In 2009, the Governmental Accounting Standards Board (GASB) issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. That guidance significantly limited the use of special revenue funds for purposes of general purpose external financial reporting. As a result, a number of governments that are legally required to account for certain activities as special revenue funds now have to report those activities as part of the General Fund in their basic financial statements prepared in conformity with generally accepted accounting principles (GAAP), thereby creating a conflict between legal compliance and GAAP.
National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, takes a both/and approach to conflicts between GAAP financial reporting and legal compliance. That is, reporting in compliance with GAAP is essential (paragraph 11) and reporting legal compliance is essential (paragraph 12). When the two conflict, a government should present both 1) its basic financial statements in conformity with GAAP and 2) such additional schedules and narrative explanations in the comprehensive annual financial report [CAFR] as may be necessary to report its legal compliance responsibilities and accountabilities. Accordingly, GFOA advises that if a government is legally required to report a given activity as a special revenue fund, but must include that activity as part of its General Fund for purposes of GAAP financial reporting, the government should:
- Maintain separate information on each legally mandated special revenue fund in its accounting system; and
- Provide schedules for each legally mandated special revenue fund within the statements and schedules subsection of the CAFR that follows the notes to the financial statements, accompanied by an explanation that those funds are presented as part of the General Fund in the basic financial statements.