Fall 2007 issue of Horizons

INDUSTRy u PUBLIC SECTOR New Government Withholding Provision (cont.)

understanding among financial statement preparers as to the definitions of reserved and unreserved fund balances, as well as confusion over the difference between reserved fund balances and restricted net assets. One of the more significant areas of misunderstanding regarding the reporting of reserved fund balances involves the reporting of fund balances of governmental funds when the entire fund balance is restricted for a specified purpose. For example, a Transportation Sales Tax Fund is required by law to use its resources for street and highway improvements and maintenance. Many financial statement preparers and users were unsure as to whether the fund balance of this type fund should be reported as reserved or unreserved because of the nature of its restriction. A majority of the financial statement users interviewed did not understand that a legal segregation reservation of fund balance for restricted resources is narrower in scope than the fund in which the resources are reported. In other words, the available fund balance of the Transportation Sales Tax Fund, described above, should not be reported as a reserved fund balance within the fund. The ITC focuses on two main topics: 1. The definition of governmental fund types and 2. The classification of fund balance. Definition of Governmental Fund Types The ITC proposes a number of alternatives and options in the consideration of redefining special revenue, capital projects and debt service funds. Special revenue funds are presently defined as follows: Special revenue funds – To account for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are legally restricted to expenditure for specified purposes. The three portions underlined above are the main sources of confusion in the special revenue funds definition. The ITC proposes the following options or alternatives for consideration in clearing up this confusion: Special Revenue Funds

Proceeds of specific revenue sources: • Limit the use of the fund to report only a specific revenue source and no other resources. • If matching funds are required, allow the special revenue fund to report only a specific revenue source and resources transferred to meet matching requirements. • A special revenue fund may be created not only to report a specific revenue source and resources to meet matching requirements, but also resources that are legally limited to the same purpose as the specific revenue source. Legally restricted: • A special revenue fund may be created to report a specific revenue source that is restricted to a specific purpose, as defined in GASB Statement No. 34, “Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments.” • A special revenue fund may be created to report a specific revenue source that is restricted or otherwise legally limited to a specified purpose. Specified purposes: The ITC seeks input on the proposed definition of the term “specified purposes” to be a purpose that is narrower than the basic activity of the government itself. Capital Projects and Debt Service Funds Capital projects and debt service fund types are presently defined as follows: Capital projects funds – To account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds or in trust funds for individuals, private organizations or other governments). Debt service funds: To account for the accumulation of resources for and the payment of general long-term debt principal and interest.

The ITC proposes the following alternative definitions:

43 u winter 2007 issue