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Fund balance is an important measure that represents the difference between a fund's assets and liabilities. The overall objective of fund balance reporting is to isolate that portion of fund balance that is unavailable to support the following period's budget.
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Because governmental funds’ measurement focus is the flow of financial resources, the balance sheet primarily reports assets and liabilities that represent net spendable and available resources for these funds. In many ways, fund balance represents working capital, which can either be used as a liquidity reserve or for spending in future years.
Many state and local governments are experiencing revenue shortfalls and are facing difficult decisions in balancing their budgets. One option some governments have is to use a portion of fund balance to offset revenue declines and balance the current-year budget. However, not all amounts reported as part of fund balance are available to be used in a future budget.
Under current practice, fund balances are either classified as reserved or unreserved. Many governments also designate part of unreserved fund balance. Recent research conducted by GASB shows a lack of consistency among governments in reporting the components of fund balance and that the components are often misunderstood by financial statement users. It is often unclear if any of the reserved or designated fund balances are available to help balance a government’s budget.
GASB Statement no. 54, Fund Balance Reporting and Governmental Fund Type Definitions, will significantly change how this information is reported. The statement is intended to improve the usefulness of the amount reported in fund balance by providing more structured classification. The statement also clarifies the definition of existing governmental fund types.
The presentation below was given at the GFOA of Pennsylvania Annual Convetion in State College, May 2-5, 2010
CLICK HERE FOR THE PRESENTATION
CLICK HERE FOR THE GFOA-PA
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