The fund balance is the difference of available funds after accounting for a government’s assets minus its liabilities and delayed outflows.
The restricted fund balance is the section of the total fund balance that can either not be spent or is restricted for a particular use.
The unrestricted fund balance is the portion of that total fund balance that is not restricted in any way and can be spent however the government chooses to. These labels are governed by rules adopted by the Governmental Accounting Standards Board (GASB).
The governmental funds typically account for tax-supported activities of a government and include:
- The general fund, where a government accounts for everything not reported in any another fund
- Special revenue funds, for reporting those specific revenues generated that have to be put to a specific use
- Debt service funds, which account for the repayment of debts
- Capital project funds, which keep up with the accumulation and use of resources for constructing, acquiring, and restoring capital assets, such as buildings and roads
- Permanent funds, which are where a government reports principal amounts that have to be invested or reinvested to generate income but can not be spent.
How unrestricted funds balance works?
Resources in a fund other than the general fund are to be used for the purpose behind the fund or however the government intends to use them.
The portion of fund balance that doesn’t have any restrictions on how to be spent and isn’t reserved for any special purpose is the unrestricted fund balance.
It represents resources available that can be used for any purpose of the fund they are presented in.
Unrestricted fund balance in a debt service fund can be used to repay any remaining debt and the unrestricted fund found in the general fund can be used for any purpose at all.
Governments may decide to put labels on or designate some of their unreserved fund balance.
Although unrestricted fund balance is not limited to any one particular purpose, a government may designate some unreserved fund balance to make their intentions clear on how they want to use certain funds.
A label or designation is not legally binding in any way but does help convey a government’s plans for using its available funds.
This can, however, have a significant impact on the financial statements. If the accounting standards are applied based on the intent described above, a financial statement user should be able to understand that unrestricted fund balance in any fund other than the general fund can be used for any purpose.
The user should conclude that those resources are available only for the purpose of the fund they are reported in.
If a government decides to restrict all the funds in a fund balance, the user of the balance sheet may think that there is no flexibility when it comes to using the available recourses, when there is.
The GASB clarifying their intent is only the partial solution to this problem. The users of financial statements look at the fund balances of governmental funds because they know from experience that they can find generally available resources there.
Most people believe that some governments transfer resources from the general fund to another of the many governmental funds even when they do not intend to use the funds for that particular fund’s purpose.
The government probably does this in order to minimize the size of the fund balance in the general fund.
It is very hard to recognize when this has happened by just looking at the financial statements; even if such resources are reported as unrestricted, you cannot differentiate between the available resources that belong in the fund and those that have been residing there temporarily.
However, the users of financial statements may be helped by a provision of GASB Statement No. 38, Certain Financial Statement Note Disclosures, which requires governments to disclose all information about the resources they transfer between funds.
These standards require governments to explain the exact reasons why they made transfers between funds and to state the actual amounts transferred between each of the fund columns in the governmental and proprietary funds financial statements.
Governments are also required to specify the amounts and intended purposes of significant transfers that usually don’t occur or are inconsistent with the routine activities of the fund, such as a transfer from a capital projects fund to the general fund.
The Government Finance Officers Association (GFOA) has recommended that governments should establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund.
If such a guideline exists, it would help provide a framework for any increases or decreases in the fund balance.
GFOA recommends that general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of minimum no less than two months of regular general fund which has been operating revenues or expenditures.