Reporting and Governemtal Fund Type Definitions, was approved in February 2009.

Fund Balance Reporting—Project Plan

Project Description: This project will assess whether existing reporting requirements related to fund balance adequately meet the needs of financial statement users and will consider potential changes to improve the usefulness of fund balance information. Clarification of terms within governmental fund type definitions will also be addressed.

Background: This project originated after the completion of the financial reporting model project, growing from concerns that some financial statement users were unclear about the distinctions between reserved and unreserved fund balances and the relationship between reserved fund balances and restricted net assets. Subsequently, an issue regarding the determination of net asset restrictions related to enabling legislation developed during the initial phase of implementing Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. The Board received feedback on a potential fund balance/net assets project as part of the Governmental Accounting Standards Advisory Council’s (GASAC’s) agenda prioritization activities in 2002. The project was formally added to the GASB’s technical plan for the final third of 2002 as a research project.

Accounting and Financial Reporting Issues:

  1. What decisions do users currently make based on fund balance information?
     
  2. What type of information do users need about fund balances for their decision-making tasks? (This would include the general fund and other governmental funds.)
     
  3. What components of fund balance do users need information about?
     
  4. How would users prefer that fund balance information be presented to them (for example, display versus disclosure)?
     
  5. Should governmental fund type definitions be clarified to enhance the consistency of information conveyed in fund balance? 

Project History: Background research was conducted during September and October 2003, and Board deliberations began in January 2004. The GASB’s research finds that there is substantial variation in the information that governments report about fund balance in the governmental funds. There is also evidence that a significant number of governments do not adequately understand the requirements for fund balance reporting under generally accepted accounting principles. Furthermore, there is considerable variation in the way that users interpret fund balance information and there is widespread confusion about the nature of the information and the reporting requirements under generally accepted accounting principles. The Board believed that a fundamental review of the needs of users for fund balance information was necessary in order to determine whether the current standards are adequate.

The Board discussed various issues related to fund balance and net assets during five meetings prior to the fund balance project’s being established as a separate project. In June 2004, however, the Board determined that additional research on fund balance was necessary and decided to separate the net asset and fund balance issues into separate projects. The Board reviewed and approved a research plan for studying user needs for fund balance information at its July 2004 meeting.

Research conducted to date employed open-ended questions in an interview or small-group setting. A variety of different types of users were interviewed, including governmental researchers, legislators and legislative staff at both the state and local levels, oversight boards, bond insurers, bond raters, buy- and sell-side analysts, and so on. Representatives from the preparer and attestor communities were also interviewed.

The results of those interviews were considered in conjunction with the findings from the staff’s previous research, which included a review of approximately 200 state and local government comprehensive annual financial reports and preparer and user surveys. The GASAC, at its July 2005 meeting, was asked to discuss the overall research results and offer input to the Board concerning whether to proceed with the project and the possible direction it might take.

Based on the advice of the GASAC and the information obtained from the interview research, the staff presented a proposal to the Board at the August 2005 meeting that was built on past Board deliberations. At the August meeting, the Board reviewed its previous fund balance-related deliberations from early in the financial reporting model project through the discussions leading to Statement No. 46, Net Assets Restricted by Enabling Legislation, the point at which the Board split off the fund balance reporting questions for further user needs research. At that meeting, the Board agreed to revive the approach considered before the project spin-off as well as two alternative approaches suggested by individual Board members. Those alternatives were illustrated and discussed at the September meeting. Although the results of that exercise were inconclusive—all three models received some support, but none garnered consensus—it did help clarify where the Board stood with regard to formulating an “exposable” proposal. That is, there were viable alternatives that, subject to continuing development, would be appropriate as the basis for a due process document.

At the November meeting of the GASAC, the Council provided positive feedback on a proposal to develop alternatives to be presented in a discussion due process document.

At the November and December 2005 Board meetings, the Board agreed first to clarify certain terms within the existing definitions of special revenue, debt service, and capital projects funds, before proposing alternative classification and display schemes for reporting fund balance information.

At the January 2006 meeting, the Board tentatively agreed on alternative interpretations of certain terms within the governmental fund type definitions. In March, the Board resumed its earlier deliberation on alternative fund balance classification and display schemes, and continued their review at the April meeting. Also at the March meeting, the Board tentatively agreed that an Invitation to Comment would be the most appropriate format for the due process document because of the number of alternatives to be considered.

At the May/June 2006 meeting, the Board discussed the remaining overarching issues and considered some features of the three alternative approaches to classifying fund balance for the Invitation to Comment. At the July meeting, the Board reviewed a draft of an Invitation to Comment chapter that discussed alternatives for certain phrases or terms within existing governmental fund type definitions. The purpose of the review was to agree on the style and approach for the Invitation to Comment. The Board generally agreed with the staff’s proposed approach. At the August meeting, the Board reviewed the first complete draft of the proposed Invitation to Comment. The Board cleared the preballot in September and after reviewing the ballot draft, did not object to the issuance of the Invitation to Comment in October.

The Invitation to Comment was issued on October 20 and was subject to a January 31, 2007, comment deadline. A separate user Internet survey, incorporating the issues addressed in the Invitation to Comment, was posted. Notification of the availability of the survey was accomplished through the user database and the listservs of user organizations on the GASAC. Users completing the survey were asked to respond by January 15. A user roundtable was held on February 1 in New York City, and a public hearing that was scheduled for February 2, also in New York City was cancelled due to a lack of testifiers. Ninety-four responses to the Invitation to Comment, including the separate user on-line response form, were received.

The Board briefly discussed the project at the regular February 2007 meeting and agreed to a revised work plan that would delay the issuance of an Exposure Draft. At the April meeting, the Board began its deliberations of the issues raised in the Invitation to Comment, beginning with the questions that pertained to the use and definition of special revenue funds.

