Fund balance classifications under GASB 54

• Classify governmental fund balance into the five GASB 54 categories
• Determine whether a stabilization arrangement qualifies as committed or restricted
• Apply a spending order policy when restricted and unrestricted amounts are both available
• Design procedures that test the authority behind each constraint

The hierarchy

GASB Statement No. 54 classifies governmental fund balance by how strongly the government is bound to observe constraints on how the resources are spent. The categories, from most to least constrained:

1. Nonspendable: amounts that cannot be spent because they are not in spendable form (inventories, prepaid items, long-term receivables) or are legally or contractually required to be maintained intact, such as the principal of a permanent fund.
2. Restricted: amounts that can be spent only for purposes stipulated by constitution, external resource providers (creditors, grantors, other governments) or enabling legislation.
3. Committed: amounts that can be used only for purposes determined by a formal action of the government's highest level of decision-making authority, such as an ordinance of the council. Removing or changing the commitment takes the same type of action.
4. Assigned: amounts the government intends to use for specific purposes that are not restricted or committed. The intent can be expressed by the governing body or by an official or body it has delegated. In funds other than the general fund, assigned is the remaining positive amount not restricted or committed.
5. Unassigned: the residual classification for the general fund. In other governmental funds it is used only for a deficit that results from spending more than the restricted, committed or assigned amounts.

Timing of commitments

The formal action that commits fund balance must occur before the end of the reporting period. The amount may be determined after year end, but the action itself cannot. A resolution adopted in August cannot commit June 30 fund balance. Ask for the minutes and agree the adoption date.

Stabilization arrangements

Many governments keep a rainy-day or budget stabilization amount. GASB 54 treats stabilization as a specific purpose. It is reported as restricted or committed in the general fund only if the constraint meets those definitions and the formal action describes the specific circumstances that allow spending, and those circumstances are not expected to occur routinely. The Statement gives two examples that fail: an amount that can be used "in an emergency," because the term is too vague, and an amount to offset an "anticipated revenue shortfall," unless the shortfall is quantified and distinguishable from ordinary shortfalls. Arrangements that fail are reported as unassigned in the general fund. Required disclosures cover the authority, the conditions for use and the balance.

Spending order policy

When an expenditure qualifies for more than one class, the government applies its accounting policy on which amounts are spent first, for example restricted before unrestricted. Within unrestricted fund balance, a government with no policy treats committed amounts as spent first, then assigned, then unassigned (GASB 54 paragraph 18). The policy must be disclosed, and the auditor checks that year-end classifications follow it.

Fund type definitions

GASB 54 also tightened the governmental fund definitions. A special revenue fund must be built on one or more specific revenue sources that are restricted or committed, and those sources must be expected to remain a substantial portion of the fund's inflows. A fund supported mainly by general fund transfers does not qualify and is reported in the general fund.

Audit procedures

• Obtain the governing body's resolutions and ordinances and agree each committed amount to an action adopted before year end.
• For restricted amounts, read the grant agreement, bond covenant or enabling legislation and confirm the restriction is externally enforceable.
• For assigned amounts, confirm who holds the delegated authority and that the policy granting it was adopted by the governing body.
• Check that no fund other than the general fund reports positive unassigned fund balance.
• Recompute the classifications using the fund balance calculator; the GASB 54 audit guide lists more tests.

Classifying the Riverside general fund balance