Can governments reserve a portion of fund balance equal to appreciation in the fair value of investments?

The correct answer reflects the accounting principle that allows governments to reserve a portion of their fund balance for the appreciation in the fair value of investments if these investments are held to maturity. When a government holds investments with the intent and ability to hold them until they mature, it can reflect the appreciation in value without needing to recognize it as revenue until it is realized. This approach aligns with accounting standards that aim to present a conservative and accurate financial position of the government without overstating revenue or assets.

The ability to reserve for appreciation is contingent on the nature of the investment. Since the prices of investments can fluctuate, holding them to maturity provides assurance that the increase in value will be realized without requiring corresponding adjustments in the financial statements until that point. This treatment promotes a consistent financial strategy and provides stakeholders with clear insight into the government’s financial condition regarding its investment portfolio.