Fund Financial Statements
Within governmental funds, equity is reported as fund balance;
proprietary and fiduciary fund equity is reported as net assets.
Fund balance and net assets are the difference between fund assets
and liabilities reflected on the balance sheet or statement of net
assets. Because of the current financial resources measurement focus
of governmental funds, fund balance is often considered a measure
of available expendable financial resources. This is a particularly
important measure in the general fund because it reflects the primary
functions of the government and includes both state aid and local
tax revenues. The relative amount of unreserved fund balance reflected
in the general fund is used by rating agencies as a measure of financial
strength of the government. Declines in the amount of unreserved
fund balance may signal deterioration in the financial condition
of the entity.
Governmental fund balances are categorized as
Reserved Fund Balances
Reservations of fund balance should be used in governmental financial
reporting to identify the portion that is
The amount and nature of the reservation of
fund balance should be disclosed on the face of the financial statements.
The description may need to be supplemented by disclosure in the notes
to the financial statements.
- not available for appropriation or expenditure
(e.g., reserve for inventories, reserve for long-term receivables)
- legally earmarked by external parties or entities
for a specific future use, that is, a legal restriction on the
use of assets (e.g., reserve for encumbrances).
of reservations of fund balance follow:
The aggregate fund balance in the debt service
fund is legally reserved for the payment of bonded indebtedness and
is not available for other purposes until all bonded indebtedness
is liquidated. The fund balance of the capital projects fund reflects
an amount designated for construction and major renovation projects,
and it usually represents unexpended proceeds from the sale of bonds
that have restricted uses. However, in all instances in which the
name of the fund communicates the legal segregation, the fund balance
should be reported as unreserved.
- Debt service
- Prepaid items
- Outstanding encumbrances
- Federal and state programs
Unreserved fund balance is the difference between the total and
reserved fund balance. It has two components: designated and undesignated.
The unreserved fund balance of the general fund represents the balance
available for legal appropriation and expenditure for general operating
Prudent financial management requires accumulating
a sufficient undesignated, unreserved fund balance in the general
fund representing available expendable financial resources to meet
the net cash outflows during the fiscal year.
Designated, Unreserved Fund Balances.
Portions of fund balance may be designated by management to
reflect tentative plans or commitments of governmental resources.
Designations generally reflect board action to earmark the
balance for purposes that will be fulfilled at a later time, but
specific board action is not required. Designations represent planned
actions, rather than actual commitments. Because they typically
arise from internal actions (management decisions) rather than actions
external to the entity (encumbrances), designations are reported
as part of unreserved fund balance.
The amount and nature of the designation should
be explained in a
Designations may be related to
- separate line of the balance sheet,
- parenthetical comment, or
- note to the financial statements.
Undesignated, Unreserved Fund Balances.
Undesignated, unreserved fund balance is the difference between
total fund balance and the portion that is reserved and designated.
This is the balance available for legal appropriation and expenditure
if a government budgets on a GAAP basis for its governmental funds.
- construction or other capital expenditures,
- claims and judgments, or
- self-insurance contingencies.
Within proprietary and fiduciary fund
statements of net assets, net asset balances are classified into
Governmentwide Financial Statements: Statement
of Net Assets
- Invested in capital assets, net of related
debt represents the net amount invested in capital assets
(original cost, net of accumulated depreciation, and capital-related
- Restricted represents the amount
of net assets for which limitations have been placed by creditors,
grantors, contributors, laws, and regulations. For example, school
districts that account for food services within an enterprise
fund may have restrictions related to certain proceeds or commodities
imposed by the USDA. Internal actions through enabling legislation
and constitutional provisions may also lead to restricted net
- Unrestricted is the amount of
net assets that is not restricted or invested in capital assets,
net of related debt.
The difference between an entity's assets and liabilities in the Statement
of Net Assets represents its net assets. Net assets have three components:
Table 3 defines each component.