As a result of the discussions at the April and May meetings, the Board tentatively concluded that options A and B from the Invitation to Comment should not be adopted at this time. Instead, the Board agreed that any significant modifications to the purpose of a special revenue fund, and to its definition, should be considered after a broader reexamination of governmental fund reporting in connection with the measurement and recognition conceptual framework project on the agenda. In the meantime, the Board will consider, as part of this project, required note disclosures, including the government’s policy for using special revenue funds.

The May discussion also focused on the clarifications proposed in the Invitation to Comment for certain terms in the definitions of capital projects and debt service funds. The Board tentatively agreed that Alternative A from the Invitation to Comment should not be pursued at this time. A majority of the Board tentatively agreed that the definitions should be clarified. The Board then discussed the clarifications proposed in Alternative B of the Invitation to Comment. For capital projects funds, the Board tentatively concluded that the clarifications as proposed in Alternative B should be carried forward to the Exposure Draft, with the additional stipulation that restrictions, legal limitations, and intentions should be established by the end of the financial reporting period.

With regard to debt service funds, the Board tentatively concluded that a different approach from the proposal under Alternative B in the ITC was preferred and decided that an existing provision about the use of debt service funds in paragraph 30 of National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, should instead be modified to provide the definition. That modification would define debt service funds to state that “debt service funds should be used if they are legally mandated or to report financial resources that are being accumulated for principal and interest payments maturing in future years.” That modification (the addition of the phrase should be used) would clarify that debt service funds are required in those circumstances. For consistency with those proposed modifications, the Board also concluded that the definition of general fund in paragraph 26 of NCGA Statement 1 needed a conforming alteration. That definition currently states that the general fund is used to account for all financial resources except those required to be accounted for in another fund. To recognize that some special revenue and capital projects funds are discretionary, the Board proposed that the definition be revised to state that the general fund is used to account for all financial resources not accounted for in another fund. Thus, the unintended notion that all other governmental funds should be required was eliminated.

At the June meeting, the Board began deliberations on issues associated with the fund balance classifications and display alternatives in the Invitation to Comment, and tentatively concluded that none of the three models illustrated in the Invitation to Comment should be adopted “as is” for the Exposure Draft. The Board also agreed that the required components of fund balance should clearly distinguish the various levels of constraints that are imposed on the use of resources. Within the proposed categorization scheme, Board members expressed tentative support for a proposal to display resources that are considered nonspendable, but it acknowledged that further discussion would be needed to determine what the criteria should be to qualify for that distinction. The Board members did indicate tentative support for the proposed categories of “restricted,” as defined in Statements 34 and 46, and “limited” as defined in the ITC as “legally limited.”

The Board continued its deliberations throughout the August, September, and October meetings, tentatively resolving the remaining issues. Major decisions tentatively reached included:

Regarding special revenue funds proposal:

  • An accompanying narrative in the Standards section could adequately convey that the term proceeds of specific revenue sources requires that a specific revenue(s) be the foundation for a fund but that the term is not meant to limit includable resources to only those revenues but also could include resources reassigned from other funds.
     
  • A term other than legally restricted should be used in the special revenue fund definition.

Regarding the approach to the overall fund balance classification proposal:

  • Fund balance should be reported in two main categories—nonspendable and spendable.
     
  • Restricted, limited, and assigned (and unassigned in the general fund) should be required classifications within the spendable category.
     
  • Reporting encumbrances as a separate classification is incompatible with the purpose limitation focus established in the proposed restricted/limited/assigned hierarchy, which is based on the degree to which a government is bound by limitations placed on the use of resources. Information about material encumbrances would be disclosed in the notes to financial statements in conjunction with other commitments.
     
  • With regard to “rainy day” resources, to be consistent with the approach that displays fund balance categories in a hierarchy based on the extent to which a government is bound to spend resources for specific purposes, “economic (budgetary or revenue) stabilization” should be considered a “purpose” for this classification approach. Furthermore, the strength, or enforceability, of the constraints associated with resources in the limited category should be comparable to the difficulty of accessing rainy day resources. Therefore, a process similar to that required for classification as limited should be required for display as stabilization (rainy day) resources. Contingency reserves that do not meet those criteria would be included in the unassigned category.
     
  • The provision in paragraph 115(h) of Statement 34 that requires governments to disclose their policy about whether they first apply restricted or unrestricted resources when an expense is incurred for which both unrestricted and restricted net assets are available should also apply to governmental fund balances. Furthermore, that policy disclosure should extend to the application of resources that are limited, assigned, and unassigned.
     
  • Governments should have the option of either displaying on the face of the governmental fund financial statements or disclosing in the notes the major purposes for which resources have been restricted, limited, or assigned.

At its December 2007 meeting, the Board reviewed and discussed a draft standards section of a proposed Statement, Fund Balance Reporting and Governmental Fund Type Definitions. The Board reviewed a second revised draft of the standards section during the January teleconference meeting and considered the pre-ballot draft at the regular January meeting. At that meeting, the Board added a discussion in the Standards section to address (a) residual amounts in funds other than the general fund that no longer qualify as limited or assigned fund balance (which should be reported as interfund liabilities) and (b) the disclosure requirement for encumbrances. The Board also agreed to include a discussion in the Basis for Conclusions to (a) address governments’ spending prioritization accounting policies and the related disclosure requirement and (b) expand the discussion of issues related to the capital projects fund definition. The Board discussed the ballot draft during the February teleconference meeting, and after agreeing to modifications in certain paragraphs of the Basis for Conclusions, unanimously approved the Exposure Draft for issuance. The Exposure Draft was posted to the GASB website on February 29. During the exposure period, a test field of the proposal is being conducted.

Over the course of the next three months (September—November 2008) the Board redeliberated the issues in the ED that caused some concern among respondents. The Board reached the following tentative conclusions.

  • The nonspendable classification should be retained for the final standard. Clarifications were made to the definition to address questions raised by respondents.
     
  • There is no need to use the term “spendable” in classifying fund balance components. A concern shared by several of the ED respondents and testifiers at the public hearing was that the term “spendable” carries a connotation that the resources in that category may be “spent” for any purpose, when in fact they may be subject to significant external or internal constraints.
     
