What is the meaning of special revenue fund?

GFOA Advisories identify specific policies and procedures necessary to minimize a government's exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.

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 annual comprehensive financial report 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 annual comprehensive financial report 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.

Notes: 

This advisory was previously titled Demonstrating Legal Compliance When Budgetary Special Revenue Funds Are Not Reported as Special Revenue Funds for the Purpose of GAAP Financial Reporting.

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.

Examples of Special Revenue Funds

Examples of special revenue funds are those used for the funding of parks, libraries, schools, and wastewater management.

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.

Key Takeaways

• Special revenue funds are established by a government to collect money that must be used for a specific project.

• Municipalities generally budget money into a general fund, capital fund, "rainy day" fund, and special revenue fund.

• The Government Accounting Standards Board (GASB) issued Statement No. 54 in 2011 to define special revenue funds.

How a Special Revenue Fund Works

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."

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.

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