What does GAAP require regarding lapsing encumbrances intended to be honored in the subsequent year?

GAAP requires that lapsing encumbrances intended to be honored in the subsequent year must be carried forward if the amounts are not designated for a specific purpose. This means that encumbrances that were established in the current fiscal period, but not expended, must be recognized in the subsequent period to accurately reflect the commitment of funds. This ensures that the financial statements provide an accurate representation of the government’s financial position and obligations.

In the context of public sector accounting, failing to carry forward these encumbrances could mislead stakeholders regarding the availability of funds. By requiring the recognition of these encumbrances, GAAP maintains transparency and accountability in how resources are allocated and spent in subsequent periods, ensuring that governments do not overspend their budgets.