  • The restricted fund balance classification should be retained using the definition proposed in the exposure draft (parallel with the definition of restricted net assets), and the final standard should address the classification of permanent fund principal as nonspendable. Permanent fund principal is classified as Restricted—nonexpendable in the statement of net assets.
     
  • The final standard should continue the requirement in the exposure draft to present both limited and assigned fund balance classifications and to not combine the two classifications. Negative comments from respondents covered a wide range of specific issues about the classifications.
     
  • To use the more descriptive term “committed” in place of the “limited” label. The Board concluded that committed was a better characterization of the level of constraint imposed on amounts in that classification.
     
  • Funds in a deficit condition should report a negative amount in the unassigned classification, not in other classifications. Several ED respondents asked the Board to clarify, in the final Statement, whether and how negative balances should be reported for individual fund balance classifications. Some field test participants reported negative balances in their converted fund balance displays. They also suggested that the Board address that situation in the final standard.
     
  • To not carry forward the requirement in paragraph 15 of the ED to recognize an amount due to the general fund in situations in which the specific purpose for which the resources in a separate governmental fund had expired. Some ED respondents suggested that the guidance for classifying residual amounts was unclear and would not be implemented consistently without additional clarification.
     
  • The final standard should provide more guidance than was presented in the exposure draft with regards to encumbrances. Many ED respondents and some field test participants maintained that the requirement in the ED is not clear.
     
  • An amount representing existing resources that will be used to satisfy executory contractual requirements should be included in the committed classification. This issue arose during the Board’s discussion of how should encumbered amounts be classified for fund balance reporting purposes.
     
  • The appropriation of existing fund balance as a budgetary resource in the subsequent year’s budget in an amount that is necessary to cover a projected excess of expected expenditures over expected revenues meets the criteria as an assignment of fund balance.
     
  • Level of detail provisions will be carried forward to the final Statement, essentially as proposed in the ED
     
  • As proposed in the exposure draft, governments should disclose the certain information about their fund balance classification policies and procedures in the notes to the financial statements.
     
  • The final standard continues the exposure draft approach to not prescribe a spending prioritization policy (the flow assumption). A government should determine the composition of its ending fund balance by applying its accounting policy regarding whether it considers restricted or unrestricted (limited, assigned, or unassigned) amounts to have been spent first when an expenditure is incurred for purposes for which both restricted and unrestricted amounts are available. For governments that have not established a spending prioritization policy for their unrestricted amounts, the final Statement will provide a default policy in which resources are used from the specific fund balance classifications in descending order from committed to unassigned.
     
  • As proposed in the exposure draft, stabilization arrangements should be classified as either restricted or committed, based on the nature of the arrangements . The final Statement will include a more in depth explanation of the required characteristics for stabilization arrangements.
     
  • The disclosure requirements for stabilization arrangements and minimum balance requirements will be clarified. 

At the December 2008 meeting the Board will discuss the comments received during due process regarding the proposed clarifications to the governmental fund type definitions. The remainder of the work plan is presented in the timetable below.

Fund Balance Reporting—Minutes for Deliberations

Minutes of Meeting, February 17, 2009

The Board began the session by considering the resolution of issues that had arisen during the discussion of the preballot draft at the January meeting. The Board generally agreed with the changes that the project staff had proposed in the ballot draft. The Board modified two paragraphs in the Basis for Conclusions section of the draft to further clarify positions taken in establishing the spending prioritization provisions in the standard. After tentatively accepting the changes to the ballot draft, the Board voted by a six to one majority to issue Statement No. 54, Fund Balance Reporting and Governemtal Fund Type Definitions. Mr. Williams dissented.

Minutes of Meeting, January 27–29, 2009

The Board reviewed the preballot draft of the final Statement. Generally, the Board supported the contents and organization of the draft; however, a number of editorial, wording, and construction suggestions were discussed. The more significant modifications that the Board directed the project staff to make included the following.

  • The proposed guidance regarding how negative residual balances in funds other than the general fund should be accounted for was clarified to require that amounts assigned to other purposes in a fund should be reduced to eliminate a deficit caused by overspending for a specific purpose. If all assigned amounts have been eliminated, a remaining negative residual balance should be reported as negative unassigned fund balance. Guidance regarding the requirements for reporting specific purposes details of the respective fund balance classifications was expanded to clarify that governments may use a combination of display and disclosure to meet the requirements.
     
  • The requirements for the financial reporting treatment of encumbrances and the related discussion in the Basis for Conclusions were clarified. The Board also agreed on several other clarifications to be made for the ballot draft.

Minutes of Meeting, December 16–18, 2008

The focus of this discussion was on issues raised during exposure regarding the fund type definitions proposed in the Exposure Draft. The Board discussed issues raised by respondents to the Exposure Draft on all of the governmental fund type definitions and reached the following tentative conclusions. After considering comments that called for changes to the debt service fund type definition, the Board tentatively concluded that the definition from the Exposure Draft should be carried forward to the final Statement.

Several issues were raised and discussed by the Board regarding the special revenue fund type definition. The Board acknowledged that restricted or committed revenues, which would Entered Minutes 5 comprise the foundation for a special revenue fund, sometimes are received in another fund on a temporary basis before they are recognized as revenue in a separate special revenue fund. The Board tentatively concluded that the Statement will emphasize that those distributed amounts, which should not be recognized as revenues in the initial receiving fund, can serve as the foundation for a special revenue fund. The Statement will emphasize that those amounts, which are temporarily received in a “clearing fund,” should not be recognized as revenues in the clearing fund.The Board then discussed the provision in the proposed definition of special revenue funds that called for restricted or committed revenues to comprise a “significant portion” of the resources in the fund. Because the term “significant” has been used in other standards with a different meaning, the Board tentatively concluded that the definition will be modified to state that specific restricted or committed revenues should be expected to comprise a substantial portion of the inflows in the fund and that governments should discontinue reporting a special revenue fund if the government no longer expects that a substantial portion of the inflows will continue to derive from restricted or committed revenue sources. The Board also tentatively concluded that the final Statement also will address the appropriate reporting for certain revolving loan arrangements. Clarifications to the provisions for reporting stabilization arrangements also were tentatively agreed to by the Board. Specifically, the Board tentatively agreed that the following language should be added to the final standard: “A stabilization arrangement would satisfy the criteria to be reported as a separate special revenue fund only if a substantial portion of the inflows derive from a specific restricted or committed revenue source.” Based on feedback received from constituents, the Board tentatively concluded that the definition of capital projects funds should be clarified to indicate that the activity reported in those funds relates to capital outlays in general, rather than only to outflows for major capital facilities.

