CLASSIFYING FUNDS-GAAP BASIS

Additionally, an education or communication strategy, or at a minimum, explanation of large changes in fund balance is encouraged. In all cases, use of those funds should be prohibited as a funding source for ongoing recurring expenditures. Combining statements for the nonmajor funds are not required, but may be presented as supplementary information. The net assets of a government should be reported in three categories—invested in capital assets net of related debt, restricted, and unrestricted. Permanent endowments or permanent fund principal amounts included in restricted net assets should be displayed in two additional components—expendable and nonexpendable.

The terms “reserves” and “fund balance” are often used interchangeably, which can be confusing to the layperson. For the purposes of developing a financial policy that addresses reserves, the distinction should be made within the scope and purpose component of the policy. Whether you define fund balance as a “general operating reserve” or simply “general operating fund balance” will be determined by the needs of your jurisdiction. Revenue sources that would typically governmental accounting be looked to for replenishment of a fund balance include nonrecurring revenues, budget surpluses, and excess resources in other funds (if legally permissible and there is a defensible rationale). In short, the new annual reports should give government officials a new and more comprehensive way to demonstrate their stewardship in the long term in addition to the way they currently demonstrate their stewardship in the short term and through the budgetary process.

Similar to The use of Funds in Governmental Accounting (

Until GASB Statement No. 34, this assurance has been provided by the inclusion of the budget to actual comparison statement within the audited financial statements. Although under generally accepted auditing standards (GAAS) auditors are required to consider the effect of material instances of non-compliance, the GFOA believes that placing budgetary information in the unaudited RSI significantly weakens this important control. The second type is the government-wide financial statement, which governments are also required to provide. Government-wide financial statements combine the governmental and business-type activities of the government for the purpose of presenting an overall picture of the financial position and the results of operations.

This reduces the number of funds presented on the face of the financial statement and directs the focus to the significant funds of the reporting entity. Major fund reporting is applied only to governmental funds (i.e., general, special revenue, debt service, capital project, and permanent funds) and enterprise funds. The fact that separate funds are established in the first place is evidence that audited individual fund data must be important to at least some financial statement users. As a practical matter, however, most governments have too many funds to make it feasible to include audited information on all of them within the basic financial statements. Therefore, as a compromise, GASB Statement No. 34 required that individual fund data be reported in the basic financial statements, but only for a government’s major funds. As a result, individual fund data automatically became available for the most significant governmental and enterprise funds, even if a government did not prepare a CAFR.

Charts of Accounts

In practice, it is uncommon for debt service funds to meet this threshold, meaning they most often are not included as major funds in the basic financial statements. Financial statement users with a special interest in debt service funds see this outcome as a deficiency and have drawn attention to it. Some have even  argued that individual debt service funds should automatically be classified as major funds, as is now the case for the General Fund. Such a change would ensure the availability of information in individual debt service funds even if a government did not issue a CAFR. At the same time it would raise the level of audit assurance significantly for individual debt service funds. Each of the fund statements should report separate columns for the general fund and for other major governmental and enterprise funds.

Fiduciary funds should be used to report assets that are held in a trustee or agency capacity for others and that cannot be used to support the government’s own programs. Required fiduciary fund statements are a statement of fiduciary net assets and a statement of changes in fiduciary net assets. The GASB is responsible for developing standards of state and local governmental accounting and financial reporting that will (a) result in useful information for users of financial reports and (b) guide and educate the public, including issuers, auditors, and users of those financial reports.

Lesson 2: Priniciples of Accounting for State and Local Governments

A reporting entity defines the boundaries of a particular financial reporting unit by describing whose assets, liabilities, revenues, expenses, and equities are included in the entity’s financial report. In the private sector, if a parent company, such as General Motors, exercises control over its legally separate subsidiaries, the financial activities of all those units are consolidated for financial reporting purposes. In Lesson 1, we examined the key characteristics that differentiate not-for-profit accounting and financial reporting from for-profit accounting and reporting. We compared the financial reporting objectives in government, not-for-profit organizations, and for-profit organizations.

Governments with at least $10 million but less than $100 million in revenues (phase 2) should apply this Statement for periods beginning after June 15, 2002. Governments with less than $10 million in revenues (phase 3) should apply this Statement for periods beginning after June 15, 2003. Governments that elect early implementation of this Statement for periods beginning before June 15, 2000, should also implement GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, at the same time. If a primary government chooses early implementation of this Statement, all of its component units also should implement this standard early to provide the financial information required for the government-wide financial statements. Separate fiduciary fund statements (including component units that are fiduciary in nature) also should be presented as part of the fund financial statements.

Related to Major Fund

It is essential to clearly define the intended use for each reserve and/or fund balance that your entity establishes. FIDUCIARY FUNDS – these are used to account for assets held by the Town in a trustee capacity or as an agent for individuals, private organizations, and other governmental units. In some cases, governments can find themselves in a position with an amount of unrestricted fund balance in the general fund over their formal policy reserve requirement even after taking into account potential financial risks in the foreseeable future. Amounts over the formal policy may reflect a structural trend, in which case governments should consider a policy as to how this would be addressed.

• It will also allow users to assess the government’s ability to estimate and manage its general resources.
• We especially appreciate the input of those who participated by becoming members of our various task forces, which began work on this and related projects as early as 1985.
• For example, governments should not be required to disclose either the number of tax abatement agreements they enter into during the reporting period, or the number of tax abatements in effect at the end of the reporting period.
• If a primary government chooses early implementation of this Statement, all of its component units also should implement this standard early to provide the financial information required for the government-wide financial statements.
• That is, auditors offer no opinion on the fair presentation of the fund financial statements as such, but only on the fairness of their presentation “in relation to” the basic financial statements, based solely on the audit of the latter.
• Similarly, purchases of office supplies are recorded whether paid for in cash or bought with a promise to pay later (by credit card or business account).

Fund statements also will continue to measure and report the “operating results” of many funds by measuring cash on hand and other assets that can easily be converted to cash. These statements show the performance—in the short term—of individual funds using the same measures that many governments use when financing their current operations. For example, if a government issues fifteen-year debt to build a school, it does not collect taxes in the first year sufficient to repay the entire debt; it levies and collects what is needed to make that year’s required payments.