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Net Assets Policy

Authority:

• GASB Statement 34 and related implementation guides
• GASB Statement 46, Net Assets Restricted by Legislation

Effective Date:
7/1/2001; Revised 3/20/2007

The following applies to the proprietary and government-wide financial statements of the State primary government and to component units.

Policy:
Net Assets Restricted by Enabling Legislation (GASB 46): For the State primary government, constraints placed on net asset use by enabling legislation are not reported as net asset restrictions since such constraints are not legally enforceable. An Attorney General Advisory Opinion referenced that the Governor, pursuant to his constitutional authority under Article III, Section 5(3), may use resources restricted by enabling legislation in his discretion to meet a budget shortfall. Legal enforceability means that the State can be compelled by an external party, such as citizens, public interest groups, or the judiciary to use resources created by enabling legislation only for the purposes specified by the legislation.

Flow of Funds Assumption (GASB 34, paragraph 115h): Under some programs, the State has the option of using either restricted or unrestricted resources to make certain payments. When both restricted and unrestricted resources are available for use, generally it is the State?s policy to use receipts first (which include restricted and unrestricted resources), then State appropriations as necessary. Receipts are defined as all funds collected by an agency or institution other than State appropriations. The decision to use restricted or unrestricted receipts to fund a payment is transactional-based within the departmental management system in place at the agency or institution. For projects funded by tax-exempt debt proceeds and other sources, the debt proceeds are always used first.

Accounting Guidance:
The equity reported in the statement of net assets should be labeled net assets and displayed in the following three components: (1) invested in capital assets, net of related debt; (2) restricted (distinguishing between major categories of restrictions); and (3) unrestricted.

Invested in Capital Assets, Net of Related Debt

This component of net assets consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets.

Generally, the effect of capital debt on total net assets will be negligible since the outstanding capital debt will be offset by either capital assets and/or restricted cash related to any unspent proceeds. However, it is essential that both the restricted assets and the liabilities related to the restricted assets be reported within the same category of net assets. Reporting both within the same classification of net assets prevents one classification from being overstated while another is understated by a similar amount. For example, if there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds should not be included in the calculation of "invested in capital assets, net of related debt". Rather, that portion of the debt should be included in the same net assets component as the unspent proceeds for example, "restricted for capital projects". Therefore, if no capital assets have been purchased or constructed from the debt proceeds, the entire amount of the debt would reduce net assets "restricted for capital projects". If some capital assets have been purchased or constructed from the debt proceeds, that portion of the debt would be considered "capital-related." The remainder the unspent portion of the debt would be included in the calculation of net assets "restricted for capital projects".

All uses of bond proceeds do not have to be categorized to determine how much of the debt actually relates to assets that have been capitalized. Unless a significant portion of the debt proceeds is spent for noncapitalizable purposes, the entire amount should be considered "capital-related."

If debt is issued to refund existing capital-related debt, the new debt is also considered capital-related. Even though the direct connection between the capital assets and the debt issued to finance the construction or acquisition has been eliminated, the replacement debt assumes the capital characteristics of the original issue.

Unamortized debt issue costs and deferred amounts from refunding "follow the debt" in calculating net asset components for the statement of net assets. That is, if the debt is capital-related, the deferred amounts would be included in the calculation of "invested in capital assets, net of related debt." If the debt is restricted for a specific purpose and the proceeds are unspent, the net proceeds would affect "restricted net assets."

The state issues bonds to construct/renovate capital assets of other entities (e.g., local governments and colleges/universities). The bonds are a liability of the state, but the buildings will be reported as capital assets of the other respective entities. Because the state acquires no capital assets, the debt is not "capital-related" to the state. Therefore, the effect of the noncapital debt should be reflected in the unrestricted net assets component. The fact that the bonds are related to capital assets of another entity does not make the debt "capital" debt of the issuing government even though the assets acquired may benefit its residents. The government has incurred a liability, decreasing its net assets, with no corresponding increase in its capital or financial assets.

Restricted Net Assets

Net assets should be reported as restricted when constraints placed on net asset use are either:

1. Externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments
2. Imposed by law through constitutional provisions.

The basic concept is that restrictions are not unilaterally established by the reporting government itself, and cannot be removed without the consent of those imposing the restrictions. This category of net assets is intended to identify resources that were received or earned by the government with an explicit understanding between the government and the resource providers that the funds would be used for a specific purpose. For example, grants, contributions, and donations are often given under those kinds of conditions. Bond indentures similarly limit the use of proceeds. Also, a State law authorizing a component unit to levy or charge a tax or fee, the proceeds which can only be used for specified purposes, is a restriction imposed by an external party (i.e., the State) and any related net assets should be reported by the component unit as restricted.

The specific purpose of a restriction must be narrower than the reporting government itself. For example a grant to a college that may be used only for educational purposes should not be considered restricted, since the purpose of the grant is as broad as that of the college itself. A true restriction must impose a real limitation on the use of resources.

This category of net assets should represent restricted assets on the accrual basis reduced by liabilities that relate to those specific assets. A liability relates to restricted assets if the asset results from incurring the liability or if the liability will be liquidated with the restricted assets. Examples of related liabilities include the following:

• Unspent portion of capital debt related to amounts restricted for capital projects.
• Unspent portion of noncapital debt related to amounts restricted for education.
• Accrued interest related to funds restricted for debt service.
• Compensated absence accruals related to federal grant reimbursements (Note: Generally, compensated absences will reduce unrestricted net assets. However, compensated absences will be considered related liabilities if they are reimbursable expenses when earned).
• No category of restricted net assets can be negative. If liabilities that relate to restricted assets exceed those assets, no balance should be reported; the negative amount should be reported as a reduction of unrestricted net assets.

When permanent endowments or permanent fund principal amounts are included, "restricted net assets" should be displayed in two additional components expendable and nonexpendable. Nonexpendable net assets are those that are required to be retained in perpetuity.

Amounts reported as reserved fund balances in governmental funds will generally be different from amounts reported as restricted net assets in the government-wide statement of net assets. These amounts will differ because different measurement focuses and bases of accounting are used in the statement of net assets than in governmental fund statements and because the definition of reserved includes more than resources that are restricted. For example, reserves include amounts not available for appropriation (e.g., inventories) that are not restricted.

In the notes to the financial statements, the summary of significant accounting policies should disclose the government?s policy regarding whether to first apply restricted or unrestricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available.

Unrestricted Net Assets

Unrestricted net assets are the "residual" component of net assets. It consists of net assets that do not meet the definition of "restricted" or "invested in capital assets, net of related debt."

Situations where the State's internal governing body (General Assembly) places restrictions on existing resources or earmarks existing revenue sources are considered to be constraints that are internally imposed. In these situations, the government does not obtain funds under restrictive conditions; thus, the limitations imposed indicate designations, not restrictions. Such internally dedicated net assets should be presented as unrestricted.

Designations of net assets should not be reported on the face of the statement of net assets.

Unrestricted net assets may be a negative number to the extent that a government has elected to fund certain long-term liabilities (compensated absences) as they come due rather than when they are incurred. Agencies should be certain that all liabilities payable from restricted sources have been reported as part of the restricted net assets component.