What is the Special Revenue Fund?
A special revenue fund is an account established by a government to collect money that must be used for a specific project. Special revenue funds provide an extra level of accountability and transparency to taxpayers that their tax dollars will go toward an intended purpose.
A special revenue fund is a fund used within a government entity to record the proceeds from certain revenue sources for which fund usage is restricted. The use of a special revenue fund makes it easier to track cash inflows and outflows related to special-purpose activities. They are especially useful for maintaining the accountability for specially-allocated funds. A government may be required to report the cash inflows and outflows associated with a special revenue fund.
Understanding Special Revenue Funds
In accounting, revenues are recognized when they are earned and are reasonably estimable (subject to the accrual concept). Judgment is paramount when determining the materiality of the revenues collected within the current accounting period, and how the accounting principles are applied. Expenses are recognized when incurred, and are offset against related revenues using the matching principle.
Generally, goods and services received before the end of the government’s fiscal year are recorded, and a liability is incurred. The general fund and special revenue fund are used to segregate discernable transactions. Under the current rules, the emphasis is on capturing the proceeds of specific revenue sources and accumulating them during the accounting period. Thus, the general and special revenue funds do not record liabilities and long-term assets.
Breaking Down Special Revenue Fund
In the periodic budget process that every municipality goes through, there are negotiations and battles over money — where does it come from, who gets it, and how much they get. There are four basic buckets of budget money to be allocated: general fund, capital fund, “rainy day” fund and special revenue funds.
The general fund pays for usual and ongoing town expenses; the capital fund is earmarked for large projects, and the rainy day fund is the emergency account for unexpected expenditures. A special revenue fund is established to finance and operate dedicated smaller-scale projects. Parks, libraries, beaches and town plazas may all be financed by special revenue funds. These projects will have their own set of books for recording cash inflows and outflows.
The Government Accounting Standards Board (GASB) issued Statement No. 54 in 2011, to clarify the definition of special revenue funds, as there was some ambiguity before. From the Statement: “Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.”
Nature and Use of Special Revenue Funds
The Government Accounting Standards Board (GASB) Statement 54 outlines the use of a special revenue fund by the government to resolve any ambiguities between a special revenue fund and other funds. GASB Statement 54 states that government entities should use the special revenue fund to account for certain revenues from specific sources whose use is restricted to specific activities other than serving debts or capital projects.
It is worth noting that only revenues that are specifically assigned are allocated to a special revenue fund. Assigned resources refer to the unrestricted or unassigned proceeds whose uses are limited by the government’s intent.
On the other hand, unassigned resources refer to resources that are neither assigned nor commuted for use. Therefore, the implementation of GASBS 54 may practically result in reporting and accounting for most resources in a general fund since the special revenue fund no longer qualifies to account for them.
The government is not obliged by GASBS 54 to report restricted or committed resources in the special revenue fund and can opt to use it or not. Special revenue fund is governed by various laws and guidelines, which require the use of the fund balance to meet any regulations or disclosures.
Example of a Special Revenue Fund
A city might establish a special revenue fund to pay expenses associated with stormwater management. The money in this fund could only be used for stormwater management costs, such as street sweeping, drain and ditch cleaning, system maintenance, and a public awareness campaign. The city would be required to publicly report on where it collected the special revenue fund money from and how it spent the special revenue fund’s budget.