- Invested in capital assets, net of related
- Restricted net assets
- Unrestricted net assets
3. Net Asset Classification
in Capital Assets, Net of Related Debt
All capital assets (including restricted capital assets) net
of accumulated depreciation and reduced by outstanding balances
of debt relating to the acquisition, construction, or improvement
of these assets
If the entity has
capital assets but no related debt, the account should be
titled "invested in capital assets" so that readers are not
Net assets on which limitations have been placed by creditors,
grantors, contributors, laws, and regulations of other governments.
Also, internal actions may lead
to restricted net assets in some cases such as constitutional
provisions or enabling legislation.
All other net assets not included in the "Invested in capital
assets, net of related debt" category or the "Restricted net
may not be shown in this statement.
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The accounting and financial reporting
for revenues within a governmental entity is determined by the economic
substance of the underlying transactions. Generally accepted accounting
principles have established criteria for recognition based on the
classification and characteristics of the transaction.
Within governmental entities, transactions may
be classified as either exchange (or exchange-like) transactions
or nonexchange transactions. Exchange transactions are those in
which the parties involved give up and receive essentially equal
values. Within a commercial enterprise, transactions between businesses
and their customers meet this definition. Within a proprietary fund
of a governmental entity, fees or charges made for goods or services
represent exchange transactions.
Although similar to exchange transactions, exchange-like
transactions represent situations in which the values exchanged
may not be equal or the direct benefits may not be exclusively for
the parties involved in the transaction. Examples include permits
and professional or regulatory licensing fees.
To clarify and expand existing guidance in the
accounting and financial reporting of nonexchange transactions within
governments, GASB issued Statement 33, Accounting and Financial
Reporting for Nonexchange Transactions, and Statement 36, Recipient
Reporting for Certain Shared Nonexchange Revenues (an amendment
of Statement 33). These standards establish recognition criteria
for nonexchange transactions reported on the accrual basis or the
modified accrual basis of accounting.
Statement 33 describes four classifications of
For both government-mandated nonexchange transactions
and voluntary nonexchange transactions, revenues and receivables should
be recognized when all eligibility requirements have been met. For
revenues accounted for on a modified accrual basis, the criteria are
extended to include the availability of the resources.
- Derived tax revenues result from assessments
imposed on exchange transactions, such as income taxes and sales
taxes. Derived tax revenues and the related receivables normally
should be recognized when the underlying transaction occurs with
the criteria extended to include the availability criteria for
revenues accounted for on the modified accrual basis.
- Imposed nonexchange revenues result from assessments
imposed on nongovernmental entities, other than assessments on
exchange transactions. Property taxes, ad valorem taxes on personal
property, and fines are common examples. A receivable is usually
recognized at the time an enforceable legal claim arises. Imposed
nonexchange revenues should be recognized in the first period
in which the use of the revenues is permitted or required. For
imposed nonexchange revenues accounted for on a modified accrual
basis, recognition also depends on the availability of the resources.
- Government-mandated nonexchange transactions
occur when a government at one level provides resources to a government
at another level and requires the recipient to use them for a
specific purpose in accordance with the provider's enabling legislation.
An example is the federal funds provided for food and nutrition
programs in school districts.
- Voluntary nonexchange transactions result from
legislative or contractual agreements, other than exchanges, entered
into willingly by two or more parties. Certain grants and entitlements
and most donations are examples of this type of transaction. Frequently,
purpose restrictions and eligibility requirements are established
by the provider.
GASB Codification Section 1600.106 states that revenues in governmental
funds and other governmental fund financial resource increments
are recognized using the modified accrual basis of accounting when
they are susceptible to accrual, which means they must be both measurable
and available. Revenues are measurable when the amount of the revenue
is subject to reasonable estimation. To be available, revenues must
be subject to collection within the current period, or after the
end of the period, but in time to pay liabilities outstanding at
the end of the current period.
