Major Fund Rule 10% and 5% Test Governmental Accounting CPA Exam BAR

In this video, I explain the major fund rule using the 10 and 5% test to determine if the fund is a major fund to be reported separately.
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The "major fund" rule and the 10% and 5% tests are concepts from governmental accounting, particularly related to the presentation of financial statements by state and local governments in the United States.

Major Fund Rule: This rule is part of the Governmental Accounting Standards Board (GASB) Statement No. 34, which provides guidelines for the financial reporting of state and local governments. Under this rule, a governmental fund is considered a major fund if it meets certain criteria based on its relative size within the government's financial statements. The purpose is to highlight funds that have a significant impact on the overall financial position or operations of the government.

10% and 5% Tests: These tests are used to determine whether a fund qualifies as a major fund and therefore requires separate presentation in the financial statements. A fund is considered a major fund if it satisfies both of the following criteria:

The total assets, liabilities, revenues, or expenditures/expenses of that fund are at least 10% of the corresponding total for all funds of that category (governmental or enterprise).
The same element (assets, liabilities, revenues, or expenditures/expenses) that met the 10% test is also at least 5% of the corresponding total for all governmental and enterprise funds combined.
If a fund meets both these criteria, it must be reported separately in the government's financial statements to provide a clearer understanding of its activities and financial position. This approach ensures transparency and accountability in governmental financial reporting, allowing stakeholders, like taxpayers and investors, to better assess the financial health and priorities of the government.

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