Essentials of Accounting for
Governmental and
Not-for-Profit Organizations
Chapter 7
Fiduciary Funds
Copyright © 2015 McGraw-Hill Education. All rights reserved.
Chapter 7 – Learning objectives
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Identify the fiduciary funds and describe when
each is appropriate
Apply the accrual basis of accounting in the
recording of typical transactions of agency,
private-purpose trust, investment trust, and
pension trust funds
Prepare the fund-basis financial statements for
fiduciary funds
Apply GASB standards for the measurement
and reporting of investments
7-2
Overview of Fiduciary Funds

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Fiduciary funds report resources which do not
belong to the government 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.
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Agency funds do not have revenues, expenses or net
position -- their accounting equation is Assets=Liabilities
Pension trust funds only reflect the obligation for pension
benefits currently due government retirees -- not the
obligation to future retirees
7-3
Fiduciary Funds and the Government-Wide
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.
7-4
Government-wide
Statement of Net Position and Statement of Activities
Fiduciary
Funds are not
included in
governmentwide
Agents vs. Trustees

The difference in agents and trustees is a
legal distinction concerning the
responsibilities of the fund manager.
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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.
7-6
Common Uses of Agency Funds

Collection of taxes to service special
assessment debt

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Used when governments are not legally obligated
to pay the debt in case of default by citizens.
Tax agency fund

When you have property taxes supporting
governments in overlapping geographic areas, one
unit typically agrees to do all of the tax collection
and remit appropriate amounts to other units.

For example, sales taxes are generally collected by the state government.
That portion belonging to cities and counties is recorded in an agency fund
until payment is made to the local governments.
7-7
Accounting Equation
for Agency Funds

Note: The accounting equation is:
Assets = Liability
There are no revenues, expenses, or net
postion. Closing entries are not necessary.
7-8
Financial Statements for Agency Funds

Agency assets and liabilities will be included in the
Statement of Fiduciary Net Position.

There are no revenues or expenses so agency funds do
not appear in the Statement of Changes in Fiduciary
Net Position.

However, the Combining Statement of Changes in Assets
and Liabilities for Agency Funds allows users to see
activity for the year.
7-9
Private Purpose Trust Funds

Used when the government administers funds used for
beneficiaries other than the government and its
citizens. For example, endowment investments providing income to be
used for scholarships.

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In some cases the principal is held intact.
 These are called endowments or nonexpendable
funds.
In other cases, both the principal and income can be
spent (expended) for specific purposes.
7-10
Private Purpose Trusts vs.
Permanent Trusts
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Although Permanent and Private Purpose Trust
Funds may appear similar, 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.
7-11
Investments in Trust Funds

General Rule:
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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 realized and unrealized gains and
losses:
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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).
7-13
Escheat Property
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
Escheat Properties are
resources from
unclaimed bank
accounts, estates, etc.
Escheat property is
typically turned over to
the state -- the state
searches for owners.

Typically the state may
keep part of unclaimed
amount and return some
to the local level.

The amount treated as
net revenue to the state
should be the amount
they ultimately expect to
be able to keep.
7-14
Escheat Property - continued
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The escheat property should be reported either in
a private-purpose trust fund or in the fund where
the property ultimately escheats.
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When the government takes over property, it records the
asset at its FMV and an equal amount of gross
contribution revenue.
The $ amount expected to be distributed to owners should
be estimated and treated as an expense and liability.
7-15
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 (not in an
investment trust fund).

External Investment
Pools


These represent amounts
held for other governments
participating in the
investment pool.
External moneys are
reported in investment trust
funds
7-16
Reporting by Investment Trusts

Investment Trust funds use the accrual
basis
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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.
7-17
Pensions: Types of Pension Plans
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Contributory vs. noncontributory funds -- refers to whether
the ‘employee’ is required to contribute
Defined benefit plans:
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The employer must pay a guaranteed level of benefit,
computed using a formula.
The risk of additional future liability is on the employer.
Defined contribution plans:
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The employer pays based on assets accumulated with
investment earnings
The risk of insufficient retirement pay is on the employee,
not the employer.
7-18
Pensions have two categories of
reporting
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Plan Reporting applies only
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whether a government manages
its own plan or participates in a
plan administered by another
government
to governments administering
pensions
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The Statement of Fiduciary Net
Position reports the excess of
currently available resources over
benefits currently payable to
retired employees
The Statement does not report a
liability for amounts expected to
be paid to current employees
when they retire in the future.
Employer reporting applies

The central issues of employer
reporting are the measurement
and presentation of the net
pension liability in statements
displaying financial position and
the related recognition of pension
expenditure or expense.
7-19
Plan Reporting: Pension (and other
postemployment benefits) Trust Financial
Statements

Statement of Fiduciary Net Position
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Assets less short term accrued liabilities = Net
position
Statement of Changes in Fiduciary Net
Position

Takes the place of an income statement -- uses
the terms Additions and Deductions instead of
Revenues and Expenses.
7-20
Pension Funds – Additional Disclosures
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Required supplementary schedules:
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Ten year schedule of changes in net pension liability and
related ratios
Ten year schedule of employer contributions and
Ten year schedule of investment returns.
7-21
Pensions: Employer Reporting
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Total Pension Liability: The actuarial present value
of projected pension benefits that are attributable to
years of service already performed.
Fiduciary net position of the pension trust fund is the
excess of these accumulated resources over benefits
currently payable to retired employees.
Net Pension Liability: Total pension liability minus
fiduciary net position
7-22
Pensions: Employer Reporting

Financial statements prepared using the
economic resources measurement focus
and accrual basis of accounting must report
a liability equal to the net pension liability.
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
Proprietary fund Statement of Net Position
Government-wide Statement of Net Postion
7-23
Pensions: Employer Reporting

Pension Expenditure (Governmental
Funds)

Pension expenditures for governmental type
funds are equal to the amount paid to the
pension fund for current year service plus any
accruals for amounts to be paid from current
financial resources.
7-24
Pensions: Employer Reporting
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Pension Expense (Proprietary funds and
Government-wide Statements)
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Every year three items affect both the net pension
liability and pension expense: current-period service
cost, interest on the total pension liability, and the
projected level of earnings on plan investments.
Additional expense is recognized for changes in the
benefit terms, changes in demographic and
economic assumptions, and differences between
projected and actual investment returns.
7-25
Pensions – Discount rate
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If pensions are being fully funded, then the
appropriate discount rate is the long-term
expected rate of return on pension plan
investments.
To the extent these conditions are not met,
governments are required to use a discount
rate based on municipal bond yields.
7-26
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 …. The manager will not be taxed on the $5,000 until
he draws it out at retirement.
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At one time these moneys were to be accounted for in
an agency fund.
Current requirements:
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These resources are not shown in government financial
statements if the plan is administered by an external party.
If the government administers or participates in investment
decisions, then a pension trust fund would be used.
7-27