Net Position and Components Thereof

Net position equals assets plus deferred outflows of resources, less liabilities and deferred inflows of resources. The resulting total is allocated among capital investment, restricted resources and unrestricted resources.

For state and local governments, the Governmental Accounting Standards Board (GASB) governs this calculation and its component classifications. Deferred resources remain separate financial statement elements, even though they enter the equation alongside assets and liabilities.

• Deferred outflows represent resource consumption attributable to a future reporting period and enter the net position equation with a positive sign.
• Deferred inflows represent resource acquisition attributable to a future reporting period and enter the equation with a negative sign.

Government-wide financial statements of local governments use the economic-resources measurement focus and accrual accounting, capturing capital assets and outstanding long-term obligations when calculating net position. Governmental activities and business-type activities appear separately; component-unit treatment is determined before aggregation.

Fund financial statements distinguish the following reporting bases:

• Governmental funds use the current-financial-resources focus and modified accrual. Their balance sheets exclude general capital assets and general long-term debt and report fund balance as nonspendable, restricted, committed, assigned or...
• Proprietary funds use economic resources and accrual. Their statements of net position use the same three components taught here.

Common mistakes

• Reversing deferred-resource signs. Subtracting the deferred outflow in Example 1 gives $\$4{,}880{,}000 - \$60{,}000 - \$2{,}440{,}000 - \$50{,}000 = \$2{,}330{,}000$, understating net position by $120,000.
• Deducting every borrowed dollar. Ignoring unspent proceeds gives $\$3{,}500{,}000 - \$2{,}040{,}000 + \$60{,}000 - \$10{,}000 = \$1{,}510{,}000$ for the capital component, $300,000 too low.
• Using restricted cash gross. Debt-service cash of $200,000 exceeds the supported restricted balance of $180,000 by the $20,000 interest payable.

Bottom line

• Total net position equals assets plus deferred outflows, less liabilities and deferred inflows.
• Government-wide and proprietary statements use net position components; governmental funds use fund balance classifications.
• Net investment in capital assets incorporates net capital assets, qualifying debt carrying amounts and related deferred resources.
• Unspent debt proceeds and their related debt belong together outside the capital component.

Exam shortcut

Identify the reporting level before using any balance labeled committed, assigned or unassigned; those labels signal governmental fund balance. Calculate total net position first, then inspect each borrowing for unspent proceeds, premiums, discounts and related deferred resources. Match restricted cash to its related obligations before subtracting the two determined components to obtain unrestricted net position.

The full lesson (about 3,721 words, 25 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.

Learning objectives

• III.C1

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