Minutes of Meeting, September 24–26, 2008

The focus of the Board’s discussion was primarily on four issues that arose from Exposure Draft respondent comments and field test participant observations and questions:

  • To what extent should the fund balance categories and classifications proposed in the Exposure Draft be carried over to the final Statement?
     
  • How should negative balances be reported? • Should the provision in paragraph 15 of the Exposure Draft regarding residual limited or assigned resources be carried over to the final Statement?
     
  • How should encumbrances be classified?

The staff paper posed a series of alternatives to address those issues, and the Board was able to reach tentative conclusions relative to each of those questions.

The Board tentatively agreed that the nonspendable classification should be retained for the final Statement, but some clarification of its definition, especially the “not in spendable form” criterion, was needed. Specific details of the conclusions will be reaffirmed at the October teleconference. The Board also tentatively accepted the staff recommendation that there was no need to use the term spendable in classifying fund balance components.

The Board tentatively agreed that the restricted fund balance classification should be retained using the definition proposed in the Exposure Draft and that the final Statement should discuss and clarify the classification of permanent fund principal as nonspendable, even though those resources are reported as restricted net assets (but within the “nonexpendable” component) in the government-wide statements.

After a lengthy discussion, the Board tentatively agreed that the final Statement should continue the requirement in the Exposure Draft to present both limited and assigned fund balance classifications. The possibility of combining those two classes was considered, but it was ultimately rejected, primarily because of the high level of users’ interest in understanding governments’ intentions for the use of existing resources. On a related matter, the Board determined that the limited label did not sufficiently convey the substance of that classification and agreed that committed was a more descriptive term for that classification of fund balance. Regarding how to classify the fund balance of a fund that is in a deficit position, the Board tentatively accepted the staff’s recommendation that funds in a deficit condition report a negative amount in the unassigned classification for all governmental funds. The Board also considered an approach that would eliminate a negative fund balance by recognizing an amount due from the general fund. The Board preferred the negative unassigned solution because it is more representationally faithful to report negative fund balances in funds that are truly in a negative position than it would be to obscure the deficits with hypothetical receivables from another fund. Earlier in the discussion, the Board had disagreed with the staff proposal to recognize long-term interfund advances payable as negative amounts within the nonspendable classification to offset the positive balances resulting from the long-term advances receivable. Instead, the Board determined that negative balances of this type would be displayed as unassigned, regardless of the circumstances that led to the negative position. As a consequence of those tentative decisions, the general fund would not be the only fund that would report an amount on the unassigned fund balance line, but it would be the only fund that could report a positive amount of unassigned fund balance. Because fund balance classifications should provide context to the resources that are reported in a given fund, the Board tentatively agreed that it is not appropriate for a government to assert that it has restricted, committed, or assigned to a specific purpose more resources than are reported in that fund. Thus, there should never be negative balances reported in any classification except unassigned.

The Board also redeliberated the requirement in paragraph 15 of the Exposure Draft to recognize an amount due to the general fund in situations in which the specific purpose for which resources in a separate governmental fund had expired. The Board tentatively agreed with the staff recommendation to not carry forward that provision to the final Statement, because, as pointed out by some respondents to the Exposure Draft, those resources remain committed or assigned until the government overturns or modifies its previous action to set those resources aside.

The final topic for the session was the classification of encumbrances. The Board tentatively agreed that the final Statement should provide more guidance than was presented in the Exposure Draft and that additional guidance would specify that encumbered amounts related to appropriations that carry forward should be classified within either committed or assigned fund balance, based on which classification more closely equates to the government’s encumbering procedures. The Board will continue its discussion of this issue at its October teleconference.

The Board also discussed how obligations under certain executory contracts should be reflected in fund balance and tentatively concluded that an amount that represents the extent to which existing resources will be used to satisfy those contractual requirements should be included in the committed fund balance classification. Again, discussion of this issue will continue at the October teleconference.

Minutes of Meeting, August 19–21, 2008

Board members opened the session with a brief discussion of their overall reaction to the input from comment letters on the Exposure Draft and testimony from the public hearing. The Board then reviewed the results of the field test, including an overview of the responses from the 25 participating government entities to the field test questions and certain aspects of the participants’ fund balance illustrations. After discussing the field test results, the Board began redeliberations by addressing the two broad directional issues of the proposed approach to fund balance classification and the proposed clarifications to governmental fund type definitions. The Board tentatively agreed with the staff’s recommendations to proceed in the general direction established in the Exposure Draft for both fund balance classifications and fund type definitions, acknowledging that there would be many specific issues within those broad areas that may need to be considered for modification.

Minutes of Meeting, February 12, 2008 Teleconference

The purpose of the session was to review the ballot draft of the proposed Statement. The Board began by discussing the desirability and need for a user forum that would be held in conjunction with the July 14 public hearing in Kansas City. The Board decided that a user forum was not necessary, given that one was held to address the issues in the Invitation to Comment in February 2007.

During its review of the ballot draft, the Board suggested a variety of editorial changes in the Summary, Standards section, and the Basis for Conclusions. Two paragraphs in the Basis for Conclusions were redrafted and circulated to the Board members before they submitted their ballots. The ballot draft was unanimously approved for issuance as a proposed Statement.

