2. GASB Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions (Effective for FYE June 30, 2011) John F. Sutton, CPA Audit Manager Pugh & Company, P.C. Home Federal Plaza – Suite 200 315 N. Cedar Bluff Rd. Knoxville, TN 37930-1409 Phone: 865-769-0660 Direct: 865-769-1684 jsutton@pughcompany.com

3. Effect of GASB 54 GASB 54 has significantly changed the definitions and criteria for establishing governmental funds, especially special revenue fund types. Also, fund balance terminology and definitions have changed dramatically. GASB 54 does not apply to proprietary fund types (Enterprise and Internal Service Funds) or fiduciary fund types (trust and pension funds).

4. Types of Governmental Funds Governmental funds are one of the following: –General Fund –Special Revenue (Restricted or Committed Revenues) –Debt Service –Capital Projects –Permanent (Endowments, etc.)

5. Special Revenue Funds Special revenue funds can only be established for restricted or committed revenues and not for the assignment or transfer of resources. Governments should discontinue reporting a special revenue fund and instead report with the General Fund if the government no longer expects that a substantial portion of the funds revenues are from restricted or committed resources.

6. Restricted vs. Committed Restricted – Restraints imposed by creditors, grantors, contributors, or laws and regulations. These are also considered a legal restriction or external legal limitation (legally enforceable requirements). Committed – Self-imposed legal limitation by the governments highest level decision making authority (City Council, County Commission, etc.). Committed amounts cannot be redeployed (transferred) for other purposes unless formal action is approved, or reversed, by the decision making authority.

7. Special Revenues No special revenues can be used unless they meet the restricted or committed requirements. Management cannot use or create additional special revenue funds to earmark funds, or to segregate for internal financial management. Once a special revenue fund is established, the governmental body is free to assign, or transfer additional resources to that fund, provided the funds basic revenue sources remain a substantial portion of total inflows.

8. Fund Balance Definitions Non-Spendable – Cannot be used in cash, or is legally or contractually required. Restricted - Restraints imposed by creditors, grantors, contributors, or laws and regulations. These are also considered a legal restriction or external legal limitation. Unrestricted Committed – (previously defined) Assigned – Constrained by the governments intent, can be redeployed by governing board or management. Unassigned

9. Fund Balance Definitions: Old vs. New Old A.Reserved for Prepaid Expenditures, Inventories, or Encumbrances, etc. B.Reserved for external, or internal reasons: for grants or certain projects New Non-Spendable for: Prepaid Expenditures, Inventories, Encumbrances, Long-term Notes Receivable, etc. Restricted by law, creditors, grantors, or by enabling legislation (State Street Aid Fund, Drug Control Fund, etc.)

10. Fund Balance Definitions: Old vs. New (continued) Old Unreserved – Designations, internally designated for projects, could be redeployed by board or management. Unreserved - Undesignated New Committed, internally imposed by Board, and cannot be redeployed by management. Assigned fund balance, constrained by intent and can be deployed by Board or management. (cont.)

11. Fund Balance Definitions: Old vs. New (continued) Old D.Unreserved - Undesignated New Fund balances of special revenue, debt service, and capital projects funds that are not non-spendable, restricted, or committed are assigned. Unassigned is the residual fund balance of the general fund only.

12. Exception to Unreserved – Unassigned Funds If there is a deficit in a Special Revenue, Debt Service, or Capital Projects Fund due to expenditures exceeding the restricted, committed, or assigned fund balances, then it is possible to report a negative unassigned fund balance.

13. Stabilization or Minimum Fund Balance Policies Disclosure in the notes: –Stabilization arrangements should disclose the authority, required amounts, conditions that allow when amounts can be spent, and the year-end amount (if not apparent on the face of the statements). –Minimum fund balance policies should be disclosed if the government has a formally adopted policy and disclose the minimum amount required. These disclosures are required even if the arrangements do not meet the restricted or committed criteria.

14. Required Note Disclosures The entity will need to add a paragraph to the fund balance descriptions in the Summary of Significant Accounting Policies (SAAP) for the new fund balance terminology. Adopting GASB 54 is a change in accounting principle (ASC 250-10), then if the entity closes, or combines some special revenue funds into the general fund, then a note disclosure will be needed to describe the prior period adjustments (July 1, 2010) (continued)

15. Required Note Disclosures (Cont.) (cont.) to the general fund balance and special revenue fund balances for funds that were closed, or combined. If audited comparative financial statements are presented, then the entity will need to retroactively (retrospectively) apply GASB 54 to the earliest period presented and have a note disclosure that describes the $ change in assets, liabilities and equity as of the beginning of the first period presented (July 1, 2009).

16. Quick Quiz Question 1: The City Manager of Gotham wants to establish a special revenue fund to account for the revenues generated by traffic tickets issued by the police department. Can the city establish or report this type of special revenue fund under GASB 54?

17. Answer #1 No, the revenues generated by the traffic tickets are not restricted for certain purposes under state law and the revenues are used to support public safety expenditures. In order to qualify as a special revenue fund, the City Council would need to pass a budget ordinance/resolution that would dedicate the use of these revenues for some specific purpose.

18. Quick Quiz Question 2: The Beaufort County Commission during its current year budget process has decided to transfer $100,000 from the Countys State Street Aid Fund to the General Fund to help reduce the current years budget deficit. Under GASB 54, can the County record this fund transfer as budgeted?

19. Answer #2 No, the Countys State Street Aid Fund is restricted externally by state statutes to only be used for road repairs and maintenance.

20. Quick Quiz Question # 3: The B.O.E. finance director decides to make a transfer of $100,000 from the General Funds assigned fund balance for technology to unassigned fund balance to help pay for unexpected increased costs in utilities and fuel. Under GASB 54, is the finance director permitted to do this without action from the B.O.E.?

21. Answer #3 Yes, management is allowed to make transfers from an assigned fund balance which is used for intent and can be redeployed by the Board or management.

22. Quick Quiz Question # 4: The City of Gotham has established a property tax rate of $1.00, of which $.50 will go to the parks fund and $.50 will go to the school fund. However, in order to help pay for a new high school football stadium, the City Council wants to budget a transfer of $.25 from the parks fund to the school fund. Under the new standard, can the city still continue to record $.50 property tax revenue in the park fund and $.50 in the school fund?

23. Answer # 4 No, the property tax revenue should be recorded as $.25 for the parks and $.75 for the school fund. Revenues should be recorded in the special revenue fund for which they will be expended for their specified purposes.

24. Any questions? John F. Sutton, CPA Audit Manager Pugh & Company, P.C. Home Federal Plaza – Suite 200 315 N. Cedar Bluff Rd. Knoxville, TN 37930-1409 Phone: 865-769-0660 Direct: 865-769-1684 jsutton@pughcompany.com