08-14-07 FPAC Agenda - Laserfiche WebLink

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, ._,- „, - 72■Financial Policies:Design and Implementation FUND BALANCE TERMINOLOGY Fund balance is not simply the amount of cash a local government has on hand at the end of the fiscal year. Rather, it is an accounting term used to describe the difference between a governmental fund's assets 1 and liabilities.3 Cash balance is not a good indicator of financial health because it does not consider liabilities. I Reserved Versus Unreserved Fund Balance Fund balance is divided into reserved and unreserved portions.4 Re- served fund balance is used to segregate financial resources of a fund that are not available to liquidate liabilities of the current period.Some • financial assets are notyet available for spending(e.g.,long-term loans I P g g-receivable);others, although classified as financial assets, actually rep- resent amounts that have already been spent (e.g., certain inventories '' and prepaids); still others are subject to legal restrictions and commit- ments (e.g., encumbrances for unfilled purchase orders). In addition, state governments can provide for local governments the option of cre- ' ating legally binding reserved fund balance in various categories.5 Re- served fund balance is not established by management prerogative,but rather is determined by accounting rules and standards. i` Unreserved fund balance is the portion of fund balance that is available for appropriation. Unreserved fund balance, in turn, can be divided into designated and undesignated portions. iJ Designated Versus Undesignated Unreserved Fund Balance.Un- li like reserved fund balance, designated unreserved fund balance is Pavailable for appropriation. Designations mean that public managers have earmarked funds for a particular purpose(they would prefer to use the designated portion for a particular purpose). According to the American Institute of Certified Public Accountants'audit guide,desig- nations should be supported by definitive plans and approved by the governmental unit's senior management.6 Funds can be designated to reflect management priorities, such as completion of capital improve- , ment projects,providing for unknown contingent liabilities, or setting aside amounts for appropriation in next year's budget.It is on this sub- ject that some professionals in the field remain confused, for the use of II the term reserved fund balance has been and is still used interchange- ably with the term designated fund balance.