What Is Governmental Accounting Standards Board Statement 54?

The Governmental Accounting Standards Board (GASB) establishes accounting and financial reporting standards for U.S. state and local governments. It issued Statement No. 54 to address inconsistencies in financial reporting, as terms like “reserved” and “unreserved” were often applied differently and could be confusing. The statement’s goal was to create clearer, more consistent classifications for fund balances to provide a more transparent picture of a government’s financial position. This clarifies which resources are available for spending and which have constraints on their use. The requirements became effective for financial statements for periods ending after June 30, 2011.

Understanding Governmental Fund Balances

Governmental entities use a system of funds to manage their finances, acting as separate checking accounts for specific activities. These “governmental funds” track financial resources for most of a government’s basic services and allow governments to demonstrate compliance with legal or contractual requirements. Common governmental fund types include:

• General Fund: Accounts for all financial resources not required to be accounted for in another fund.
• Special Revenue Funds: Used for the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes.
• Capital Projects Funds: Track financial resources for the acquisition or construction of major capital facilities.
• Debt Service Funds: Account for the accumulation of resources for, and the payment of, general long-term debt principal and interest.
• Permanent Fund: Reports resources that are legally restricted to the extent that only earnings, not principal, may be used for purposes that support the government’s programs.

The term “fund balance” represents the difference between the assets and liabilities recorded in a governmental fund. It is a measure of the net financial resources available to be spent for the fund’s designated purpose. GASB Statement 54 fundamentally changed how this fund balance is reported by creating a more descriptive, five-category hierarchy.

The Five Fund Balance Classifications

GASB Statement 54 established a hierarchy of five classifications for reporting fund balances, based on the strength of the constraints controlling how amounts can be spent. The classifications are presented from most to least constrained, clarifying what resources are available for new spending.

The most constrained classification is Nonspendable fund balance. This category includes amounts that cannot be spent because they are not in a spendable form or are legally required to be maintained intact. Examples of non-spendable forms include inventories and prepaid amounts. The principal of a permanent fund is an example of an amount legally required to be maintained intact.

Restricted fund balance resources have constraints on their use that are externally imposed by creditors, grantors, contributors, or the laws of other governments. Constraints can also be imposed by law through constitutional provisions or enabling legislation. For instance, revenue from a motor fuel tax that state law requires be used for road maintenance is classified as restricted.

Committed fund balance includes amounts that can only be used for specific purposes determined by a formal action of the government’s highest level of decision-making authority, like a city council. This authority passes an ordinance or resolution to commit the funds. These self-imposed constraints are binding and cannot be changed unless the same formal action is taken to remove them.

Assigned fund balance represents amounts a government intends to use for specific purposes that do not meet the restricted or committed criteria. Intent can be expressed by the governing body or by a delegated official, such as a finance committee or city manager. Unlike committed funds, these designations do not require formal action by the highest decision-making authority.

Unassigned fund balance is the residual classification for the General Fund and includes all spendable amounts not in the other classifications. The General Fund is the only fund that can report a positive unassigned fund balance. In other governmental funds, a negative unassigned fund balance may be reported if expenditures exceed the amounts restricted, committed, or assigned for those purposes.

Application and Reporting Requirements

GASB Statement 54 requires governments to present the five fund balance classifications in hierarchical order on the balance sheet of their governmental funds. This presentation clarifies the nature of the available resources.

Governments must also provide details in the accompanying notes. A disclosure is required for the government’s policy on the order in which it spends funds when multiple classifications are available for the same purpose. For example, a policy might be to spend restricted funds first, followed by committed, then assigned, and finally unassigned resources. If no formal policy is adopted, GASB provides a default that assumes committed funds are spent first, then assigned, and then unassigned.

Governments must also disclose information about the specific purposes of their committed and assigned funds. For committed funds, the disclosure should describe the formal action taken to impose the constraint. For assigned funds, it should identify the body or official authorized to make assignments. Additionally, criteria for stabilization arrangements, often called “rainy day” funds, must be disclosed if they are reported as restricted or committed, detailing the conditions under which these funds can be accessed.