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The changing face of governmental financial reporting.

The last three years have seen the most far-reaching changes in governmental financial reporting since the introduction of the integrated reporting model. These changes have primarily affected the reporting of financial position at both the fund and government-wide levels, as well as the inclusion of greater detail on the face of the financial statements. Since 2010, the balance sheets of governmental financial statements have been refined to show five enhanced constraint classifications for fund balances. Furthermore, all fund and government-wide presentations must now report two additional categories of financial position: deferred outflows and deferred inflows. For analysts, accountants, and auditors, these changes to governmental financial statements present challenges--not only in ensuring compliance with accounting standards, but also in understanding new interpretations of fair presentation.

Fund Balance Classifications

Prior to the implementation of GASB Statement 54, Fund Balance Reporting and Governmental Fund Type Definitions, governmental fund balances were generally reported and disclosed as "reserved," "unreserved," or "designated." Financial statement readers depended upon short descriptions of reserves and various disclosures to understand the limitations on the uses of fund balance. GASB Statement 54 mandated that financial statements classify governmental fund equity based on five levels of constraints--"nonspendable," "restricted," "committed," "assigned," and "unassigned"--that generally relate to the expended status of current assets, the external or internal sources of restrictions, or the absence of any constraints.

Nonspendable constraints. Governmental financial statements only display current assets. When a fund balance represents current assets that can no longer be spent, such as inventories and prepaid expenditures, the fund balance is classified as nonspendable. This allows financial statement users to easily see the fund balance amounts that are not available for expenditure at the government's discretion. The residual values of some of the government's assets, for example, are clearly shown as having already been spent on inventories or insurance.

Restricted classification. Constraints placed on a fund balance by sources external to the government are "restricted." These might include enacting legislation, bond covenants, or grants. For financial statement users, this means that fund equity in special revenue, debt service, and capital projects funds, for example, are clearly shown as available only for the purposes specified by the source of the funding.

Committed classifications. Constraints placed on fund balances by a local authority, such as the elected officials that make up a local government's governance board are "committed." The commitment classification shows that fund equity in a governmental fund has been set aside by a formal action from elected officials. The treatment of commitments of restricted balances raises a reporting nuance that requires the attention of both financial statement preparers and users: the commitment of restricted balances may be disclosed, but it will not be displayed on the face of the financial statements. The character of a restriction made by an external party reported in the financial statements will not change as a result of the board's actions. Elected officials may encumber a portion of the fund balance with a purchase order, and the fund balance is displayed as committed. But if the elected officials encumber a portion of a capital projects fund that is restricted by bond holders for construction, the fund balance remains restricted, and the encumbrance is disclosed.

Prior to GASB Statement 54, fund balances were "reserved" for different purposes. In the past, a reserve could show up anywhere, regardless of the underlying constraint. Thus, many believe that the changes under GASB Statement 54 have improved the clarity of the financial reporting.

Assigned funds and unassigned funds. Finally, assigned funds are constraints placed on a fund balance that might be used for a particular purpose, similar to a designation. When a local government's elected officials intend to set aside money without a binding, formal action by the governing board, it is classified as assigned. Unassigned funds indicate no constraint and represent the remainder after considering a fund balance with nonspendable, restricted, committed, and assigned amounts. Only the general fund should have unassigned funds.


With the changes under GASB Statement 54, financial statement users have access to more information and can look at transactions in a new way. Knowing the character of the constraints immediately reveals the actual flexibility that a government has over the use of the resources it manages and the amount of restricted funds available for specific purposes. GASB summarized the improvements realized by the pronouncements as the achievement of clearer fund balance classifications and improved consistency among them.

John Lord, CPA, a senior audit manager with the U.S. Government Accountability Office (GAO) and instructor for Becker Professional Education, observed that "these major changes add nuances to our presentations, starting with the fund financial statements. They've changed from something relatively binary to something more principles based." In a conversation with the author, he cited several experiences from his professional auditing position and examples that he regularly uses in instruction to illustrate the manner in which enhanced fund balance presentations demonstrate compliance with important public policy decisions:

Government financial statements, even for the smallest jurisdiction, can be a frightening array of funds that report mind-boggling amounts of money.... The citizen financial statement reader can be easily frustrated by the appearance of millions upon millions of dollars only to be told that a seemingly small priority, like a park, new recreational equipment or even a new stop sign cannot be funded.... Understanding the degree of a local government's discretion is crucial to meaningful interpretation of local government financial statements.... One of the major areas of financial resources in local government financial statements is debt-funded capital projects repaid with a pledge of special revenues.... A local government's bond issues are typically restricted by a bond indenture for use on specific projects.... The display of restricted fund balances in capital project funds makes the limited use of those funds very clear to financial statement users. And often, the debt service is paid with a pledge of taxes levied on specific activities like fuel purchases or tourist taxes recorded in special revenue funds. Restriction of the fund balance in the special revenue fund announces to financial statement readers that these funds are spoken for and the local government has little or no latitude to change that decision.... In other cases, governments may encumber funds based on commitments made in prior periods. Commitments for encumbered funds would typically be shown in the General Fund and, like restrictions, tell the financial statement reader that the resources of the government are spoken for, based on decisions made in the prior year. Reporting fund balance constraints is a crucial financial statement feature that communicates local discretion and funding priorities.

