Project Pages

Fund Balance Reporting—Project Plan

Project Description: The objectives of this project are to assess whether existing reporting requirements related to fund balance adequately meet the needs of financial statement users and to consider potential changes to improve the usefulness of fund balance information.

Background: This project originated after the completion of the Financial Reporting Model project, growing from concerns that some financial statement users were unclear about the distinctions between reserved and unreserved fund balances and the relationship between reserved fund balances and restricted net assets. Subsequently, an issue regarding the determination of net asset restrictions related to enabling legislation developed during the initial phase of implementing Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. The Board received feedback on a potential fund balances/net assets project as part of the GASAC’s agenda prioritization activities in 2002. The project was formally added to the GASB’s technical plan for the final third of 2002 as a current research project.

Accounting and Reporting Issues:

1. What decisions do users currently make based on fund balance information?

2. What type of information do users need about fund balances for their decision-making tasks? (This would include the general fund and other governmental funds.)

3. What components of fund balance do users need information about?

4. How would users prefer that fund balance information be presented to them (for example, display versus disclosure)?

Project History:

Background research was conducted during September and October 2003, and Board deliberations began in January 2004. In June 2004, however, the Board determined that additional research on fund balance was necessary and decided to separate the net asset and fund balance issues into separate projects.

The GASB’s research finds that there is substantial variation in the information that governments report about fund balance in the governmental funds. There is also evidence that a significant number of governments do not adequately understand the requirements for fund balance reporting under generally accepted accounting principles. Furthermore, there is considerable variation in the way that users interpret fund balance information and there is widespread confusion about the nature of the information and the GAAP reporting requirements. The Board believes that a fundamental review of the needs of users for fund balance information is necessary in order to determine whether the current standards are adequate.

Current Developments: The Board decided in June 2004 to establish a separate project on fund balance issues. The Board discussed various issues related to fund balance and net assets during five meetings prior to the fund balance project’s being established as a separate project. The Board reviewed and approved a research plan for studying user needs for fund balance information at its July 2004 meeting. That plan is described below.

Work Plan: The research could potentially be conducted in two stages. The first stage, nearing completion, employs open-ended questions in an interview or small-group setting. A variety of different types of users have been interviewed, including governmental researchers, legislators and legislative staff at both the state and local levels, oversight boards, bond insurers, bond raters, buy- and sell-side analysts, and so on.

That stage of the research is intended to garner insight into the purposes for which users utilize fund balance information and what they ideally would like that information to communicate in order to best meet their needs. Answers were sought to the research questions listed previously as accounting and reporting issues.

Depending on the results of the interviews, the information gathered in the first stage could be used to develop alternative approaches to categorizing and displaying/disclosing fund balance information. (Initial interviews were conducted in August 2004, with telephone interviews continuing into the early part of 2005.) If the interviews provide a sufficient basis for alternatives proposals, a survey will be developed and widely distributed to different kinds of users. The survey would solicit users’ preferences regarding which alternative would best suit their needs, as well as their explanations of how and why it best suits their needs.

The timeline below envisions research and deliberations leading to an Exposure Draft. However, if the Board believes that substantial changes should be made to the requirements for fund balance reporting, a Preliminary Views document may be a more appropriate medium.

Fund Balance Reporting—Recent Developments

Minutes of Meeting, August 9–11, 2005

The Board reviewed the history of the results of previous Board deliberations and proposals relative to modifications in the manner in which fund balance information is defined and presented. The staff issues paper discussed several alternatives that the Board could consider if the project were to proceed. The Board unanimously agreed to retain the project on the current agenda and after considering two additional alternatives, offered by Board members, decided to delay reaching a tentative conclusion on the scope and direction of the project until those additional approaches could be more fully developed and discussed. As a result, the staff was directed to prepare a paper for the September meeting to allow the Board to evaluate the pros and cons of the additional alternatives as they relate to the staff recommendation as presented in the current issues paper.

Minutes of Meeting, June 21–23, 2005

Dr. Gil Crain of Montana State University and staff presented the Board with a report that summarized the results of interviews he conducted with assistance from GASB staff during late 2004 and early 2005. Dr. Crain discussed the findings as presented in the report and the possible standards-setting implications of those findings for the Board to consider.

The Board members discussed the interview results and some of the possible directions the project could take. No decisions were reached, but the staff was asked to prepare an analysis of some alternative paths for the Board’s consideration at the August meeting. In the interim, the staff will also seek the advice and counsel of the GASAC at its July meeting.

Fund Balance Reporting—Major Tentative Decisions to Date

• A variety of different types of users have been interviewed, including governmental researchers, legislators and legislative staff at both the state and local levels, oversight boards, bond insurers, bond raters, buy- and sell-side analysts, and so on. This research is intended to garner insight into the purposes for which fund balance information is used and what users ideally would like that information to communicate in order to best meet their needs.

• A summary of the interview results was presented to the Board at the June 2005 meeting.

• The project staff is currently developing a proposal that would outline the scope of the project and a projected work plan. The plan will be developed in consideration of the results of the recent interviews and information obtained in previous interviews and surveys.

• The project proposal was discussed at the August 2005 meeting. The Board asked the staff to develop illustrations using three variations of proposed fund balance displays. The Board will discuss those illustrations at the September meeting.

Fund Balance Reporting—Relevant Links

Government Finance Officers Association