GASB exposure draft on fund balance.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle - Governmental Accounting Standards Board

At the end of February, the Governmental Accounting Standards Board (GASB) released an exposure draft (ED) that proposes to substantially change how fund balance is categorized. It also proposes guidance that would modify how some of the governmental fund types are used.

WHERE'S THE FIRE?

The term fund balance has long been used in state and local government accounting to describe the net difference between the assets and liabilities reported in governmental funds. That amount, in turn, has traditionally been divided into reserved and unreserved components, with the option of further distinguishing designated unreserved fund balance from undesignated unreserved fund balance.

Few would dispute that fund balance is the most-discussed single item that appears in a typical state or local government's financial statements. Indeed, the amount of fund balance is frequently regulated by law, regulation, or policy, and is subject to close scrutiny by rating agencies and others interested in a government's finances. So why the need for change?

First, the terms used to describe the various components of fund balance are not completely self-explanatory and have often been misunderstood by otherwise knowledgeable financial statement users. Second, research amply demonstrates that there is considerable (and unjustified) diversity in how those categories are applied in practice, which significantly diminishes comparability among governments.

The ED proposes to remedy these two problems by establishing clear guidelines for classifying the various components of fund balance and then describing those components in such a way as to be immediately understandable to a typical user of state or local government financial statements.

WHAT DO PEOPLE REALLY NEED TO KNOW?

The ED proposes to categorize fund balance to provide two essential pieces of information (see Exhibit 1).

Can the resources ever actually be spent? A government cannot actually "spend" inventory or prepaid rent.

Likewise, the corpus of an endowment must remain intact and can thus never be spent. The ED proposes to distinguish such non-spendable resources reflected in fund balance from the portion of fund balance that reflects resources which are, in fact, spendable, at least in the future, if not now.

Are there resources that can be spent only for specified purposes? Typically, a significant portion of a government's spendable resources can be spent only for specified purposes. The ED proposes to...