What distinguishes a restricted fund balance?

A restricted fund balance is characterized by constraints that are imposed by external parties, such as creditors, grantors, contributors, or laws and regulations. This means that the resources allocated in a restricted fund balance cannot be used for any purpose other than that specified by the external source. For example, a government might receive grant funding that can be exclusively used for a specific project, and that funding would be classified as restricted.

This distinction is crucial because it reflects the legal or contractual obligations that govern the use of funds. Understanding this helps in recognizing how resources can be utilized within governmental accounting and financial reporting.

The other options do not accurately capture the nature of restricted fund balances. Internal policies may govern the allocation and use of funds in different contexts but do not create the restrictions associated with external obligations. Funds allocated for emergency use may be designated as such within an internal framework, but that does not define a restricted fund balance. Finally, non-spendable resources refer to assets that cannot be easily converted to cash or are not intended to be spent, which is a different concept. Thus, identifying the source of constraints as external is critical in defining what a restricted fund balance is.