GFOA updates best practice on fund balance.

• Author: Gauthier, Stephen J.
• Position: The Accounting Angle - Government Finance Officers Association

In 2002, the Government Finance Officers Association (GFOA) issued a recommended practice (now a best practice) on The Appropriate Level of Unreserved Fund Balance in the General Fund. In 2009, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, which replaces the traditional categories of reserved and unreserved fund balance with five new categories (i.e., nonspendable, restricted, committed, assigned, and unassigned) that represent a fundamentally different approach to classifying fund balance.

The changes that will result from the implementation of GASB Statement No. 54 made it necessary, at a minimum, that the GFOA revise its 2002 best practice to reflect the new categories of fund balance. At the same time, the very process of revision created an excellent opportunity for the GFOA to review and "fine tune" certain aspects of its 2002 guidance. Accordingly, the GFOA's Committee on Accounting, Auditing, and Financial Reporting (CAAFR) and the GFOA's Committee on Governmental Budgeting and Fiscal Policy jointly prepared a draft revised version of the 2002 best practice in June, which was subsequently approved by the GFOA's Executive Board at its October 2009 meeting.

FOCUS

The revised best practice, like its predecessor, deals exclusively with the appropriate level of fund balance in the general fund. The revised best practice also, like its predecessor, focuses on just one portion of fund balance. Prior to GASB Statement No. 54, of course, the focus had been on unreserved fund balance. Now that the distinction between reserved and unreserved fund balance has been eliminated, the focus henceforth will be on unrestricted fund balance, defined as the sum of committed fund balance, assigned fund balance, and unassigned fund balance. The revised best practice goes on to suggest that some governments may wish to focus even more narrowly on just the unassigned portion of unrestricted fund balance.

MINIMUM LEVEL

A primary objective of a fund balance policy is to maintain adequate resources to cope with contingencies. As a practical matter, very large governments often are in a much better position to predict contingencies than are smaller governments (for the same reason that an insurance company can more readily predict the number of accidents for a pool of 500,000 drivers than for a pool of fifty). In preparing the original 2002 best practice, the GFOA...