Andy Richards

The implementation of Statement 54 will likely cause certain state and local governments to change their accounting systems, including how fund balances are classified internally and which funds are used to report certain governmental activities. Statement 54 only impacts governmental fund types and does not change the current reporting standards at the government-wide level.

Statement 54 is effective for periods beginning after June 15, 2010, with early implementation encouraged. Governments required to implement Statement 54 should evaluate their current fund reporting structure to determine the necessary accounting system changes. Planning for the implementation of Statement 54 prior to or early in the fiscal year should minimize disruptions in the annual reporting process for the year of implementation.

New Standards for Fund Balance Reporting

Statement 54 creates a new, expanded hierarchy of fund balance classification, replacing the old method of reporting fund balances as either reserved or unreserved. Each new classification indicates a certain level of constraint on fund balance or its availability for use:

Nonspendable – Amounts that cannot be spent because they are associated with inventory, prepaid items, long-term loans and notes receivable, property held for sale and permanent fund corpus
Restricted – Amounts constrained by external parties, constitutional provision or enabling legislation
Committed – Amounts constrained by a government using its highest level of decision-making authority
Assigned – Amounts a government intends to use for a particular purpose
Unassigned – Amounts that are not constrained and will be reported in the general fund

Determining the appropriate classification for the beginning fund balances in the year of implementation likely will be difficult for governments that have not tracked their fund balances in sufficient detail in prior years. Therefore, governments should plan for the implementation of the new fund balance classifications before the annual reporting process begins.

New Fund Type Definitions

Statement 54 also clarifies the definitions of individual governmental fund types and interprets certain terms within the definition of special revenue fund types while further clarifying definitions within debt service and capital projects fund types. In addition, Statement 54 specifies how economic stabilization arrangements, or “rainy day” amounts, should be reported.

A key change to the special revenue fund type definition is that the foundation for a special revenue fund should be a restricted or committed revenue source, which is further defined in the Statement. This new definition of a special revenue fund initially appears less restrictive; however, it may be more restrictive for some governments, as the research resulting in the issuance of Statement 54 found that many governments’ special revenue funds do not comply with the current definition. Therefore, some resources currently reported in special revenue funds by some governments will be required to be reported in the general fund upon implementation of the new standards. Because moving resources to different funds for external financial reporting could affect where governments budget those resources in their system, governments should analyze the effect of implementing Statement 54 on their systems as early as possible.

In general, changes to the capital projects and debt service fund type definitions are less substantial and primarily reflect the change in the fund balance classifications.

Notes Disclosures

Statement 54 also provides new requirements for note disclosures about fund balances, including disclosures of the government’s policy regarding the order of spending restricted, committed, assigned and unassigned fund balances, details of stabilization arrangements and other fund balance policies the government has adopted. In planning for the implementation of Statement 54, governments should consider whether policies regarding fund balances need to be revised or adopted.

Please contact your BKD advisor if you have any questions about the impact of Statement 54 on your government’s financial statements.