FUND

new fun
with
BALANCES:
Implementing GASB Statement 54
12 Government Accounting • Disclosures • July/August
 By Paul A. Copley
CPA, Ph.D., and
M. Loretta Manktelow
MBA, MST
For example, fund resources may be
restricted by creditors, donors or granting
agencies. Resources may also be formally
committed by elected officials to specific
activities. Alternatively, constraints may
merely be nonbinding indications of manage-
ment’s intent to use resources for a particular
purpose. Statement 54 establishes new fund
balance classifications to reflect these varying
levels of constraint.
Fund balance
classifications
GASB Statement 54 establishes five new
fund balance categories while eliminating
the previous categories of reserved and un-
reserved. The new standard affects only the
equity section of the balance sheet of govern-
mental funds. It does not change the report-
ing of net assets of proprietary and fiduciary
funds or the government-wide Statement of
Net Assets.
The first step in applying Statement 54 is
to identify those fund resources that are non-
spendable. Inventories and prepaid items
typically appear in governmental funds be-
cause they are current assets. However, these
resources are nonspendable because they are
used in operations rather than converted into
cash. The principal (corpus) of a permanent
fund that is required to be maintained would
also be classified as nonspendable.
The remaining resources (net of liabilities)
of the fund include cash and items expected
to be converted into cash in the next period.
These “spendable” resources are further
classified according to the nature of any
Government Accounting • Disclosures • July/August 13
T en years ago, the Governmental Accounting Standards Board
(GASB) issued Statement 34, which dramatically changed state
and local government reporting by requiring accrual basis,
government-wide statements.
For the first time since that noteworthy standard, GASB has issued a
new standard that is certain to affect the financial statements of every local
government in Virginia. In the paragraphs that follow, we review GASB
Statement 54, “Fund Balance Reporting and Governmental Fund Type
Definitions,” which is required for fiscal years ending June 30, 2011.
The new standard is GASB’s response to credit market participants
who sought greater information about the availability of reported fund
balances. In particular, bond investors and rating agencies wish to under-
stand the extent to which the financial resources of governmental funds
are constrained and how binding those constraints are.
constraints imposed on their use, using a hi- net resources of a governmental fund that the
erarchy of constraints. The hierarchy ranges governing body has specified for particular
from “restricted” for the most constrained to use. To be classified as committed, the re-
“unassigned” for the least. sources should have been designated through
Restricted fund balance represents ordinance or resolution by the government’s
the net resources of a governmental fund highest level of authority (e.g. city council
that are subject to constraints imposed by or county board of supervisors). Commit-
external parties or law. Restrictions arising ted resources differ from restricted in that
from external parties include debt covenants the constraint is imposed by a government
(such as a requirement for a sinking fund) or upon itself.
constraints imposed by legislation or federal Statement 54 also provides that amounts
and state agencies on the use of intergov- representing contractual obligations of a
ernmental revenues. Restrictions may also government should also be classified as com-
result from legally enforceable requirements mitted fund balance. The statement offers
that resources be used only for specific pur- no examples of such contractual obligations,
poses. but it seems reasonable that they would be
For example, Virginia cities and counties of sufficient significance to involve the formal
may impose taxes on the sale of prepared food action of the governing board. For example,
and beverages. If approved by the voters, the board approval of large construction con-
referendum commonly restricts the use of the tracts would typically represent commitment
tax proceeds (typically to capital projects). of the funds.
The (unexpended) resources derived from Assigned fund balance represents the
this tax would be displayed as restricted net resources of governmental funds that
fund balance. the government intends for a specific pur-
The equity section of the government- pose. Assigned resources differ from com-
wide Statement of Net Assets in GASB 34 mitted in that they do not require a for-
classifies net assets within three categories, mal action by the governing body. Con-
including restricted net assets. With one excep- straints imposed on assigned resources
tion, those resources classified as restricted are more easily modified or removed.
net assets in the government-wide statements For governmental funds other than the Gen-
would also be classified as restricted fund eral Fund, this is the category for all (posi-
balance in the fund basis statements. The tive) residual fund balances. The rationale is
exception is permanent fund principal. These that the act of recording resources in special
resources are classified as restricted net assets revenue, capital projects, debt service or
under GASB 34 and nonspendable fund bal- permanent funds is evidence of the govern-
ance under GASB 54. ment’s intent to use the resources for a
Committed fund balance represents the specific purpose. 
 Resources in the General Fund may also be
assigned to a specific purpose if that is the intent
of the government. Intent may be expressed
through the governing body by means other
than ordinance or resolution. Alternatively,
committees or individuals may assign resources
to specific activities. Assignment within the
General Fund implies an intended use that is
more limited than merely support of the gen-
eral purposes of the government.
Unassigned fund balance is the residual
category for the General Fund. Within the
General Fund, governments should not report
assigned fund balance amounts if the assign-
ment for specific purpose results in a negative
unassigned fund balance.
Negative balances
Negative fund balances could occur if ex-
penditures for a specific purpose exceed the
resources available in the fund. However,
Statement 54 does not permit the reporting of
negative restricted, committed or assigned fund
balances. If this occurs, the government should
reduce any assigned fund balances (in that fund)
by the amount of the negative balance.
The rationale is that if expenditures exceed
restricted or committed resources, then funds
have in effect been reallocated to the purpose
used. If a deficit remains once all assigned
fund balances are zero, the remaining nega-
tive amount should be reported as unassigned
fund balance.
Encumbrances
Under past reporting practices, outstanding
encumbrances at year-end were reported in
the governmental funds as fund balance: reserve
for encumbrances. Statement 54 requires that

