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Financial Accounting for Local and State School Systems: 2009 Edition
NCES 2009-325
June 2009

Chapter 5: Financial Reporting — Fund Balance/Net Assets

Fund Financial Statements

Within governmental funds, equity is reported as fund balance; proprietary and fiduciary fund equity is reported as net assets. Fund balance and net assets are the difference between fund assets and liabilities reflected on the balance sheet or statement of net assets. Because of the current financial resources measurement focus of governmental funds, fund balance is often considered a measure of available expendable financial resources. This is a particularly important measure in the general fund because it reflects the primary functions of the government and includes both state aid and local tax revenues. The relative amount of unreserved fund balance reflected in the general fund is used by rating agencies as a measure of the financial strength of the government. Declines in the amount of unreserved fund balance may signal deterioration in the financial condition of the entity.

Governmental fund balances are categorized as follows:

  • reserved; and
  • unreserved (designated and undesignated).

Reserved Fund Balances
Reservations of fund balance should be used in governmental financial reporting to identify the portion that is

  • not available for appropriation or expenditure (e.g., reserve for inventories, reserve for long-term receivables); and/or
  • legally earmarked by external parties or entities for a specific future use (e.g., funds with a legal restriction on the use of assets, such as reserve for encumbrances).

The amount and nature of the reservation of fund balance should be disclosed on the face of the financial statements. The description may need to be supplemented by disclosure in the notes to the financial statements.

Examples of reservations of fund balance are as follows:

  • inventories;
  • debt service;
  • endowments;
  • prepaid items;
  • outstanding encumbrances;
  • construction; and
  • federal and state programs (where the funds have met the available criteria, as well as any other provider provisions that may be required, but have not yet been expended).

The aggregate fund balance in the debt service fund is legally reserved for the payment of bonded indebtedness and is not available for other purposes until all bonded indebtedness is liquidated. The fund balance of the capital projects fund reflects an amount designated for construction and major renovation projects, and it usually represents unexpended proceeds from the sale of bonds that have restricted uses. However, in all instances in which the name of the fund communicates the legal segregation, the fund balance should be reported as unreserved.

Unreserved Fund Balances
Unreserved fund balance is the difference between total and reserved fund balance. It has two components: designated and undesignated. The unreserved fund balance of the general fund represents the balance available for legal appropriation and general operating expenditures.

Prudent financial management requires accumulating a sufficient undesignated, unreserved fund balance in the general fund representing expendable financial resources available to meet the net cash outflows during the fiscal year.

Designated, Unreserved Fund Balances. Portions of fund balance may be designated by management to reflect tentative plans or commitments of governmental resources. Designations generally reflect school board action to earmark the balance for purposes that will be fulfilled at a later time, but specific school board action is not required. Designations represent planned actions rather than actual commitments. Because they typically arise from internal actions (management decisions) rather than actions external to the entity (encumbrances), designations are reported as part of unreserved fund balance.

The amount and nature of the designation should be explained in a separate line of the balance sheet, parenthetical comment, or note to the financial statements. Designations may be related to construction or other capital expenditures, claims and judgments, or self-insurance contingencies.

Undesignated, Unreserved Fund Balances. Undesignated, unreserved fund balance is the difference between total fund balance and the portion that is reserved and designated. This is the balance available for legal appropriation and expenditure if a government budgets on a GAAP basis for its governmental funds.

Within proprietary and fiduciary fund statements of net assets, net asset balances are classified into the following three components:

  • Invested in capital assets, net of related debt represents the net amount invested in capital assets (original cost, net of accumulated depreciation, and capital-related debt).
  • Restricted represents the amount of net assets for which limitations have been placed by creditors, grantors, contributors, laws, and regulations. For example, school districts that account for food services within an enterprise fund may have restrictions related to certain proceeds or commodities imposed by the USDA. Internal actions through enabling legislation (which is legally enforceable) and constitutional provisions may also lead to restricted net assets.
  • Unrestricted represents the amount of net assets that is not restricted or invested in capital assets, net of related debt.

Government-Wide Financial Statements: Statement of Net Assets

The difference between an entity's assets and liabilities in the statement of net assets represents its net assets. Net assets have the following three components:

  • invested in capital assets, net of related debt;
  • restricted net assets; and
  • unrestricted net assets.

Exhibit 5 defines each component.