Essentials of Accounting for Governmental
and Not-for-Profit Organizations
Chapter 7:
Fiduciary Funds
McGraw-Hill/Irwin
©2007, The McGraw-Hill Companies, All Rights Reserved
7-2
Overview of Chapter 7
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Overview of fiduciary funds
Agency funds
Private-purpose trusts
Investment trust funds
Pension (employee benefit) funds
Re-cap of Fiduciary Financial
Statements
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Overview of Fiduciary Funds
• Fiduciary funds report resources which belong
to other parties but which are being held by the
government as agent or trustee.
• As a general rule the accrual basis and economic
resources measurement focus are used
– Agency funds do not have revenues, expenses or
net assets -- their accounting equation is
Assets=Liabilities
– Another exception for liabilities of pension plans
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Fiduciary Funds and the Governmentwide Financial Statements
• Fiduciary assets are NOT included in the
government-wide statements because the
resources are not available for general use
• They are reported at the fund level only.
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Agents vs. trustees
• The difference in agents and trustees is a
legal distinction concerning the
responsibilities of the fund manager.
– Agents hold assets and keep them safe from
theft etc.
– Trustees are responsible for not only holding
the assets safely, but also for administering
an investment program to earn a reasonable
return on the principal.
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Common uses of agency funds
• Collection of special assessments
– Used when governments not legally
obligated to pay the debt in case of default
by citizens.
• Tax agency fund
– When you have property tax on city, county,
library etc in overlapping geographic areas,
one unit typically agrees to do all of the tax
collection and remit appropriate amounts to
other units.
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Accounting equation for
agency funds
• Note: Accounting equation is:
Assets = Liability
There are no revenues, expenses, or fund
balances. Closing entries are not
necessary
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Financial Statements for
Agency Funds
• Agency assets and liabilities will be included
in the Statement of Fiduciary Net Assets.
• There are no revenues or expenses, however,
use of a Combining Statement of Changes in
Assets and Liabilities for Agency Funds
allows users to see increase and decrease
activity for the year.
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Private Purpose Trust Funds
• Used when the government administers funds
used for beneficiaries other than the
government and its citizens.
• In some cases the principal is held intact.
– Called endowments or nonexpendable funds.
• In other cases, both the principal and
income can be spent (expended) for
specific purposes.
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Private Purpose Trusts vs
Permanent Trusts
• In addition to differing in purpose, these
two forms of trust fund have very different
accounting
– Permanent Funds use the modified accrual basis
of accounting while Private Purpose Trusts use
the accrual basis.
– Permanent Funds are included in the
government-wide financial statements and
Private Purpose Trusts are not.
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Investments in Trust Funds
• The primary guidance on reporting
investments is GASB 31
• Investments are carried at fair value -usually measured by a quoted market
price
• Holding gains and losses are reported as
“Net increase (decrease) in fair value of
investments”
7-12
Reporting of Investment Gains
and Losses:
Unlike business accounting, the financial
statements are not permitted to distinguish
between
– Changes in value from completed exchanges
(realized gains or losses), and
– Changes from year end adjustments to fair
value for investment balance (unrealized
gains or losses).
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Escheat Property
• Escheat Property is
resources from unclaimed
bank accounts, estates, etc.
is typically turned over to
the state -- the state
searches for owners.
• The state may keep part of
unclaimed amount and
return some to local level.
• The amount treated as net
revenue to the state should
be the amount they
ultimately expect to be
able to keep.
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Escheat Property - continued
• When the government takes over property, it
records the asset at its FMV and an equal amount
of gross contribution revenue.
• The escheat property should be reported either in a
private-purpose trust fund or in the fund where the
property ultimately escheats.
• The $ amount for which the government expects
to find owners should be estimated and treated as
an expense and liability.
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Investment Trust Funds
• Internal Investment
Pools
– If government money
is pooled for efficient
management, the
individual investment
balances should be
shown on the balance
sheets of the
contributing funds of
the government.
• External Investment
Pools
– These represent
amounts held for other
governments
participating in the
investment pool.
– External moneys are
reported as investment
trust funds
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Reporting of Investments
• Use accrual basis
• Investments are reported at fair value
• Both realized and unrealized changes in
fair value are reported as “Net increase
(decrease) in fair value of investments”
• Special note disclosures show categories
of investments etc.
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Public Employee
Retirement Systems (PERS)
• Contributory vs. noncontributory funds -- refers to whether
the ‘employee’ has to contribute
• Defined benefit plans:
– employer must pay formula amount whether or not the asset return
is sufficient to make payments
– risk of additional future liability is on the employer.
• Defined contribution plans:
– pays based on assets accumulated with interest earnings -– risk of insufficient retirement pay is on the employee, not the
employer.
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Pension (and other postemployment
benefits) Trust
Financial Statements
– Statement of Plan Net Assets
• Assets less short term accrued liabilities = Net
assets
– Statement of Changes in Plan Net Assets
• Takes the place of income statement -- uses the
terms Additions and Deductions instead of
Revenues and Expenses.
7-19
Pension Funds –
Additional Disclosures
• Required supplementary schedules
– Schedule of Funding Progress
• Shows trends over long time period
– Schedule of Employer Contributions
• Shows difference in what government is contributing and what
the actuary says should be contributed - Annual Required
Contribution
– PERS note disclosures are required even if the
PERS is considered part of a separate reporting
entity.
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Pension note disclosures
• Descriptions of plan details
• Accounting policies
• Lists of investments which exceed 5% of
net assets
– If have over 5%, those investments are
more risky because the portfolio may be
insufficiently diversified.
• Description of actuarial methods used
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Employer Reporting
• Previous section discussed how to handle
pension moneys once in the pension trust, but
those money’s have to be transferred in from
an another (the employer) fund.
• In general, the employer fund contribution is
considered a quasi-external transaction.
• The amount of the required contribution is an
expenditure in government type funds and an
expense in proprietary types
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IRS 457
Deferred Compensation Plans
• Example of IRS 457 plan:
Manager earns
$50,000 but has $5,000 withheld and contributed to a
457 plan …. Will not be taxed on the $5,000 until he
draws it out at retirement.
• At one time these moneys were to be
accounted for in an agency fund.
• Current requirements:
– Not shown in government financial statements if administered
by an external party.
– If government administers or participates in investment
decisions, then a pension trust fund would be used.
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Re-cap of Fiduciary Fund
Financial Statements
• Statement of Fiduciary Net Assets
• Statement of Changes in Fiduciary Net
Assets
• Supplemental Schedules
– Schedule of Pension Funding Progress
– Schedule of Employer Pension Contributions
• Note: Fiduciary Funds are NOT included in governmentwide statements