Minutes of Meeting, January 22–24, 2008

The Board reviewed the preballot draft of the proposed Exposure Draft and recommended several modifications to the wording in specific parts of the Summary, Standards section, and Basis for Conclusions. The suggested revisions were primarily editorial or for clarification. However, the Board suggested adding discussion in the Standards section to address (a) residual amounts in funds other than the general fund that no longer qualify as limited or assigned fund balance (which should be reported as interfund liabilities) and (b) the disclosure requirement for encumbrances. The Board also agreed to include a discussion in the Basis for Conclusions to (a) address governments’ spending prioritization accounting policies and the related disclosure requirement and (b) expand the discussion of issues considered related to the capital projects fund definition. The Board will discuss the ballot draft during the February teleconference meeting.

Minutes of Meeting, January 3, 2008 Teleconference

The focus of the session was on the second draft of the Standards section of the proposed Exposure Draft. The Board generally agreed that the modifications discussed at the December meeting had been appropriately made to the draft. No substantive changes to this version of the draft were recommended, but several suggestions were made for wording edits and clarifications. The Board will discuss the preballot draft at the regular January meeting.

Minutes of Meeting, December 11–13, 2007

The Board discussed the initial draft of the complete Standards section of the Exposure Draft. As a result of the review, several organization and editorial changes were made to the draft. For example, the Board tentatively decided to reorganize portions of the draft to bring together all of the fund balance disclosures in a common section of the document.

No substantive changes were suggested for the proposed display and disclosure requirements. The Board will review the revised version of the Standards section at the January teleconference meeting. The preballot draft, including the Summary and appendices, will be discussed at the regular January meeting.

Minutes of Meeting, October 30–31, 2007

The first issue discussed related to the fund balance project was the question of how resources remaining at the balance sheet date should be allocated among the fund balance classifications. The Board tentatively agreed that the provision in paragraph 115(h) of Statement No. 34, Basic Financial Statement—and Management’s Discussion and Analysis—for State and Local Governments, that requires governments to disclose their policy about whether they first apply restricted or unrestricted resources when an expense is incurred for which both unrestricted and restricted net assets are available also should apply to governmental fund balances. The Board further tentatively agreed that the policy disclosure should extend to the application of resources that are limited, assigned, and unassigned.

The final topic discussed was the level of detail within the various categories of fund balance that should be displayed or disclosed. The Board tentatively concluded that governments should have the option of either displaying on the face of the fund financial statements or disclosing in the notes the major purposes for which resources have been restricted, limited, or assigned.

The Board is scheduled to review a draft of the proposed Standards section of an Exposure Draft at the December meeting.

Minutes of Meeting, October 11, 2007 Teleconference

The Board first discussed the revised fund balance category definitions and the specific guidance that would accompany the definitions in a proposed standard. The Board reached tentative conclusions on the five questions asked in the staff paper.

  1. After agreeing to several clarifications and wording changes in the proposed definitions, the Board agreed with the fund balance classifications and their revised definitions as modified. The most significant change made was to eliminate the “matter of public record” provision from the proposed definition of assigned fund balance.
     
  2. The Board had tentatively concluded at the September meeting that stabilization (rainy day) resources should be presented within the limited fund balance category. After a short discussion, the Board members agreed that if stabilization balances meet the criteria as restricted (if established by constitution or charter, for example) they should be included in the restricted fund balance, rather than limited.
     
  3. The proposed disclosures were generally supported, with some wording changes.
     
  4. At the August meeting, the Board agreed that encumbrances were a budgetary matter and should not be separately displayed as a unique fund balance classification. However, it was noted that certain encumbrances would meet the definition of limited or assigned fund balance. The Board tentatively agreed that information about material encumbrances should be disclosed in the notes to the financial statements in conjunction with other commitments. That decision will be discussed in the Basis for Conclusions of the Exposure Draft.
     
  5. At the September meeting, the Board discussed whether an appropriation of existing fund balance to finance the subsequent year’s budget constituted an assignment. The Board tentatively agreed then that the issue is about implementing the principle established by the assignment definition. At this meeting, they concluded that the matter should be discussed in the Exposure Draft’s Basis for Conclusions.

The final topic discussed was the revised fund type definitions. After agreeing to some minor rewording, the Board tentatively agreed with the definitions and specific guidance as presented in the staff paper.

Minutes of Meeting, September 18–19, 2007

The Board continued its previous discussion about the proposed categories for classifying governmental fund balances. At the August meeting, the Board tentatively agreed on a classification approach that would distinguish between spendable and nonspendable resources, with the spendable component further segregated into restricted, limited, assigned, and unassigned categories. The Board debated whether “rainy day” or “stabilization” funds should be disclosed or displayed and tentatively concluded that those resources would be most appropriately displayed as a subcategory of the limited classification. To be consistent with the approach that displays fund balance categories in a hierarchy based on the extent to which a government is bound to spend resources for specific purposes, the Board tentatively concluded that “economic (budgetary or revenue) stabilization” should be considered a “purpose” for this classification approach. Furthermore, the Board tentatively agreed that the strength, or enforceability, of the constraints associated with resources in the limited category should be comparable to the difficulty of accessing rainy day resources. Therefore, a process similar to that required for classification as limited, should be required for display as stabilization (rainy day) resources. Contingency reserves that do not meet that criteria would be included in the unassigned category. The Board also discussed the notion that the authorization to set aside limited resources should be established prior to the end of the reporting period but that the exact amount that should be classified as limited could be determined later in the year-end closing process. This discussion will continue at the next meeting.

After a lengthy discussion of the proposed definition for the assigned category, the Board determined that the tentative definition in the staff paper should be revised to eliminate the impression that assigned resources are “committed” to a specific purpose. The revised definition should emphasize intent, identify the authority for expressing that intent, and clarify that the intent does not meet the criteria for classification as either restricted or limited.

