Fund types: governmental, proprietary and fiduciary funds and the major fund test

• Classify an activity into the correct fund category and fund type
• Apply the three enterprise fund criteria in Statement 34 paragraph 67
• Calculate the major fund test for governmental and enterprise funds
• Evaluate whether an internal service fund is the right vehicle for an activity

Why governments use funds

A fund is a fiscal and accounting entity with a self-balancing set of accounts, set up to track resources that come with legal or policy limits on how they are spent. Fund reporting lets a council, a grantor or a bondholder see that dedicated money went where it was supposed to go. Statement 34 paragraph 63 sets the three categories and the fund types inside them, and Statement 84 later replaced agency funds with custodial funds.

Governmental funds

Governmental fund reporting focuses on the sources, uses and balances of current financial resources and often has a budgetary orientation. The five types:

• General fund: the main operating fund. It is always a major fund.
• Special revenue funds: under GASB 54, proceeds of specific revenue sources that are restricted or committed to purposes other than debt service or capital projects. The restricted or committed inflows must be expected to make up a substantial portion of the fund's inflows.
• Capital projects funds: resources restricted, committed or assigned to acquiring or building capital assets.
• Debt service funds: resources restricted, committed or assigned to paying principal and interest.
• Permanent funds: resources legally restricted so that only earnings, not principal, may be used for the government's own programs, such as a public cemetery perpetual care fund.

Proprietary funds

Proprietary fund reporting focuses on operating income, changes in net position, financial position and cash flows. There are two types.

Enterprise funds may report any activity that charges external users a fee. Under paragraph 67 an activity must be reported as an enterprise fund if any one of these is true, judged in the context of its principal revenue sources:

1. It is financed with debt secured solely by a pledge of the net revenues from its fees and charges.
2. Laws or regulations require its costs, including capital costs, to be recovered through fees and charges rather than taxes.
3. Its pricing policies set fees and charges designed to recover its costs, including capital costs.

Internal service funds report activities that provide goods or services to other funds, departments or governments on a cost-reimbursement basis, such as fleet maintenance or self-insurance. Paragraph 68 allows one only if the reporting government is the predominant participant; otherwise the activity is an enterprise fund. Internal service funds are not subject to the major fund test, and in the government-wide statements their balances are folded mostly into governmental activities.

Fiduciary funds

Fiduciary funds report resources held for others that cannot support the government's own programs. The four types are pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds and custodial funds. Lesson 12 covers the Statement 84 tests that decide whether an activity is fiduciary at all.

The major fund test

Paragraph 76 requires each major fund to be shown in its own column, with nonmajor funds combined in one column. The general fund is always major. Any other governmental or enterprise fund is major when the same element (total assets, liabilities, revenues, or expenditures/expenses, excluding unusual or infrequent items) of that fund meets both of these tests:

• at least 10 percent of the total for all funds of its category (all governmental funds, or all enterprise funds), and
• at least 5 percent of the total for all governmental and enterprise funds combined.

Management may also report any fund as major if it believes the fund is particularly important to users. Run the test every year, on the current year's audited numbers, and keep the calculation in the file: a fund that becomes major changes the opinion units and the materiality levels you set. The fund accounting guide compares this structure to not-for-profit net asset classes.

Common errors

• Reporting a utility that recovers its costs through rates in the general fund.
• Using an internal service fund when outside entities are the main customers.
• Running the 10 percent test on revenues and the 5 percent test on expenditures. Both tests must use the same element.
• Dropping a fund to nonmajor the first year it falls below the thresholds without asking whether officials want to keep it major for consistency or public interest, which paragraph 76 allows.

Major fund test for the City of Pine Hollow