3.1 Accounting Principles and Internal Control
3.1.8 Beginning and Ending Cash and Investments Classifications
|Emergency funds, savings accounts, and rainy day funds|
|Flow of funds assumptions|
|Reporting a negative cash and investment classification balance|
18.104.22.168 There are often limitations on how all or a portion of a government’s resources can be spent. Accordingly, the BARS manual requires beginning and ending cash and investments be classified as nonspendable, restricted, committed, assigned, or unassigned. These classifications indicate “the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent.” The classifications reflect these limitations and inform management and financial statement users how much of the government’s resources are reserved for a specific purpose or use and how much is freely available for spending.
22.214.171.124 BARS accounts 3082100 and 5082100 define the beginning and ending nonspendable cash and investments as the amounts of cash and investments that according to laws or contracts cannot be spent (required to be maintained intact). This category applies to items like permanent endowments when the donor stipulates that the principal amount of the contribution must be preserved and invested and only the earnings can be used for governmental purposes.
This category can only be used in permanent (700) and trust (600-629) funds.
126.96.36.199 BARS accounts 3083100 and 5083100 define the beginning and ending restricted cash and investments as the amounts of cash and investments that is subject to externally enforceable legal restrictions (imposed by creditors, grantors, donors, other governments, most voter approved levies, etc.). The restrictions may also be imposed by law through constitutional provisions or enabling legislation. For more information on external restrictions please see BARS manual 188.8.131.52 below.
This category can be used in all fund types. Custodial funds must report beginning and ending cash and investment balances in this category.
184.108.40.206 BARS accounts 3084100 and 5084100 define the beginning and ending committed cash and investments as the amounts of cash and investments that is constrained by specific limitations that the government imposes upon itself at the highest level of decision making (normally the governing body) through the most binding formal action (e.g. resolution, ordinance, etc.) and that remains binding unless removed in the same manner. For more information on internal restrictions please see BARS manual 220.127.116.11 below.
This category can be used only in governmental and proprietary funds.
18.104.22.168 BARS accounts 3085100 and 5085100 define the beginning and ending assigned cash and investments as the amounts of cash and investments that reflects a government’s intended use of resources. These are amounts intended to be used by the government for specific purposes that are neither restricted nor committed. Intent can be expressed in one of two ways:
- The governing body can state its intent to use resources for a specific purpose. The intent would be expressed in an informal way such as a motion or other form of a directive.
- The governing body can delegate authority to others (e.g., finance or executive director, chief, head of a department, manager, etc.) to express intent to use amounts for specific purposes.
Any transfer of resources to funds other than the general fund represents an assignment since the transfer represents the intent for those resources to be used for a specific purpose.
The creation of a fund outside of the general fund is considered at least assigned, since the creation of a fund automatically sets aside the monies for a purpose.
By definition a special purpose district’s monies in any fund that is not the general fund are considered at least assigned since they are only able to use the monies for the purpose of their government.
22.214.171.124 BARS accounts 3089100 and 5089100 define the beginning and ending unassigned cash and investments as the amounts of cash and investments that are remaining after classifying amounts as nonspendable, restricted, committed, or assigned. Unassigned amounts are technically available for any purpose. The general fund is the only fund that can have a positive unassigned cash and investments balance since all other funds represent a specific purpose for their resources.
126.96.36.199 Any constraints on the purpose or use of resources imposed by an external party constitutes restricted classification. Any cash and investment balance subject to these restrictions must be reported as restricted. Generally the purpose of externally restricted revenue would need to be narrower than the purpose of the fund; unless the government has created a fund for this specific revenue. For example:
Unspent resources contributed by other governments in accordance with an interlocal agreement (contract) for future replacement of a building would be classified as restricted because they are subject to a specific external restriction.
Unspent operating assessments received by a government would not be classified as restricted even though it’s received from an external party. This could be classified as committed, assigned, or unassigned because such resources are not subject to specific restrictions but may be used for any allowable purpose of the government.
Any unspent taxes or other collections restricted by RCW for a specific purpose (e.g., hotel/motel tax, retainage collected or withheld, etc.)
All revenues generated by water sales can only be spent on water related activities and cannot be transferred to general fund to be spent for other governmental purposes. However these revenues can be spent for any water related activity and therefore would be either committed or assigned in the water fund.
188.8.131.52 If the government’s highest level of authority (e.g., board of commissioners, city council, board of directors, board of supervisors, etc.) imposes specific restrictions on the use of resources through the most binding formal action (resolution or ordinance), the unspent portion at the year-end would be considered committed and may be reported as such.
A motion, plan or stated management intent regarding how resources will be used does not meet criteria for classifying balances as committed because the commitment has to occur at the highest level of authority through the most binding formal action. While commitments may be removed, it would take that same level of authority and level of formal action to do so. For example:
A cash balance in a capital project fund saved for future replacement of a building after verbal direction by city council members at a council meeting would not be classified as committed because the commitment was not established by the most binding formal action (resolution or ordinance).
184.108.40.206 Balances should be classified as committed when the government dedicates resources for a specific purpose, but not if only generic or functional limitations are imposed. For example:
A cash balance in a special revenue fund committed by commissioners for transportation purposes would not be classified as committed balance because the commitment “for transportation” is not specific enough to create limitations.
The limitation should be narrower than the governmental function or even activity. While resources designated for “public safety”, “park and recreation” or “public health” would not be considered committed; the designations for “new dispatch equipment”, “purchase of additional land to expand existing park”, or “cleaning the hazardous area XYZ” would be.