Finally, the Board began a discussion of the fund type definitions and asked the project staff to rework the proposed definition of special revenue funds to be more consistent with the Board’s previous tentative conclusions about those funds. This discussion will continue at the October Board Teleconference.

Minutes of Meeting, August 7–9, 2007

The discussion began with a review of the most recent iterations of the proposed definitions of the governmental fund types. The purpose of the review was to improve consistency in the way in which the definitions were presented and focused. The Board reached some general consensus but deferred voting on the group of definitions until the fund balance classification and display issues were more fully resolved. As discussions continued, the Board tentatively agreed with the following staff recommendations.

Regarding special revenue funds:

  • An accompanying narrative in the Standards section could adequately convey that the term proceeds of specific revenue sources requires that a specific revenue(s) be the foundation for a fund but that the term is not meant to limit includable resources to only revenues but also could include reassigned resources from other funds.
     
  • A term other than legally restricted should be used in the special revenue fund definition.

Regarding the approach to the overall fund balance classification scheme:

  • Fund balance should be reported in two main categories—nonspendable and spendable.
     
  • Restricted and limited (or a similar term that would be defined the same way as limited is intended) should be required classifications within the spendable category.
     
  • Reporting encumbrances is incompatible with the purpose limitation focus established in the proposed restricted/limited/assigned hierarchy, which is based on the degree to which a government is bound by limitations placed on the use of resources. Information about material encumbrances would be disclosed in the notes to financial statements in conjunction with other commitments.
     
  • The four proposed fund balance spendable categories (restricted, limited, assigned, and unassigned) were tentatively considered to be appropriate, provided that a sufficiently discriminating distinction can be made between the limited and assigned categories. If that distinction cannot be made to the Board’s satisfaction, the net resources that would have been included in the assigned category would instead be included in either the limited or unassigned categories, depending on how broad the final definition of limited would be.
     
  • Rainy day resources would be displayed in a separate fund balance category within the spendable general fund categories, rather than as a subcategory under one of the other proposed categories. The staff will investigate the current authority for and use of those funds to provide criteria that could be used to determine which arrangements would appropriately be reported in that general fund balance category.

Deliberations will continue at the September meeting.

Minutes of Meeting, June 19–21, 2007

The Board reviewed the comments from respondents to the Invitation to Comment regarding the alternatives for classifying and displaying the components of fund balance. The Board agree with the staff recommendation that none of the three models illustrated in the Invitation to Comment should be adopted "as is" for the Exposure Draft. The Board also agreed with the staff’s recommendation that the required components of fund balance clearly distinguish the various levels of constraints that are imposed on the use of resources. Within the proposed categorization scheme, Board members expressed tentative support for staff recommendation to display resources that are considered nonspendable, but it acknowledged that further discussion would be needed to determine what the criteria should be to qualify for that distinction. Therefore, no tentative Board decisions were reached on broad classification issues. The Board members did indicate tentative support for the proposed categories of "restricted," as defined in Statements No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and No. 46, Net Assets Restricted by Enabling Legislation, and "limited" as defined in the Invitation to Comment as "legally limited." How to categorize the remaining fund balance, including whether there should be a category for "unassigned" resources, was not resolved. The Board will continue its deliberations at the August meeting.

Minutes of Meeting, May 1–3, 2007

The discussion focused on the clarifications proposed in the Invitation to Comment (ITC) for certain terms in the definitions of capital projects and debt service funds. The Board unanimously agreed with the staff recommendation that Alternative A from the ITC should not be pursued. That alternative would have limited the resources that could be reported in those funds to only those that were restricted or legally limited. A majority of the Board tentatively agreed that the definitions should be clarified rather than leaving them as they are currently written. The Board then discussed the clarifications proposed in Alternative B of the ITC. For capital projects funds, the Board tentatively concluded that the clarifications as proposed in Alternative B should be carried forward to the Exposure Draft, with the additional stipulation that restrictions, legal limitations, and intentions should be established by the end of the financial reporting period. The Board further tentatively agreed that the clarified capital projects fund definition should stress the need for substantive intent and make notorious the permissive nature of the funds.

With regard to debt service funds, the Board tentatively concluded that a different approach from the proposal under Alternative B in the ITC was preferred and decided that an existing provision about the use of debt service funds in paragraph 30 of NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles, should instead be modified to provide the definition. That modification would define debt service funds to state that "debt service funds should be used if they are legally mandated or to report financial resources that are being accumulated for principal and interest payments maturing in future years." That modification (the addition of the phrase should be used) would clarify that debt service funds are required in those circumstances. For consistency with those proposed modifications, the Board also concluded that the definition of general fund in paragraph 26 of NCGA Statement 1 needed a conforming alteration. That definition currently states that the general fund is used to account for all financial resources except those required to be accounted for in another fund. To recognize that some special revenue and capital projects funds are discretionary, the Board proposed that the definition be revised to state that the general fund is used to account for all financial resources not accounted for in another fund. Thus, the unintended notion that all other governmental funds should be required was eliminated.

Minutes of Meeting, April 3–5, 2007

The Board began its deliberations by considering the comments from the Invitation to Comment (ITC) respondents about the proposed scope of the project. Some respondents suggested that the scope should be narrowed to address only the fund balance display and classification issues without modifying the definitions of the governmental fund types. Others were concerned with the possibility that revised fund type definitions might result in noncompliance with certain legal requirements. The Board tentatively agreed with the staff recommendation to keep the scope as provided in the ITC but later acknowledged that the scope may ultimately be scaled back to exclude special revenue funds from the fund type definition component of the project.

The Board also addressed the question of what should be the purpose of special revenue funds—in connection with the interpretation of the phrase proceeds of specific revenue sources in the existing definition. The Board tentatively agreed with the staff recommendation that the more constraining options A and B from the ITC should not be adopted. Instead, the Board suggested that any significant modifications to the purpose of a special revenue fund, and to its definition, should come after a broader reexamination of governmental fund reporting in connection with the measurement and recognition concepts project on the agenda. In the meantime, the Board will consider, as part of this project, a requirement to disclose, in the notes to the financial statements, the government’s policy for using special revenue funds, identifying the purpose of a given fund and which revenues and other resources were authorized to be reported in that fund.

