Identifying Major Funds: An Analytical Process.

• Author: Freeman, Robert J.

GASB Statement No. 34--heralded by many as a significant step in the evolution of government financial reporting-includes two broad types of financial statement changes. One is the new, never-before-required government-wide financial statements. At least equally important are the changes to current fund-based financial statements incorporated in fund-based reporting under GASB Statement No. 34. Clearly, the most important fund-based financial statement change is the focus on major funds--that is, the requirement to report, in the basic financial statements, data on individual major funds instead of reporting data aggregated by fund type.

The shift to major fund reporting promises to be a significant improvement in the fund-based financial statements. It has long been recognized that individual fund reporting is more useful than fund type reporting. Indeed, the GASB's rationale for requiring major fund reporting for governmental funds and Enterprise funds is that this modification should help ensure that the basic financial statements contain the detailed individual fund information that research consistently shows that users desire on the funds of greatest importance to most users.

The potential usefulness of major fund reporting will be achieved only if governments properly identify the individual funds that are most important to users. Indeed, governments that fail to properly identify their major funds because they use a superficial or overly mechanical approach to major fund determination may expose themselves to litigation from those who have relied on their financial statements.

This article analyzes the GASB Statement No. 34 guidance on identifying major funds and recommends steps necessary for making sound, analytical decisions about which funds should be reported as major funds. An overall process for determining major funds is recommended and potential factors affecting a government's analyses are discussed.

GASB Statement No. 34 Provisions

GASB Statement No. 34 specifies several provisions regarding major funds. First, it requires major fund reporting only for governmental funds and enterprise funds. Internal service funds and fiduciary funds continue to be reported by fund type. [1]

Second, the determination of which funds are major must be made each year Some funds will be major funds one year and not be major funds (or perhaps not even exist) in another year.

Next, GASB Statement No. 34 sets forth three provisions for determining which governmental funds and enterprise funds to treat as major funds.

1) The general fund is always a major fund.

2) Any other governmental fund or enterprise fund is required to be reported as a major fund in any year that the total assets, liabilities, revenues, or expenditures/expenses (excluding extraordinary items) of that individual governmental fund or enterprise fund are both:

1. 10 percent or more of the corresponding total (assets, liabilities, and so forth) for all funds of that category or type (that is, total governmental funds or total enterprise funds), and

2. 5 percent or more of the corresponding total for all governmental funds and enterprise funds combined.

3) Any other governmental fund or enterprise fund that government officials consider particularly important to users may be reported as a major fund.

The first two provisions identify funds or circumstances that require treatment as a major fund. The third provision permits government officials to determine which funds should be major funds.

Major Fund Identification

To achieve fully the objectives of major fund reporting, a government must determine which funds are "particularly" important to the users of its financial statements. In our view, this "major fund" determination should not be viewed or implemented as a...