Revenues in the proprietary funds are recognized
using the accrual basis of accounting, (i.e., in the period in which
they are earned). They are classified either as operating or nonoperating
revenues. Operating revenues are generated by the primary activity
of the fund. Conversely, nonoperating revenues are not generated
by the primary activity of the fund, but by other means, such as
through grants or interest earnings.
Governmental entities account for a variety of
revenues that generally may be presented in the financial statements
of governmental funds in three broad categories.
Proprietary fund revenues include charges
for services, charges to other funds for services rendered, and grant
- Local and intermediate sources are
those revenues that are collected from the citizens of the district's
service area and governmental and nongovernmental entities both
within and outside the school district. Such revenues include
property taxes, tuition, and interest income.
- State revenues are those revenues
received from the state, excluding funds passed through the state
from the federal government. Such revenues include state grants
and state education foundation funding.
- Federal revenues are those revenues
received from the federal government or its agencies either directly
or through the state. Such revenues are primarily from federal
GASB Statement 34 introduces a number of new reporting concepts
for revenues in the governmentwide statements. Essentially, revenues
must be classified as either program or general revenues on the
Statement of Activities. The following sub-section outlines the
basic reporting criteria established for revenues.
Program revenues are revenues that are directly attributable to
a specific functional activity. GAAP requires these revenues to
be presented separately in the appropriate functional areas, providing
a calculation of net expense for each activity. This net expense
often represents the level of support required from the government's
own resources. Program revenues include fees collected from those
who benefit from the program, grants, and other contributions required
by the resource provider to support a specific activity.
Program revenues are reported on the Statement
of Activities in the following three categories, if applicable:
Program revenues are reported at gross amounts.
The Statement of Activities also reports program expenses net of applicable
program revenues. GASB Statement 37 clarified that difference captions
and additional categories for program revenues may be used.
- Charges for services are revenues
that arise from charges to customers or applicants who purchase,
use, or directly benefit from the goods, services, or privileges
provided. Examples are rental fees for school buses or facilities,
athletic participant or spectator fees, summer school tuition,
or library fines.
- Program-specific operating grants and
contributions are revenues that occur from mandatory and
voluntary nonexchange transactions with other governments, organizations,
or individuals that are restricted for use in a particular program.
An example is a business grant to provide a scholarship for staff
- Program-specific capital grants and contributions
are grants and contributions that consist of capital assets
or resources that are restricted for capital purposes, such as
purchasing, constructing, or renovating capital assets associated
with a specific program. These revenues should be reported separately
from grants and contributions that may be used either for operating
or capital expenses at the judgment of the reporting government.
An example is a grant to purchase a school bus.
All revenues are general revenues unless they are required to be
reported as program revenues. General revenues are reported in the
governmentwide statement of activities after program revenues have
been subtracted from functional expenses.
Classification of Revenues
Programs are financed from essentially four sources (see table
- Type A. Those who purchase, use,
or directly benefit from the goods or services of the program
- Type B. Parties outside the reporting
- Type C. Taxpayers (regardless
of whether they benefit from a particular program)
- Type D. The governmental institution
itself (primarily investment income)
Classification of Revenues
||Yes, if restricted
||Yes, if unrestricted
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GASB Codification Chapter 1600.116 defines expenditures as decreases
in net financial resources. In governmental funds, the recognition
of expenditures occurs in accordance with the modified accrual basis
of accounting. Expenses incurred in proprietary funds are recognized
using the accrual basis of accounting. Therefore, significant differences
exist between the recognition of expenditures in governmental funds
and the recognition of expenses by proprietary funds.
