One important objective of external financial reporting is to help users assess accountability by assisting in determining compliance with finance-related laws, rules, and regulations.1 To achieve this goal, state and local governments organize and operate their accounting systems on a fund basis.
The number of funds established within an accounting system to collect and maintain data should be driven by the needs of management. The number of funds reported in external financial reports, on the other hand, should be based on the needs of financial statement users, who typically need and desire less detailed data. Accordingly, separate funds within an accounting system often can and should be combined to form a single fund for purposes of general purpose external financial reporting.
Sometimes governments inappropriately combine funds in their financial statements that ought not to be combined, thus denying financial statement users valuable information on legal compliance. More commonly, governments report more funds than are truly necessary to achieve the goals of general purpose external financial reporting, thereby needlessly adding to the length and complexity of their financial reports and potentially increasing audit fees.
GFOA recommends that every state or local government that uses fund accounting3 establish clear criteria for determining whether a given fund in its accounting system should be treated as a fund for purposes of external financial reporting. The application of these criteria to individual funds should be documented and then periodically reviewed to take into account changes in circumstances (for example, a significant decrease in a revenue source reported as a separate special revenue fund). A governments periodic review of its fund structure ought to specifically consider whether the goals of general purpose external financial reporting could better be achieved by combining similar funds in the accounting system into a single fund for financial reporting purposes. For example, it may be possible to combine a number of smaller debt service funds or capital projects funds into a single debt service fund or a single capital projects fund in the financial report. Likewise, it might be possible to combine individual grant funds that are available for similar purposes (e.g., special education) into a single special revenue fund.
1 Governmental Accounting Standards Board (GASB), Concepts Statement No. 1, Objectives of Financial Reporting, paragraph 32.
2 Governmental Accounting, Auditing, and Financial Reporting, page 2.
3 This guidance is not intended to apply to most governmental units that are accounted for as stand-alone business-type activities.