Question

why there is a need for such a classification of governmental fund balances? Justify your answer with supportive examples.

Answer 1

Needs for Classifying Fund Balance-

• To Determine the nonspendable fund balance before classifying other fund balance components.
• To Determine the spendable components (restricted, committed, assigned and unassigned) by using the Comptroller’s Manual of Accounts and relevant statutes to analyze the funds. In many states the o majority of funds are created by the Legislature for a specific purpose.
• In the uncommon situation where funds are created for multiple purposes, an agency determines the spendable components based on the categorization of inflows and the agency’s spending policy on whether restricted or unrestricted amounts are spent first when both are available. If no policy exists for the order of the use of unrestricted resources, the default order is:
  1. Committed
  2. Assigned
  3. Unassigned
• Restrictions can be imposed by enabling legislation, provided the enabling legislation meets the following criteria:

• The legislation authorizes the agency to levy, assess or charge external resource providers.
  –AND–
• The legislation includes a legally enforceable requirement that the resources be used for a particular purpose specified in the same legislation (that is, the same legislation that creates the revenue source also creates the use restriction).

The enabling legislation criteria are not met if any one of the following conditions is present. In these instances, classify the fund balance as committed rather than restricted.

• The use restriction is imposed unilaterally by legislation separately from the legislation that created the revenue source.
• The allocation or earmarking of existing resource inflows by separate legislation.
• The use of constraints is not legally enforceable.
• Amounts may be redeployed for other purposes with appropriate due process.

There are currently no fund balances for agencies that meet the “restricted by enabling legislation” requirements.

• There is No need to report negative (deficit) restricted, committed or assigned balances. If the total fund balance is negative, a fund balance allocation transaction must be entered to USAS to reclassify the negative fund balance to the unassigned fund balance GL 2325. Categorizing a positive (surplus) fund balance as assigned cannot result in a negative (deficit) unassigned fund balance.
• Only general revenue fund 0001 can report a positive (surplus) unassigned fund balance. All other governmental funds must be reported at least at the assigned fund balance level.
• Restricted, committed or assigned fund balances cannot be greater than the total fund balance.
• A negative unassigned fund balance can only be reported if the total fund balance is negative, and only after all other fund balance classifications are exhausted.

Fund Balance Allocation Examples

The following examples illustrate the classification of fund balance in governmental funds.

Example 1

A GR-Dedicated fund (FT01) has a deficit income summary (current year expenditures exceeded current year revenues), resulting in a negative unassigned fund balance. Since the GR-Dedicated fund is classified as fund type FT01, USAS automatically closes income summary to the unassigned GL 2325. Fiscal year-end fund balances are:

Fund Balances (Deficits):
Restricted	$  100.00
Committed	150.00
Assigned	175.00
Unassigned	(75.00)
Total Fund Balances	$  350.00

Because a positive assigned fund balance cannot be reported with a negative unassigned fund balance, and a negative unassigned fund balance can only be presented if the total fund balance is negative — record an adjustment in USAS to allocate the unassigned fund balance of $(75.00) to the assigned fund balance. Once the allocation transaction processes, fiscal year-end fund balances are:

Fund Balances (Deficits):
Restricted	$  100.00
Committed	150.00
Assigned	100.00
Unassigned	0.00
Total Fund Balances	$  350.00

Example 2

Example 2 uses the same scenario as in Example 1, except the assigned fund balance is insufficient to absorb the entire negative unassigned fund balance. Fiscal year-end fund balances are:

Fund Balances (Deficits):
Restricted	$  100.00
Committed	150.00
Assigned	175.00
Unassigned	(200.00)
Total Fund Balances	$  225.00

To correct these fund balances:

1. Eliminate the assigned fund balance by allocating it to the unassigned fund balance. This leaves $(25.00) in the unassigned fund balance.
2. Eliminate the remaining ($25.00) by allocating the amount from the committed fund balance to the unassigned fund balance.

Once all USAS allocation transactions process, fiscal year-end fund balances are:

Fund Balances (Deficits):
Restricted	$  100.00
Committed	125.00
Assigned	0.00
Unassigned	0.00
Total Fund Balances	$  225.00

Example 3

In the scenario below, rather than a positive (surplus) total fund balance as in Example 1, the income summary for the current fiscal year creates a negative (deficit) total fund balance:

Fund Balances (Deficits):
Restricted	$  100.00
Committed	150.00
Assigned	175.00
Unassigned	(500.00)
Total Fund Balances	$   (75.00)

To correct these fund balances, process a USAS entry to eliminate the negative unassigned fund balance by allocating resources from the other fund balance classifications. Because the total fund balance is negative, there will still be a negative unassigned balance. Once all allocation transactions process, fiscal year-end fund balances are:

Fund Balances (Deficits):
Restricted	$     0.00
Committed	0.00
Assigned	0.00
Unassigned	(75.00)
Total Fund Balances	$  (75.00)

Example 4

If an agency has a fund that does not close to the unassigned fund balance, the fund balance allocation process is different.

For example, the income summary for special revenue funds (FT02) automatically closes to restricted fund balance GL 2310. If the total fund balance is positive, a surplus or deficit balance in the unassigned fund balance is not allowed. The fund balance is reported as a restricted fund balance.

Example 5

However, if the total fund balance is negative, allocation entries are required to reclassify the fund balance from restricted to unassigned — since the restricted fund balance cannot report a negative amount.

Fiscal year-end fund balances are:

Fund Balances (Deficits):
Restricted	$ (250.00)
Total Fund Balances	$ (250.00)

Process a USAS entry to allocate the negative restricted fund balance to the unassigned fund balance. Once all allocation transactions process, fiscal year-end fund balances are:

Fund Balances (Deficits):
Restricted	$      0.00
Unassigned	(250.00)
Total Fund Balances	$ (250.00)

Thanks & all the best................