A city controller discovers $2.3 million sitting in the general fund's ending balance. The mayor wants to use it for a new parks initiative. The finance director says $800,000 is legally restricted for debt service. Who is right? The answer depends entirely on how that fund balance is classified, and GASB Statement No. 54 establishes the hierarchy that determines what governments can and cannot spend.
AICPA Representative Tasks (verbatim). "Calculate the fund balances (assigned, unassigned, nonspendable, committed and restricted) for state and local governments and prepare journal entries."
GASB Statement No. 54 replaced the legacy reserved/unreserved/designated framework with five constraint-based classifications. The hierarchy runs from most constrained (nonspendable) to least constrained (unassigned). Understanding this hierarchy is essential because it determines the order in which resources are considered spent and how governments report financial flexibility.
KEY: The constraint source determines classification. External = restricted. Internal at highest level with formal action = committed. Internal without formal action = assigned. No constraint = unassigned.
Common mistakes
- Classifying internal constraints as restricted. A city council resolution is internal. It produces committed fund balance, not restricted. Restricted requires an external party (grantor, creditor, other government) or enabling legislation that itself imposes the constraint.
- Reporting positive unassigned in non-general funds. Only the general fund can report positive unassigned fund balance. Special revenue, capital projects, debt service, and permanent funds classify any positive residual as assigned (reflecting the fund's purpose). Negative unassigned can appear in any governmental fund.
- Missing the timing rule for committed. The formal action establishing a commitment must occur before fiscal year-end. A council resolution adopted in July for the June 30 fiscal year does not qualify. That would be assigned at best.
Bottom line
- Fund balance applies only to governmental funds (general, special revenue, capital projects, debt service, permanent); proprietary funds use net position and fiduciary funds report fiduciary net position.
- Five classifications in order of constraint: nonspendable, restricted, committed, assigned, unassigned.
- Nonspendable = resources not in spendable form (inventories, prepaids, long-term receivables) or legally/contractually required to remain intact (permanent fund principal).
- Restricted = externally imposed constraints by creditors, grantors, other governments, contributors, or constitutional provisions/enabling legislation.
Exam shortcut
When a question describes who imposed the constraint, map the source directly: external party or enabling legislation = restricted; governing body formal action = committed; designated official or management intent = assigned; no constraint = unassigned; non-liquid form = nonspendable. The source determines the answer. When a question asks about a non-general governmental fund, eliminate positive unassigned immediately. The residual after nonspendable, restricted, and committed is assigned, never positive unassigned.
The full lesson (about 2,612 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.C2
Browse all free CPA BAR lessons or jump into free CPA BAR practice questions.