In establishing a policy governing the level of unrestricted fund balance in the general fund, a government should consider a variety of factors, including: In any case, such measures should be applied within the context of long-term forecasting, thereby avoiding the risk of placing too much emphasis upon the level of unrestricted fund balance in the general fund at any one time. 6 Furthermore, a government’s particular situation often may require a level of unrestricted fund balance in the general fund significantly in excess of this recommended minimum level. 5 The choice of revenues or expenditures as a basis of comparison may be dictated by what is more predictable in a government’s particular circumstances. Nevertheless, GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures. Articulating these risks in a fund balance policy makes it easier to explain to stakeholders the rationale for a seemingly higher than normal level of fund balance that protects taxpayers and employees from unexpected changes in financial condition. For example, governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject to cuts in state aid and/or federal grants may need to maintain a higher level in the unrestricted fund balance. The adequacy of unrestricted fund balance in the general fund should take into account each government’s own unique circumstances. Nonetheless, financial resources available in other funds should also be considered in assessing the adequacy of unrestricted fund balance in the general fund.Īppropriate Level. In most cases, discussions of fund balance will properly focus on a government’s general fund. It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g., revenue shortfalls and unanticipated expenditures) and to ensure stable tax rates. The effect of these and other differences on the amounts reported as GAAP fund balance and budgetary fund balance in the general fund should be clarified, understood, and documented. For example, encumbrances arising from purchase orders often are recognized as expenditures for budgetary purposes, but never for the preparation of GAAP financial statements. Often the timing of the recognition of revenues and expenditures is different for purposes of GAAP financial reporting and budgeting.In such cases, GAAP fund balance includes amounts from all of the subfunds, whereas budgetary fund balance typically does not. The calculation of GAAP fund balance and budgetary fund balance sometimes is complicated by the use of sub-funds within the general fund.In contrast, budgetary fund balance, while it is subject to the same constraints on spending as GAAP fund balance, typically represents simply the total amount accumulated from prior years at a point in time. 2 The total of the amounts in these last three categories (where the only constraint on spending, if any, is imposed by the government itself) is termed unrestricted fund balance. GAAP financial statements report up to five separate categories of fund balance based on the type and source of constraints placed on how resources can be spent (presented in descending order from most constraining to least constraining): nonspendable fund balance, restricted fund balance, committed fund balance, assigned fund balance, and unassigned fund balance.1 While in both cases fund balance is intended to serve as a measure of the financial resources available in a governmental fund it is essential that differences between GAAP fund balance and budgetary fund balance be fully appreciated. Budget professionals commonly use this same term to describe the net position of governmental funds calculated on a government’s budgetary basis. In the context of financial reporting, the term fund balance is used to describe the net position of governmental funds calculated in accordance with generally accepted accounting principles (GAAP). Employment Resources for Finance Officers.Economic Development & Capital Planning.Accounting, Auditing, & Financial Reporting.Alliance for Excellence in School Budgeting.GFOA's Leadership Development Scholarship.
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