Table 1: City Government Balance Sheet

Governmental Funds as of June 30, 2011
General Special Revenue Capital Projects Debt Service Permanent Total Governmental
Fund Fund Fund Fund Fund Funds
ASSETS
Cash and cash equivalents $6,433,214 627,837 895,300 230,000 366 $8,186,717
Investments 3,287,992 25,000 3,312,992
Taxes receivable(net) 2,872,611 2,872,611
Accounts receivable 679,215 14,177 693,392
Due from State Government 1,085,184 243,264 1,328,448
Supplies Inventory 23,747 23,747
TOTAL ASSETS $14,381,963 642,014 1,138,564 230,000 25,366 $ 16,417,907
LIABILITIES
Accounts payable 2,628,422 70,000 226,532 2,924,954
Deferred Revenues 4,408,087 4,408,087
TOTAL LIABILITIES 7,036,509 70,000 226,532 - - 7,333,041
FUND BALANCE
Nonspendable Equals supplies

Supplies Inventory 23,747 23,747 } inventory

Permanent fund principal 25,000 25,000 } Corpus of

permanent fund
Restricted
Bond sinking fund 200,000 200,000 Restricted by debt
covenant, grant
School lunch grant 370,000 370,000
agreement or law
School construction 302,000 302,000
Committed
Contractual
City jail construction 120,000 120,000 commitments
Highway construction 450,000 450,000
Committed by
Rainy day funds 3,000,000 3,000,000 } City Council
Assigned
Residual balances of
School lunch program 202,014 202,014
funds other than the
Capital additions 95,000 40,032 135,032 General Fund

Debt Service 30,000 30,000

Other purposes 366 366
Library acquisitions 25,000 25,000
Unassigned 4,201,707 4,201,707 } Residual balance of
the General Fund
TOTAL FUND BALANCE $7,345,454 572,014 912,032 230,000 25,366 $9,084,866

