Marcia Taylor, CPA, CGFM William McKain, CPA Pennsylvania Association of School Business Officials March 17, 2011

Need for the Project Fund balance – widely recognized as one of most used elements in financial statements What is available to be spent? What is available to pay debt or other long term obligations?

Issues with Current Fund Balance Information Level of action Plopping Confusion on terminology Lack of comparability “Available” masked

Objective Do current reporting requirements adequately meet needs of users? Assess financial flexibility Assess liquidity Clarify distinctions between reserved and un, reserved and net assets

Fund Definition Component FB affected by funds Lack of clarity? SRF – what resources? CPF – what projects? Activity versus revenue reporting

History of Project Deliberations began in late 1980’s Debated during S 34 – withdrawn New project in 2002 – resulted in Net Assets Statement (46) with no FB changes Another new project in October 2006 Two documents for public comment Field test Task force Final February 2009

Scope and effective date Scope Changes how fund balance is presented Clarifies use of governmental fund types Effective date Fiscal period ending 6/30/11 Early implementation encouraged Retroactive reporting encouraged for stats

New Guidance Fund balance classification

Focus of classification “ The extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent” (GASB #54, para 5)

Components of fund balance Five categories Nonspendable Restricted Committed Assigned Unassigned Not all will always be present

Practitioner’s View of Implementing GASB 54 Helpful reminder of the fund balance hierarchy Nobody Really Cares About Us Nonspendable Restricted Committed Assigned Unassigned

Nonspendable fund balance Not in spendable form Cannot ever be spent Cannot currently be spent Legally or contractually required to be maintained intact

Categories representing spending constraints Three categories Restricted fund balance Committed fund balance Assigned fund balance No requirement that constraint be narrower than the purpose of the fund

Restricted fund balance Constraints on purpose/circumstances of spending that are legally enforceable by outside parties Creditors Grantors and contributors Law or regulations of other governments Constitutional provisions/enabling legislation Same rules now used to classify restricted net assets

Committed fund balance Constraints on purpose/circumstances of spending imposed by government itself Formal action Means will differ among governments Highest level of decision-making authority Binding unless removed in the same manner Action taken prior to the end of the reporting period Amount can be determined at a later date

Assigned fund balance Intent to use resources for a specific purpose Government body Subordinate high-level body or official delegated to make such assignments in accordance with policy established by the governing body Governing body’s intentions not management’s Never in excess of total fund balance less its nonspendable, restricted and committed components

Unassigned fund balance Residual balance reported in general fund The use of some other fund type presumes that all of the resources reported in that fund are either restricted, limited, or assigned Also used to report deficits in other fund types

Components of fund balance Nonspendable fund balance (inherently nonspendable) Not in spendable form or requirement to maintain intact Restricted fund balance (Externally enforceable limitations on use) Outside parties Constitutional provisions or enabling legislation Committed fund balance (Self-imposed limitations) Formal action by end of period Highest level of decision making Assigned fund balance (Limitation resulting from intended use) Less formal action Highest level of decision making or designated body or official Unassigned fund balance (Residual net resources)

Stabilization (“rainy day”) funds Resources that can be spent only if certain specific circumstances occur Use of special revenue fund for this purpose not permitted Report in general fund Restricted or committed Presumption that specific circumstances in which spending is permitted “would not be expected to occur routinely” Never classified as assigned

Encumbrances Note disclosure (commitments) Categorization for display purposes dependent on nature of constraint

Review of Recast Example Reserves – are they restrictions or commitments or? Designations – are they committed or assigned? Funds other than general – any negative balances?

New Guidance Governmental fund type definitions

Fund type definitions General fund Special revenue funds Capital projects funds

General fund Prior definition “To account for all financial resources except those required to be reported in another fund” Never intended to limit the ability to use another fund type voluntarily Use required only when a primary government is incorporating the general fund of a blended component unit Term required dropped from the definition

Special revenue funds History Designed for specific revenue sources that are legally restricted to expenditure for specified purposes Often used for resources that have been “earmarked,” regardless of source.

Special revenue funds Issues in practice Specified purposes Transferred resources Legally restricted (restrictions placed by government)

New Definition “Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.”

Resolution of issues Specific revenue source MUST be foundation of fund Transfers allowed provided that they are not substantial part of fund Government can restrict

Prior definition: capital projects funds … to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds or in trust funds for individuals, private organizations, or other governments).” One issue – limited to capital facilities?

New Definition “Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets).” Not limited to capital facilities

Disclosure Committed fund balance Government’s highest decision-making authority Formal action required to establish, modify or rescind a commitment Assigned fund balance Body or official authorized to make assignments Policy established by the governing body pursuant to which that authorization is given.

Disclosure (cont.) Flow assumptions Whether restricted or unrestricted resources are considered to be spent first when both are available for the same purpose Order in which committed, assigned, and unassigned resources are considered to be spent when they are available for the same purpose

Disclosure (cont.) Stabilization arrangements Authority for establishing Requirement for additions Conditions that need to be met for spending to be permitted. Minimum fund balance requirements Description of the policy that sets forth the details of the requirement, including the action taken to establish it.

Disclosure (cont.) Special revenue funds For each major special revenue fund Purpose of the fund Revenues and other resources reported

Implementation Thoughts Review fund structure Policies: Use of restricted or unrestricted first if both available Within unrestricted – order of use Classification of ending fund balances Actions: Commitments BEFORE end of year Authority for designations Presentation levels