Quiz 3: Modified Accrual Accounting: Including the Role of Fund Balances and Budgetary Authority
The solution to this and the first exercise of Chapters 1 and 2 and 4 through 9 will differ from student to student assuming each has a different CAFR.
Fund balance is nothing but the difference between assets and liabilities in the governmental fund and hence, fund balance is as same as the equity balance reported by the government. However, fund balance should be reported in two part which is 1) reserved and 2) un-reserved. Reserved fund balance represents that the resource is being used for particular purpose and can be un-spent resource of the permanent funds whereas un-reserved fund balance can be used for any purpose that the government finds appropriate. However, fund balance section of the balance sheet is bound to report classification of fund in respect of which the fund is assigned. In the given situation where the city has general fund , Fund balance section of balance sheet for such fund balance is prepared as under. It may be noticed from the above statement that the Fund balance section of the balance sheet will be descriptive of fund meant or reserved for particular purposes and funds that are meant for emergency and other purposes. It may also be noted that there is an Un-assigned fund balance which is un-reserved in nature and can be utilised for any purpose the government of the city find appropriate. However, rainy day fund also have eventually classified under general fund as they are neither restricted or assigned to spend for any specific purpose and is available for any purpose. The purpose of such classification is to display thepurpose for which they are meant or reserved. However, it also potrays how effectively the local government manage the available resource and related activities. However, General fund will account for all financial resources not recognized and accounted for in another fund. That is why an Un-assigned Fund is classified under General fund. The city's reported General fund, however, has clearly identified the purpose for which they are meant to and hence Fund balance section of balance sheet prepared above is accordingly prepared.
Government will report fund balance under five classifications. They are as under. 1) Non-spendable fund balance, which means these funds are in the form of assets such as inventory or a corpus of endowment fund. 2) Restricted fund balance, which means these funds are meant for certain purpose and their resource is restricted to be utilized for such purpose only. 3) Committed fund balance, which means these funds are constrained and committed to be spent for specific purpose only. 4) Assigned fund balance, which means that the intent to utilize the fund is already communicated by the government for specific purpose and 5) Un-assigned fund balance, which means that these funds can be utilized for any purpose found to be appropriate. Thus, the fund balance will be reported under the above five categories only. Rainy day fund is kept aside to cover the economic shortfalls when expenditure is in excess of revenue. However, Governmental Accounting Standards Board (GASB) statement 54 clarifies by classifying rainy day fund as budget stabilization fund. These funds are, thus, kept aside to spend on unexpected or unforeseen situation and are intended to equalize resultant financial crisis. However, GASB Statement 54 also clarifies that rainy day funds may be classified as committed by resolution or ordinance under special circumstances and eventually rainy day fund which are available for emergencies or revenue shortfalls are not classified as committed unless determined so appropriately. Therefore, rainy day funds not covered by such circumstance shall be reported as unassigned fund balance in the General fund as classified by GASB statement 54 and as initially stated above.