220.127.116.11 Budget documents approved by resolution or ordinance also do not meet criteria for classifying balances as committed because the budget only represents the government’s authorized spending during the period, rather than a constraint on remaining balances at year end. In other words, a budget deals with plans for anticipated revenues and expenditures – resources not yet collected and expenditures not yet incurred – whereas an internal commitment imposes a permanent constraint on currently existing financial resources.
18.104.22.168 The classification of cash and investments does not reflect any government-wide limitations preventing resources of one fund being spent for purposes of another fund. In other words, any constraints based solely on the purpose of the fund itself would not require classification as restricted. Such constraints imposed by RCW 43.09.210 are both generic and already evident from the fund title, classification and description in the notes. For example:
All revenues generated by water sales can only be spent on water related activities and cannot be transferred to general fund to be spent for other governmental purposes. Within the water fund, unspent proceeds of bonds issued for capital improvement are restricted to this particular project (a specific, externally imposed restriction). In this case, the cash and investments balance classification will include restricted cash and investment for unspent proceeds of bonds and the appropriate committed or assigned balances for everything else that can be spent for any water purposes.
22.214.171.124 Also, resources with external restrictions and internal commitments are classified in either restricted or committed regardless of what fund they are reported in. The external restriction, internal commitments, and subsequent classification of restricted and committed remain tied to the resources no matter which fund they are reported in and if the resources are transferred to other funds. For example:
Unspent hotel/motel tax would be classified as restricted regardless of whether it is accounted for in the general fund, a special revenue fund, or a capital project fund because it is subject to a specific external restriction. The hotel/motel tax resources remains restricted until the resources are fully spent.
If the legislative body passed a resolution or ordinance to set aside (commit) a certain amount of money (from resources that are not restricted or committed) to be used only for a specific tourism purpose, the unspent amount of these monies would be reported as committed no matter which fund the resources are held.
The unassigned classification in the general fund does not mean resources are not subject to any limitations whatsoever. It means that there are no specific external restrictions or internal commitments that constrain spending that money for any allowable use and purpose of the government.
Emergency funds, savings accounts, and rainy day funds
126.96.36.199 Sometimes a legislative body sets aside an amount of money for the purpose of paying expenditures when there is a budgetary shortfall. Since these resources would be available for any purpose or use if needed, they should be classified as unassigned in the general fund unless the resolution stipulates a way that represents an actual constraint. Even if the resolution or ordinance stipulates that the money cannot be spent for any other circumstance, this limitation does not constitute commitment. Purpose refers to the object of spending or usage, rather than circumstances. That is, purpose limitations establish what the cash and investment balance can be spent for, not the circumstances under which the resources can be spent. The same concept applies to emergencies. An emergency is not the purpose of spending but a circumstance when the spending occurs.
188.8.131.52 Sometimes a legislative body creates a “reserve” fund that is a managerial fund in nature through resolution or ordinance to set money aside for a different purpose. These managerial funds are generally rolled-up into the general fund for reporting purposes. Creation of a fund and designation of cash and investment balances are two different issues. Merely creating fund to hold money destined for a specific purpose does not automatically classify the entire cash and investment balance as committed or assigned. A managerial fund of a proprietary fund would be rolled-up into its primary operating proprietary fund and therefore is created out of at least assigned cash and investment balances and would continue to be reported as such. The reserve fund may contain resources from many different sources and not all of them may be restricted or committed for the fund objective. Again, the purpose of the fund is separate from the constraints and limitations imposed on all resources designated for such a purpose.
When creating a new fund, please refer to Fund Types and Accounting Principles for proper fund type and reporting.
184.108.40.206 An adopted minimum cash and investment balance policy would not meet the criteria to classify ending balances as committed. Such a policy only represents a target amount that the local government believes should be maintained to provide a reasonable level of assurance in the day-to day operations, and not a specific constraint on the purpose or use of any resources. For financial reporting purposes, such a policy may be disclosed, but would not affect classification of ending balances.
Flow of funds assumptions
220.127.116.11 The government may establish a policy for its intended order of use of classification balances when an expenditure is incurred in which restricted, committed, and assigned cash and investment balances can be used to pay the expenditure. In absence of an approved policy it is assumed that the government will use the most restricted cash and investment balance first.
Reporting a negative cash and investment classification balance
18.104.22.168 The classification of cash and investment balances as restricted and committed based on their respective allowable purposes will reduce the available ending cash and investment balances to be classified as assigned, and if in the general fund unassigned, in the fund in which the government is reporting. A government should not spend restricted or committed resources on any activity that does not support the requirement that led to the restricted or committed classification. Additionally, the government can only spend the available balance of restricted and committed resources that are on hand and in cash or investment deposits. Therefore reporting negative restricted or committed cash and investment balances is not allowed. The government must reduce assigned, and if in the general fund unassigned, cash and investment balances to account for payment of expenditures that would (or will) be paid from restricted or committed cash and investment balances that the government is expecting to receive as well as for expenditures paid by the available cash in the fund that were not attributed to the allowable purpose of the restricted or committed classifications.
The classifications of the available cash and investment balances to restricted and committed, as well as the evaluation of the use of available cash in the reported fund, could result in the reporting of a negative cash and investment unassigned balance, if the government has used restricted balances to pay expenses that were not related to the restricted or committed cash and investments that the government has received. The assignment of resources should not create a negative unassigned cash and investment balance, therefore a government should reduce the assigned cash and investment balance down to cover the negative unassigned cash and investment balance. The government is not allowed to report negative assigned cash and investment balances.
On the rare occasion that a government needs to report a negative cash and investment balance in any fund, that negative balance must be classified in the unassigned cash and investment category. This is the only time unassigned can be used outside of the general fund.