In governmental funds, expenditures are usually
recognized in the accounting period in which the goods or services
are received and the liability for payment is incurred. However,
in instances when current financial resources are not reduced as
a result of the incurrence of a liability, an expenditure is not
recorded. A common example is the liability for compensated absences
(e.g., employee sick and vacation pay). Such liabilities result
from current services received from employees; however, the payment
of the liabilities usually does not occur until a future date. As
a result, compensated absences relating to employees whose salaries
are accounted for in governmental funds are not recorded as expenditures
and liabilities of the fund until the due date for payment of the
compensated absences. GASB Interpretation No. 6 clarifies the guidance
for recognizing certain liabilities and expenditures in governmental
funds, including general long-term indebtedness such as compensated
absences. The matured portion of long-term indebtedness, to the
extent it is expected to be liquidated with expendable available
financial resources, should be recorded as a fund liability and
expenditure. The unmatured portion of the long-term indebtedness
represents a general long-term liability to be presented in the
governmentwide financial statements.
Types of Expenditures and Accounting
The major types of expenditures are operating, capital, debt service,
and intergovernmental charges. Operating expenditures for
governmental agencies include a wide range of expenditures. Often
the largest portion relates to payroll and related employee benefits.
The modified accrual basis of accounting requires that proper accruals
are made for the amount of unpaid salaries and related benefits
earned by employees at year-end because these liabilities will be
paid early in the next reporting period.
The other types of operating expenditures should
be accounted for in the same manner, with the recording of a liability
when the goods or services are received and necessary accruals made
In addition, transfers result in the reduction
of a fund's expendable resources, but they are not classified as expenditures.
A transfer is a legally authorized movement of monies between funds
in which one fund is responsible for the receipt of funds and another
fund is responsible for the actual disbursement. In a transfer, the
disbursing fund records the transaction as "Other Financing Uses"
of resources and not as an operating expenditure, whereas the fund
receiving the transfer does not record the receipts as revenue but
rather as "Other Financing Sources" of funds.
- Capital expenditures relate to
the acquisition of capital assets. Such expenditures may be recorded
in the General Fund, Special Revenue Funds, or Capital Projects
Funds, depending on the source of funding. Purchases of personal
property, such as furniture and equipment, are usually recorded
as expenditures in the General Fund if they are financed from
operating budgets or in special revenue funds if they are financed
from grants. Major projects, such as the construction of a school
building financed by the proceeds of debt, should be accounted
for in a Capital Projects Fund. Costs associated with acquiring
capital assets in governmental funds are recorded as capital outlay
expenditures when the liability is incurred, usually on receipt
of the related asset.
- Debt service expenditures represent
the payment of principal and interest needed to service debt.
Such payments are usually recorded as expenditures in the Debt
Service Fund on the due date. The General Fund may also be used
if a Debt Service Fund is not required. The modified accrual basis
of accounting provides that accruals for interest are not usually
allowed. When funds have been transferred to the Debt Service
Fund in anticipation of making debt service payments shortly after
the end of the period (no more than 30 days), it is acceptable
to accrue interest and maturing debt in the Debt Service Fund
in the year the transfer is made. This option is available only
if monies are legally required to be set aside in a Debt Service
Fund and if used on a consistent basis.
- Intergovernmental charges relate
to the transfer of resources from one school district to another,
to or from other local governments, or to or from the state. Examples
of such charges include contracted instructional services between
public schools, other local governments, or state-operated schools
and certain transfers of resources associated with state and local
funding (e.g., incremental costs associated with wealth redistribution).
Such expenditures are accounted for in the General Fund using
the modified accrual basis of accounting. In addition, payments
between school districts and fiscal agents of cooperative services
arrangements (e.g., joint instructional or servicing agreements)
are also considered intergovernmental charges.
Expenses are defined as the outflows or expiration of assets or
the incurrence of liabilities during a period from providing or
producing goods, rendering services, or carrying out other activities
that constitute the entity's primary operations.
Proprietary funds recognize expenses using the
accrual basis of accounting (i.e., when the related liability is
incurred) without regard for the timing of the payment. This recognition
criterion is consistent with the following guidelines discussed
in Financial Accounting Standards Board (FASB) Concepts Statement
No. 5. Although FASB Concepts Statements do not represent authoritative
guidance for governments, the discussion is useful in classifying
expense transactions within proprietary funds.
