In this video, we walk through 5 BAR practice questions on calculating net position balances. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Calculating Net Position Balances
State and local governments do not use the same reporting categories in every set of financial statements. One of the first things to keep straight is the difference between fund balance and net position.
Governmental funds report fund balance. This includes funds such as the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds. These funds focus on current financial resources, so they are mainly concerned with near-term financial assets and liabilities.
The government-wide financial statements and proprietary fund financial statements report net position. Proprietary funds include enterprise funds and internal service funds. These statements use accrual accounting and the economic resources measurement focus, so they report the overall financial position of the government or fund.
Net position is usually divided into three categories:
Net investment in capital assets
Restricted net position
Unrestricted net position
Each category tells something different about the nature of the government’s resources.
Net Investment in Capital Assets
Net investment in capital assets represents the government’s investment in capital assets after subtracting accumulated depreciation and related debt.
The basic calculation is:
Capital assets – accumulated depreciation – related capital debt = Net Investment in Capital Assets
For example, assume a city has capital assets of $2,350,000 and accumulated depreciation of $610,000. The city’s net capital assets are:
$2,350,000 – $610,000 = $1,740,000
Now assume the city also has $880,000 of bonds payable that were issued to acquire and construct those capital assets. That debt reduces net investment in capital assets.
However, there is one important detail. If some of the bond proceeds have not been spent yet, that unspent portion is not subtracted. The reason is that the unspent proceeds have not yet been used to acquire or construct capital assets.
Continuing the example, if $120,000 of the bond proceeds remains unspent, only $760,000 of the debt reduces net investment in capital assets:
$880,000 – $120,000 = $760,000
Net investment in capital assets is:
$1,740,000 – $760,000 = $980,000
Restricted Net Position
Restricted net position includes resources that must be used for a specific purpose because of an external or legal restriction.
The key question is: Who imposed the restriction?
Restricted net position can come from grant agreements, bond covenants, donor restrictions, state laws, or legal requirements. The important point is that the limitation does not come simply from the government’s own internal decision.
For example, suppose a town receives a $280,000 state grant that may only be used to improve public walking trails. By year-end, the town has spent $190,000 and still has $90,000 remaining.
The remaining $90,000 is restricted net position because the grant agreement requires the resources to be used for walking trails. The town cannot freely use that money for general operations or unrelated projects.
A basic entry to record the grant revenue could be:
Dr. Cash
Cr. Program revenue—operating or capital grant
The restriction does not mean the cash is a liability. The government received the resources. The restriction just means the related net position must be reported as restricted until the resources are used for the required purpose.
Unrestricted Net Position
Unrestricted net position is the amount left after net investment in capital assets and restricted net position are removed from total net position.
The calculation is:
Total net position – net investment in capital assets – restricted net position = Unrestricted Net Position
For example, assume a city reports total net position of $1,475,000. Its net investment in capital assets is $980,000, and its restricted net position is $235,000.
Unrestricted net position is:
$1,475,000 – $980,000 – $235,000 = $260,000
Unrestricted net position does not necessarily mean the government has $260,000 of cash available to spend. It only means that this portion of net position is not tied up in capital assets and is not externally restricted. This portion could still be internally restricted.
That distinction matters. A government could have positive unrestricted net position but still have limited cash. Net position is an accrual-based measure, not a cash balance.
Fund Balance Classifications Are Different
Restricted net position should not be confused with committed or assigned fund balance.
Committed fund balance means resources have been formally set aside by the government’s highest decision-making authority, such as a city council.
Assigned fund balance means resources are intended for a specific purpose, usually by management or delegated authority.
Both are governmental fund balance classifications. They are based on internal decisions, so they do not create restricted net position in the government-wide statements.
The main distinction is whether the limitation is external or internal. If the limitation comes from a grantor, creditor, donor, or law, it may create restricted net position. If the government simply sets money aside for a planned purpose, that is not restricted net position.
