The purpose of this policy is to establish and express the philosophy, guidelines and expectations of the Smithfield Town Council (Council) regarding and pertaining to compliance with the Governmental Accounting Standards Board Statement No. 54 ~ Fund Balance Reporting and Governmental Fund Type Definitions.
The Governmental Accounting Standards Board (GASB), an independent, not-for-profit organization founded in 1984, establishes and improves standards of accounting and financial reporting for U.S. state and local governments. Its standards guide the preparation of external financial reports of those entities. GASB statements are considered generally accepted accounting principles (GAAP) and must be followed in order to receive an unqualified opinion on financial statements.
The intent of GASB Statement No. 54 (GASB 54) is to enhance governmental fund balance reporting in order for financial statements to be more consistent and comparable (between similar governmental entities). Further, it is intended to eliminate the significant variation in how standards are applied; confusion about terminology; and the mismatch between what governments are reporting about fund balance and what users of financial statements actually need. Included is a clarification of governmental fund type definitions.
Under GASB 54, fund balance should be reported in classifications that:
“comprise a hierarchy based primarily on the extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent.”
GASB 54 became effective for periods beginning after June 15, 2010 and thus became effective for the Smithfield School Department for fiscal year ending June 30, 2011.
The School Committee concurs with the objectives, intent and spirit of GASB 54 and, by adopting this policy, will comply and conform to its requirements.
Fund Balance: The term “fund balance” describes the net assets (i.e., the difference between assets and liabilities) of governmental funds calculated in accordance with GAAP. Accountants distinguish up to five separate categories of fund balance, based upon the extent to which the government is bound to honor constraints on the specific purposes for which amounts can be spent:
Nonspendable Fund Balance: The amount of fund balance that cannot be spent because it is either (a) not in spendable form or (b) legally or contractually required to be maintained intact. The “not in spendable form” criterion includes items that are not expected to be converted to cash, e.g., inventories and prepaid amounts, and under certain circumstances long-term amounts of loans and notes receivable and property acquired for resale. The corpus (or principal) of an endowment or permanent fund is an example of an amount that is legally or contractually required to be maintained intact.
Restricted Fund Balance: The amount of fund balance that is restricted to specific purposes, i.e., when constraints placed on the use of resources are either:
(a) Externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or
(b) Imposed by law through constitutional provisions or enabling legislation.
Committed Fund Balance: The amount of fund balance that can only be used for specific purposes pursuant to constraints imposed by formal action by the Smithfield School Committee. Committed amounts cannot be used for any other purpose unless the specific use is removed or changed by action of the School Committee. Formal action that commits fund balance to a specific purpose should occur prior to the end of the reporting period, but the amount which will be subject to the constraint, may be determined in the subsequent period.
Assigned Fund Balance: The amount of fund balance that is constrained by the School Committee’s approval and intent to be used for specific purposes, but is neither restricted nor committed.
Unassigned Fund Balance: The amount of fund balance (in the General Fund) that has not been assigned to other funds and has not been restricted, committed, or assigned to specific purposes within the general fund. It includes spendable amounts not subject to any intended use or constraint. Unassigned fund balance is the residual classification for the general fund and is available to be used for any purpose.
Special Revenue Funds: Special Revenue Funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. The term “proceeds of specific revenue sources” establishes that one or more specific restricted or committed revenues should be the foundation for a Special Revenue Fund. The substantial portion of the revenue sources or inflows cannot be a “transfer” of funds.
Capital Projects Funds: Capital Projects Funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets.
The revenue streams in all governmental funds will be reviewed and appropriately classified and reported in the financial statements beginning with fiscal year ending June 30, 2011 as determined by and in accordance with the definitions listed above.
Funds may be committed only by formal action of the Smithfield School Committee. Committed amounts will not be used for any other purpose unless the constraint is removed or the specified use changed by action of the School Committee. Formal action that commits fund balance to a specific purpose will occur prior to the end of the reporting period, but the amount which will be subject to the constraint, may be determined in the subsequent period.
Funds may be assigned and be designated and used for specific purposes by the School Committee. The School Committee may also unassign previously assigned funds.
ORDER OF EXPENDITURE OF FUNDS BY CLASSIFICATION
Expenditures may be incurred for purposes for which both restricted and unrestricted (committed, assigned, or unassigned) amounts are available. Composition of the ending fund balance will be determined by applying the following: In those instances where both restricted and unrestricted amounts are available, restricted amounts will be considered to have been spent first [as allowed and in compliance with stated and specified terms or requirements], followed by committed amounts, followed by assigned amounts, and then unassigned amounts.
CLASSIFICATION OF FUND BALANCE AMOUNTS
The fund balance amounts in all governmental funds will be reviewed and appropriately classified and reported in the financial statements beginning with fiscal year ending June 30, 2011 as determined by and in accordance with the definitions listed above.
MINIMUM ASSIGNED FUND BALANCE
An adequate level of unassigned fund balance is essential to mitigate current and future risks and to ensure service levels. Specifically, amounts are and will be held in unassigned fund balance for:
- Economic uncertainty (i.e., to cushion the School Department against fluctuations in revenues and costs due to economic conditions),
- Extreme events (i.e., allows the School Department to respond quickly and decisively to events such as natural disasters, catastrophic accidents, etc.),
- Working capital (i.e., to cushion the School Department against revenue shortfalls or expenditure fluctuations associated with routine Town business
FUNDING FUND BALANCE TARGET
Funding of the General Fund fund balance target, will come generally from one-time revenues, excess fund balance (e.g., unused or excessive assignments or commitments), and projected revenues in excess of projected expenditures.
USE OF RESERVES
It is the intent of the School Department to comply with a minimum 1.5% fund balance and to limit use of the General Fund unassigned balance in excess of the 1.5% minimum to address unanticipated, non-recurring needs or known and planned future obligations. Fund balances shall not normally be applied to recurring annual operating expenditures. Reserves may, however, be used to allow time for the School Department to restructure its operations in a deliberate manner, but such use will only take place in the context of an adopted long-term plan.
At the end of each fiscal year, the Business Manager will report on the audited year-end financial results. Should annual General Fund revenues exceed expenditures and encumbrances, a year-end operation surplus shall be reported. Any portion of the year-end operating surplus that contributes to the General Fund balances in excess of established fund balance policy shall remain as part of the fund balance or be deemed available for allocation to:
- replenish any other established fund balance targets or assignments or commitments, so as to meet target levels,
- re-appropriated to offset one-time shortfalls contributing to budget-year operating expenditures,
- re-appropriated to provide funding for the General Fund operating budget,
- transfer to the capital program fund for appropriation to capital improvement program budget and/or deferred maintenance needs.