Minutes of Meeting, February 20–22, 2007

The Board reviewed and briefly discussed a revised work plan for the project. The staff paper included a recommended approach and offered two alternatives. The Board unanimously agreed with the staff’s proposed schedule for the deliberations leading to an Exposure Draft. The Board agreed that the project will not be included on the agenda for the March 12 teleconference, but instead the initial deliberative session will be scheduled for the regular April meeting.

Minutes of Meeting, October 10–12, 2006

The Board discussed several proposed wording modifications to the ballot draft, but no substantive matters arose during the brief discussion. After agreeing on the few changes to the draft, the Board voted unanimously to clear the staff Invitation to Comment for issuance.

Minutes of Meeting, September 21, 2006 Teleconference

The Board reviewed and commented on a preballot draft of an Invitation to Comment (ITC) for this project. A number of editorial suggestions were made but no substantive tentative decisions were made. The Board will review a ballot draft of the ITC at its October meeting.

Minutes of Meeting, August 29–31, 2006

The Board reviewed a first complete draft of an Invitation to Comment (ITC), Fund Balance Reporting and Governmental Fund Type Definitions. The Board’s discussion included the following:

  • The Board tentatively decided to seek input on the types of resources that may be accounted for in capital projects and debt service funds. The Board tentatively agreed that such funds may include resources that have been restricted (as defined by Statement 34) or otherwise legally limited to capital projects or debt service. The ITC will consider whether these funds could also include resources a government intends to use for those purposes.
     
  • The Board directed the staff to revise the ITC’s discussion of communicating intent to encompass both (a) the inclusion of resources intended to be used for capital projects or debt service in capital projects and debt service funds and (b) the identification of portions of fund balance as intended for a particular purpose (which is currently accomplished through designations). The Board discussed ways in which intent to use resources for a particular purpose may be identified and communicated, and directed the staff to reflect the discussion in the ITC.
     
  • The Board asked the staff to clarify in the ITC that the options for revising the fund definitions and the alternative models for classifying fund balance are interrelated and readers should consider their potential impacts jointly.

The Board also made suggestions for revisions to clarify the goals and consequences of the possible changes to the standards and to improve the ITC’s readability.

Minutes of Meeting, July 11–13, 2006

The Board reviewed a draft chapter of the proposed Invitation to Comment (ITC). The chapter related to potential revisions to governmental fund definitions to improve comparability in the funds governments use to report certain types of revenues. Overall, the Board approved of the tone and approach of the draft and agreed that the staff should prepare a complete first draft of the ITC for the August meeting. The Board also offered a number of editorial suggestions for making the draft easier to read and the various possible revisions easier to distinguish.

Minutes of Meeting, May 31–June 2, 2006

The Board discussed aspects of some of the overarching issues that will be presented in the Invitation to Comment (ITC) and tentatively agreed to propose that:

  • The nonexpendable corpus of a permanent fund should be reported as reserved fund balance (or the analogous category in the other two alternative approaches to classifying fund balance), because it is not available for appropriation.
     
  • The ITC should discuss and pose questions about the communication of how management intends to use fund balance (designations under current standards), including:
     
    • Should the reporting of intent be required, optional, or not allowed?
       
    • How should intent be reported—display in financial statements, disclosure in notes, or both combined?
       
    • What type of action and level of authorization, if any, should be required for establishing intent?
  • The ITC should discuss and pose questions about the how encumbrances should be reported in fund balance. In particular, the ITC should propose that encumbrances that a government intends to honor, but for which the appropriation has lapsed, are more akin to designations than reservations and should be reported as such.

The Board also considered some features of the three alternative approaches to classifying fund balance that will be included in the ITC:

  • The meaning of legally segregated, as it is currently used to define a reservation of fund balance, was discussed. The Board tentatively agreed that establishing a minimum level of official action required to create a reservation (or the analogous category in the other two alternatives)—such as the highest level of authority a government possesses—would not be practical because of variations in the powers available to governments. The staff will instead work on defining legally. The Board tentatively agreed that the word segregated should be replaced by limited, which more accurately describes the effect of a reservation.
     
  • Although designations are currently optional, the Board tentatively agreed that the alternative representing current practice should illustrate them and that fund balance will be shown in three components—reserved, unreserved-designated, and unreserved-undesignated.
     
  • One of the alternatives combines reserved and designated fund balance under the heading "committed to specific uses." The Board tentatively agreed that this alternative should include a required disclosure component that would distinguish between fund balance that is legally limited to a specific use and that which is intended for a specific use.

Minutes of Meeting, April 18–20, 2006

The session began with a discussion of the tentative definitions proposed in earlier meetings for certain terms within the definitions of the governmental fund types. The Board was in general agreement with the revisions as presented in the staff paper and tentatively agreed to provide those alternatives in the planned invitation to comment (ITC).

In addition, the Board resumed its discussion of the illustrative fund balance display alternatives and unanimously agreed with the staff recommendation to discontinue developing the alternative that would separately identify the net current financial resources that were "available for any purpose." That decision was made because the fund type definition alternatives previously agreed to would effectively eliminate the advantages provided by that approach. The Board tentatively agreed to proceed with the remaining three alternatives for classifying and displaying fund balance information.

For the May-June meeting, the staff will prepare a preliminary outline for the ITC and develop an issues paper with suggestions for redefining or clarifying certain components of the currently applicable fund balance configuration, including designations, reservations, and the reporting of encumbrances

Minutes of Meeting, March 7–9, 2006

The Board discussed the staff’s renditions of alternatives accepted at the previous meeting regarding possible explanations of certain terms within the existing governmental fund definitions. Several suggestions were made for editorial or clarifying changes to the alternative explanations presented for "legally restricted" within the special revenue fund definition. The Board also suggested that the illustrative displays of potential fund balance classification schemes be clarified in some ways and that definitions of the various components of fund balance needed to be developed to eliminate the potential for a given term to have different meanings in different illustrations.