Outstanding purchase orders of the General Fund

14 Government Accounting • Disclosures • July/August

encumbered resources be reported within the
restricted, committed or assigned categories
in a manner consistent with the criteria for
those classifications. Statement 54 provides
no examples as guidance on how to classify
encumbered amounts.
At the very least, the existence of an encum-
brance suggests that the government has an ex-
pressed intent to use resources for a particular
purpose and therefore these resources should
not be classified as unassigned. Encumbrance
accounting may also be used in the case of
contractual obligations, such as construction
contracts. Statement 54 requires that resources
obligated to contractual obligations be classified
as committed.
Stabilization
(rainy day) funds
Statement 54 also provides guidance on the
classification of budget stabilization or rainy day
funds. Stabilization amounts that meet certain
criteria are classified as committed or (less com-
monly) restricted, if imposed externally or by
law. Stabilization funds are classified as commit-
ted if they are created by a resolution or ordi-
nance that identifies the specific circumstances
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Government Accounting • Disclosures • July/August 15
under which the resources may be expended.
Stabilization amounts that are available “in
emergencies” or in periods of “revenue short-
falls” would not be classified as committed unless
the emergency or shortfall condition is speci-
fied and of a magnitude to distinguish it from
events that occur routinely. Stabilization funds
not meeting these conditions are reported
as unassigned fund balance in the
General Fund.
Sample balance sheet
Table 1 presents an example balance sheet
for a city government’s governmental funds
using the fund balance classifications required
by Statement 54. Note that fund balance (the
shaded segment of the table) is no longer
presented as reserved or unreserved and that
encumbrances are not separately displayed.
Explanations follow:
Nonspendable: The $23,747 in the
General Fund equals the supplies balance
reported within asset section of the balance
sheet. Additionally, the city has a Permanent
Fund in which the principal of $25,000 must
be maintained.
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investment.
Restricted: The Debt Service Fund reflects
a sinking fund balance of $ 200,000 that is
required by bond covenant. The city received
a grant from the state government that is re-
stricted for use in a school lunch program. The
unexpended portion ($370,000) of this grant is
reported in a Special Revenue Fund. The Capi-
tal Projects Fund includes $302,000 of food
and beverage tax revenues restricted by ballot
referendum for new school construction.
Committed: The Capital Projects Fund
includes amounts committed by contractual
obligation with contractors building a new
city jail ($120,000) and highway improve-
ments ($450,000).Additionally, the General
Fund reflects a rainy day fund ($3,000,000)
established by city council resolution with
specific circumstances under which the funds
may be expended.
Assigned: The residual balances of the Special
Revenue, Capital Projects, Debt Service and
Permanent Funds are classified as assigned fund
balance. Within the General Fund, outstand-
ing encumbrances of $95,000 for capital 
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 additions and $25,000 for library acquisitions discontinue the use of a special revenue fund to a particular purpose.
are classified as assigned fund balance, reflecting and report the fund’s remaining resources in Some local governments may wish to report
management’s intent to use the resources for a the General Fund. rainy day reserves. These governments should
particular purpose. verify whether the reserves were created by
Conclusion formal action of the board and whether the
Unassigned: The $4,201,707 residual balance The fund balance reporting requirements conditions under which the government may
of the General Fund is reported as unassigned of GASB Statement 54 go into effect for fiscal draw on these resources are sufficiently detailed
fund balance. years ending in June 2011. However, State- and unusual to warrant classification as commit-
ment 54 requires governments to restate ted fund balance.
Fund definitions fund balances for all periods presented in a Finally, governments should examine their
Statement 54 also modifies the existing comparative balance sheet. Governments that existing governmental funds to ensure they
governmental fund definitions to ensure con- present two years’ comparative balance sheets meet the fund definitions provided by State-
sistency with the classifications of fund balances. will effectively need to identify fund balance ment 54.The new standard is expected to
For most of the funds, the revised definitions classifications as of June 2010. limit the use of special revenue funds, and in
have little effect on current practice. The ex- In the coming year, CPAs may find client some cases governments will be required to
ception is special revenue funds. Specifically, service opportunities by alerting local gov- discontinue the use of special revenue funds
the standard requires that special revenue funds ernment clients to the standard, identifying and report those resources in the General
be used only if a substantial portion of the re- implementation issues ahead of time and sug- Fund. 
sources are provided by one or more restricted gesting actions that may ease the transition.
or committed (not assigned) revenue sources. For example, the differences between the fund
Although other resources may supplement a balance classifications are based on degree of Paul A. Copley, CPA, Ph.D., and M.
special revenue fund, assignment of resources constraint. Since committed and assigned funds Loretta Manktelow, MBA, MST, are on
is not sufficient for the establishment of one. are both self-imposed, the distinction between the faculty of the School of Accounting
Further, if the government expects that a these two categories is particularly ambiguous. at James Madison University. Contact
substantial portion of the resources will no To distinguish between these categories, gov- Paul at copleypa@jmu.edu and Loretta at
longer be derived from restricted and commit- ernments will need to note the level of author- mankteml@jmu.edu.
ted revenue sources,
E-5929-0510 the government
VA:E-5929-0510 VA should ity that
3/23/10 3:16approved the designation
PM Page 1 of resources

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16 Government Accounting • Disclosures • July/August