In February 2009, the Governmental Accounting Standards Board (GASB) issued Statement Number 54, Fund Balance Reporting and Governmental Fund Type Definitions, to clarify certain terms used in fund type definitions to establish consistency and improve upon the disclosure of fund balances in the financial statements. More specifically, the new standard is being used to clearly identify the portion of fund balance that is available to be appropriated for the following year’s budget as well as those portions that are not available due to restrictions and commitments. Accordingly, the “reserved” and “unreserved” fund balance classifications are being replaced by five (5) new classifications: nonspendable, restricted, committed, assigned and unassigned. Please be advised, the requirements set forth under Statement 54 are effective for financial statements for periods ending on or after June 30, 2011.
GASB Statement 54 requires local governments to focus on the constraints imposed upon resources when reporting in governmental funds. The classifications serve to inform readers of the financial statements of the extent to which the government is bound to honor constraints on the specific purposes for which resources in a fund can be spent. The new fund balance classifications, and their respective definitions, are as follows:
Nonspendable: consists of assets that are inherently nonspendable in the current period either because of their form or because they must be maintained intact, including prepaid items, inventories, long-term portions of loans receivable, financial assets held for resale, and principal of endowments.
Restricted (Capital Reserve Designation): consists of amounts that are subject to externally enforceable legal purpose restriction imposed by creditors, grantors, contributors or laws and regulations of other governments; or through constitutional provisions. Restrictions may not be rescinded and amounts reallocated for other purposes.
Committed (Encumbrance Designation): consists of amounts that are subject to a purpose constraint imposed by a formal action of the government’s highest level of decision-making authority before the end of the fiscal year, and that require the same level of formal action to remove the constraint. To clarify, committed amounts for a specific purpose cannot be used for any other purpose unless the District removes or changes the specific use by taking the same type of actions (resolution) it used to previously commit those amounts. Be advised, actions to commit resources must occur prior to year-end; however, the actual amount to be committed may be determined after the year-end. Different from amounts classified as restricted, amounts in the committed fund balance are not legally enforceable. Consequently, these amounts may be uncommitted and reallocated for other purposes (requires formal action from the Board).
Assigned (Encumbrance Designation): consists of amounts that are subject to a purpose constraint that represents an intended use established by the government’s highest level of decision-making authority, or by their designated body or official. The purpose of the assignment must be narrower than the purpose of the general fund, and in funds other than the general fund, assigned fund balance represents the residual amount of fund balance. In other words, in any government fund, other than the general fund, the assigned fund balance will include all remaining amounts that are not already classified as nonspendable, restricted or committed. Assignment in the general fund is meant to communicate that the intended use of those amounts if for a specific purpose that is narrower than the general purposes of the fire district. The assigned fund balance in the general fund will include all residual amounts that are intended to be used for a specific purpose. The constraints imposed on the use of assigned amounts are more easily removed than those imposed on committed amounts.
Unassigned (General Fund Designation): represents the residual classification for the government’s general fund, and could report a surplus or deficit. In funds other than the general fund, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned.
So what does this change in Fund Balance reporting mean to a fire district? The commissioners will need to take some action at or close to year end as to properly allocate fund balances. Typically a fire district will have the following actions related to:
- Prepaid expenditures – the Treasurer is to be instructed that any prepaid expenditures be reported as “non-spendable” fund balance.
- Capital Reserves – instruct the Treasurer as to the amount of fund balance to be reported as “Restricted”
- Encumbrances – Any encumbrances against fund balance are to be reported as “committed” fund balances. The action to commit fund balance must take place prior to year end, meaning the purchase order needs to be issued at or prior to 12/31.
- Assigned – Amounts included to underwrite the following years budget or surplus that will be sent to Capital Reserves in the following period are to be classified as “Assigned Fund Balance.” The Board of Commissioners should inform the Treasurer, how surplus funds will be allocated. For example “50% to vehicle reserve, 50% to building reserve up to a maximum of $x.” or “Any surplus over $x is to be allocated to reserves as follows: 25% to vehicle reserve, 75% to the capital projects reserve.”
- Unassigned – This is the remainder of the fund balance. It could actually be a “deficit” fund balance.
To conclude the new accounting rules mean some modest changes in policy and procedure for your fire district. These changes really are just providing for a different way of presenting information a fire district already has developed. The standards do not significantly change the operations at the District level. However, as you can see some relatively simple procedures need to be implemented to comply at the “Board” level.
At year end, we are available to provide our services to assist in determining how the various components of fund balance should be classified based upon district accounting policies.