The Board tentatively agreed to continue to develop all of the alternative terminology clarifications and illustrative fund balance displays in the issues paper with the objective of issuing an Invitation to Comment later this year.

Minutes of Meeting, January 24–26, 2006

The primary focus of the Board’s discussion was on the meaning of legally restricted as the term is used in the definition of special revenue funds. The Board considered potential alternatives and tentatively agreed that two merited further development. One would adopt the meaning of restricted from paragraph 34 of Statement 34; the other approach would require the use of a different term, which would establish a less binding level of authority relative to the purposes for which a specific revenue could be used. The Board tentatively agreed that the alternative level of authority should be established at a fairly high level and suggested that state statute, local ordinance, or the highest level of authority granted to a special-purpose government might be appropriate. The Board agreed that both alternatives should be presented in a due process document (an Invitation to Comment or a Preliminary Views) to seek comments from constituents before proceeding with an Exposure Draft of a proposed standard.

On other issues, the Board tentatively agreed that the purpose stipulated for a specific revenue should be a purpose that is narrower than the overall activities of the reporting government. Also, the specific purpose should be connected to identified spending or usage, rather than circumstances—that is, for what, rather than when.

With regard to the definitions of capital projects and debt service funds, the Board tentatively agreed that the proposal should clearly address the extent to which transfers into those fund types should be allowed for financial reporting purposes and that the same level of authority required to stipulate the usage of specific revenues for reporting in special revenue funds generally also should be required as the authority for transfers to capital projects and debt service funds. Finally, the Board agreed that the proposal should make it clear that the definitions and limitations on the use of those fund types apply only to external financial reporting purported to be in accordance with GAAP and would not require governments to change their internal accounting.

Minutes of Meeting, December 13–15, 2005

The Board began its consideration of the meaning of certain terms within the definitions of the governmental fund types with a discussion of the phrase proceeds of specific revenue sources from the definition of special revenue funds. The central issue was whether the activity reported in special revenue funds should be limited to the proceeds and uses of specific revenues, or should governments also be permitted to report the reassignment of resources (transfers from other funds) in those funds. The Board evaluated four alternatives that ranged from a pure revenue focus on one end to an approach that would not limit the extent to which transfers could be reported at the other end of the spectrum. After considering the advantages and disadvantages of each approach, the Board was divided between the pure revenue alternative and alternatives that would allow some transfers to be reported. However, no Board member supported the alternative that would allow a special revenue fund to be established solely from reassigned resources. As a result, the Board’s tentative conclusion was that the phrase proceeds of specific revenue sources should be interpreted to mean that rainy-day funds, budget stabilization funds, and similar funds that are not specifically revenue-based do not meet the definition of special revenue funds. Because there was support for more than one alternative, the Board tentatively agreed to continue to move forward toward a discussion-type due process document (an Invitation to Comment or a Preliminary Views) that would present alternatives for respondents to evaluate. That decision will be reconsidered as additional interpretations of other terms and phrases are deliberated in upcoming Board meetings.

Minutes of Meeting, November 1–3, 2005

The Board agreed to continue to move forward with the project and tentatively concluded that the project scope should be expanded to attempt to clarify the meaning of certain terms within the existing fund-type definitions so that application of any revised fund balance display requirements would not be compromised by different interpretations of those terms. The Board also tentatively agreed to proceed toward a discussion-type due process document (that is, a Preliminary Views or Invitation to Comment) rather than an Exposure Draft, so that it could benefit from constituents’ viewpoints and preferences about viable alternative classification and display methodologies. The illustrative models discussed at the September meeting will serve as the starting point for the development of the alternatives. For the December meeting, the project staff will prepare a paper to address the terminology clarification issues associated with fund definitions.

Minutes of Meeting, September 20–22, 2005

The Board discussed a staff paper that presented three approaches to reporting fund balance information. The strengths and weaknesses of each approach were debated. Specific features of each alternative were supported by one or more Board members, but none of the models was favored by a majority. The Board discussed the prospect of clarifying the definitions of individual fund type to more specifically stipulate what resources and activities should be reported in each of the fund types. The Board also discussed the notion that unreserved, undesignated resources should be reported in the general fund only. No final decisions were made. The staff will continue to develop the analysis of possible approaches for reporting components of fund balances; the Board will continue its deliberations at the November meeting.

Minutes of Meeting, August 9–11, 2005

The Board reviewed the history of the results of previous Board deliberations and proposals relative to modifications in the manner in which fund balance information is defined and presented. The staff issues paper discussed several alternatives that the Board could consider if the project were to proceed. The Board unanimously agreed to retain the project on the current agenda and after considering two additional alternatives, offered by Board members, decided to delay reaching a tentative conclusion on the scope and direction of the project until those additional approaches could be more fully developed and discussed. As a result, the staff was directed to prepare a paper for the September meeting to allow the Board to evaluate the pros and cons of the additional alternatives as they relate to the staff recommendation as presented in the current issues paper.

Minutes of Meeting, June 21–23, 2005

Dr. Gil Crain of Montana State University and staff presented the Board with a report that summarized the results of interviews he conducted with assistance from GASB staff during late 2004 and early 2005. Dr. Crain discussed the findings as presented in the report and the possible standards-setting implications of those findings for the Board to consider.

The Board members discussed the interview results and some of the possible directions the project could take. No decisions were reached, but the staff was asked to prepare an analysis of some alternative paths for the Board’s consideration at the August meeting. In the interim, the staff will also seek the advice and counsel of the GASAC at its July meeting.

Fund Balance Reporting—Major Tentative Decisions to Date

Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, was approved in February 2009.

Fund Balance Reporting—Relevant Links

Government Finance Officers Association