Changes to Balance Sheet Classifications

GASB introduced two additional classifications to the balance sheets of all basic financial statements: deferred outflows of resources and deferred inflows of resources. The concept of deferred outflows, which are not quite assets, and deferred inflows, which are not quite liabilities, provides financial statement users with more refined information regarding both fund and government-wide financial position. Transactions that would otherwise have been buried on the balance sheet or not displayed at all are now reported in these separate categories or given revised treatment

GASB had been systematically looking at the treatment afforded to a variety of unusual transactions and ultimately classified them as either deferred outflows or deferred inflows. This revised approach to reporting is significant for both auditors and accountants who must ensure compliance with accounting principles in evaluating the presentation of the financial statements. Analysts must know how to interpret this additional class of data. In addition, they should all be aware of unusual transactions, such as pension transactions or hedging transactions, that are classified or will be classified as deferred outflows and inflows.

Unfunded pension obligations, for example, will soon be fully displayed as a liability by the government, but changes to this liability may be classified as deferred outflows. This will allow for full display of the liability without full recognition of the entire expense. Government reporting will achieve full disclosure of its liability, while being insulated from wide fluctuations in cost due to investment performance or actuarial adjustments.

In addition, derivatives qualifying for hedge treatment are accounted for through deferred outflows and inflows. Effective hedges, which result in offsetting changes to the value of the hedge and the hedged items, qualify for treatment as deferred outflows or inflows. For example, as an investment increases in value, the hedge (financial instrument) purchased to maintain the overall value of the hedged item (the investment) declines. This offsetting nature qualifies for deferred outflow and inflow treatment because it is effective. As a hedge classified as an asset is credited to recognize its decline in value, the offsetting debit (or charge) is made to deferred outflows, rather than the income statement.

In commercial accounting, similar pension and derivative transactions would be accounted for in other comprehensive income. In many ways, the introduction of deferred outflows and inflows provides a reporting mechanism in government accounting that mirrors the issues addressed by comprehensive income in commercial accounting. But additional transactions unique to a government are also classified as deferred inflows or outflows, such as unavailable revenues, concession agreements, rate increases restricted for specific purposes in regulated utilities, and gains and losses of refunding debt.

In a conversation with the author, Lord noted the following:

   The introduction of these categories does
   provide a number of benefits, particularly
   in regards to comprehensive reporting.
   Reporting now includes a mechanism to
   display activity that was, at one time, left
   off of the financial statements] entirely.
   ... So, it in no way compromises reporting
   from the past but rather strengthens
   it by adding another layer of specificity.
   Likewise, distortion is reduced as transactions
   that are neither assets nor liabilities
   are now assessed and categorized as
   either deferred outflows or inflows....
   There are a number of transactions unique
   to government that use deferred outflow
   and deferred inflow classifications, too
   numerous to fully explain, including the
   recognition of measurable but unavailable
   revenues as deferred inflows, recognition
   of restricted rates associated with regulated
   operations as deferred inflows, and
   recognition of debt refunding as either a
   deferred outflow or inflow. In fact, the
   introduction of the deferred outflow and
   deferred inflow category stimulated a
   review of all types of transactions. Debt
   issuance costs [other than insurance],
   formerly capitalized, are now expensed.
   The GASB's review concluded that debt
   issuance costs were neither asset nor liability
   and neither deferred outflow nor

Looking to the Future

The enhanced approach to reporting fund balances has produced a more fluid and consistent presentation of them. Uncertainties about fund classifications have been reduced, and reporting has improved as a result.

The expansion of balance sheet classifications to embrace deferred outflows and deferred inflows comprehensively reports transactions on the face of the balance sheet. The introduction of this approach impacts numerous areas of reporting and allows analysts and managers to anticipate the future impact of unrecognized pension expense, unearned modified accrual revenue, unrecognized changes in hedge transactions, and other similar transactions.

Seeing the separate deferrals and understanding the general governmental resources available to deal with the consequences through separate fund balance constraints gives analysts and managers alike the tools to make more informed decisions. The effects of these standards are critical to accounting professionals; thus, CPAs should keep abreast of any additional changes in this area.

Thomas Cox, CPA, is an editor for Becker Professional Education, Downers Grove, III.
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Title Annotation:Accounting & Auditing: government accounting
Author:Cox, Thomas
Publication:The CPA Journal
Date:May 1, 2014
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