As examples, the major types of governmental
expenditures are accounted for differently in proprietary fund expenses
- Associating cause and effect. Some
expenses (such as the cost of goods sold) are recognized on recognition
of revenues that result directly and jointly from the same transactions
or other events as the expenses.
- Systematic and rational allocation.
Some expenses (such as depreciation and insurance) are allocated
by systematic and rational procedures to the periods during which
the related assets are expected to provide benefits.
- Immediate recognition. Many expenses
(such as selling and administrative salaries) are recognized during
the period in which cash is spent or liabilities are incurred
for goods or services that are used up either simultaneously with
acquisition or soon after.
- Capital. Capital asset acquisition
in proprietary funds is accounted for using the flow of economic
resources method. Amounts disbursed for the acquisition of capital
assets are not recorded as an expense. Instead, the appropriate
property, plant, or equipment asset account is debited on the
purchase. Depreciation expense is recorded to reflect the allocation
of the cost of the assets to operations over the service life
of the asset.
- Debt service. Principal payments
on debt do not represent expenses for proprietary funds, but rather
are recorded as a reduction of the obligation. Payments of interest
represent expenses to be accounted for on the accrual basis of
accounting. Accrual of interest at year-end is usually necessary
to reflect the proper amount of expense for the period.
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Governmental entities are required to present
the governmentwide financial statements on the accrual basis of
accounting. Thus, the Statement of Activities reflects the expenses
of the entity for the reporting period. Entities are required to
report all expenses by activities and programs (by function), except
certain indirect expenses, as explained below. GASB has defined
direct expenses as those that are specifically associated with a
service, program or department and thus are clearly identifiable
to a particular function. Direct expenses include both operating
and nonoperating expenses, including depreciation and amortization
Functions, such as general administration or
data processing services, may include indirect expenses of other
functions. Governmental entities are not required to allocate indirect
expenses to other functions, but may choose to do so. If indirect
expenses are allocated, direct and indirect expenses should be presented
in separate columns. A column totaling direct and indirect expenses
may be presented, but is not required. Indirect expenses may be
allocated to any of the primary government's functions. Although
there are no standards for determining an allocation methodology,
there should be a reasonable basis for expense allocations.
Depreciation expense should be included in the
statement of activities as follows:
The difference between a "shared" capital
asset and one that "essentially serves all functions" is the number
of functions involved. As the number of functions increases, the ease,
practicality, and usefulness of assigning depreciation to those functions
decreases. Therefore, the depreciation of assets that serve many,
or essentially all, functions is not required to be included in the
direct expenses of those functions. A shared capital asset is generally
used by only a few functions, and its use can be specifically identified
to those functions.
- Capital assets that can specifically
be identified with a function. Depreciation should be
included in the direct expenses of that function.
- "Shared" capital assets. Depreciation
should be prorated as direct expenses of the appropriate functions
on some reasonable allocation basis.
- Capital assets that essentially serve
all functions. Depreciation is not required to be included
in the direct expenses of the various functions but may be reflected
as a separate line captioned "unallocated depreciation" in the
Statement of Activities or as part of the general government function.
If an entity chooses to use a separate line in the Statement of
Activities to report unallocated depreciation expense, it should
clearly indicate in the footnotes to the financial statements
that this line item does not include direct depreciation expenses
of the other functions. Because school buildings often serve multiple
functions, many school districts are reporting the depreciation
as "unallocated depreciation" for these assets.
- General infrastructure assets. Depreciation
should not be allocated to the various functions, but should be
reported as a direct expense of the function that the reporting
government normally associates with capital outlays or as a separate
line in the Statement of Activities.
- Interest expense. Interest on
general long-term liabilities, including interest on capital leases
or other vendor financing arrangements, should be considered an
indirect expense. Interest on long-term debt should be included
in direct expenses only when borrowing is essential to the creation
or continuing existence of a program.
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