Chapter 7
Fiduciary Funds
Agency, Pension, Invest. Trust and Private-Purpose Funds
Fiduciary funds includes those resources that the government holds for others external to the government (e.g., individuals, private organiza- tions, and other governments) in an agency capacity.
In contrast, in earlier chapters we discussed funds established for resources to be used to benefit the government or its programs. If the resources are nonexpendable and only the interest may be spent, then a Permanent Fund would be used, while if the resources are expendable for their allowed purpose then a Special Revenue Fund would be used.
There are four types of fiduciary funds: 1) agency funds, 2) private-purpose trust funds, 3) investment trust funds, and 4) pension trust funds. Two financial statements are required of these funds: the Statement of Net Position and the Statement of Changes in Net Position. They use the capital maintenance focus (economic resource measurement) and full accrual accounting basis, with some exceptions, as will be brought out in discussing the different fiduciary funds.
A.Agency Funds - used when a gov’t unit is the custodian of resources
belonging to some other organization. Since the fund does not have
title to nor control over these resources, they do not report revenues,
expenses. Neither do they have a Net Position balance; instead, total
assets should equal the total liabilities due.
- Summaries of Activities:
Collect resources, invest them if hold them long enough. Disburse
them to proper organizations, usually charge a small fee for
providing service. Income earned or expenses produced by
investments or operation of the fund are recorded in the General
Fund of the custodian, not the agency fund.
- Control of Activities:
Uses accrual basis to determine the timing of the transactions
recorded. No concept of measurement focus for agency funds.
A separate agency fund is usually established for each unique
relationship.
- The General Fund and two other governmental units are assessing $3,000,000 of taxes each. Set up receivable and liability for other gov’t units.
Taxes Receivable-Other gov’t
units-current 6,000,000
Due to Other gov’t units 6,000,000
(To record levy of property taxes for year for other gov’t.)
- As receive cash, reduce the receivable and convert the liability
from other gov’t units to the specific gov’t units owed and then
pay them. Normally need to adjust amounts if one gov’t unit, e.g.,
the General Fund, gets paid a fee for handling the agency fund.
Cash 4,000,000
Taxes Receivable-Other gov’t
units-current4,000,000
(To record the collection of cash for other gov’t units.)
Due to Other gov’t units4,000,000
Due to General Fund 80,000
Due to School Board1,960,000
Due to Levee District1,960,000
(To record allocation of cash collected. The General Fund
gets a .02 fee for collecting and distributing the tax. )
Due to General Fund 80,000
Due to School Board1,960,000
Due to Levee District1,960,000
Cash 4,000,000
(To record distribution of cash collected.)
- If receivables become uncollectible, write off by eliminating
liability to other gov’t units.
Due to Other gov’t units50,000
Tax Receivable for Other gov’t
units-current50,000
(To record the write-off of uncollectible tax receivables.)
- No closing entry for agency funds since has no revenues or expenses. Ran through the General Fund instead.
- Financial Statements
Agency funds only have total assets and total liabilities
on their Statement of Net Position, which should equal one
another. Their Statement of Changes in Net Position only
recognizes Additions and Deductions to these asset and
liability balances. Illustration 7-2 provides an example of a
Statement of Changes in Assets and Liabilitiesfor all
agency funds in a governmental unit.
- Private Purpose Trust Funds are where resources are held for the
benefit of outsiders, e.g., individuals, private organizations, or other
governments, for which an endowment has been created.
Examples include: 1) scholarship funds to benefit a specific
narrowly defined class of students, or 2) endowments held to
benefit needy employees or their families (like slain police
officers). The principal of the gift in a private purpose trust fund
may be expendable or nonexpendable, depending upon the
requirements set by the donor of the gift. Sometimes the principal
is spendable for allowed purposes, whereas sometimes the
principal cannot be spent, only the income off of it.
- Summary of Fund Activities
Assets are recorded when received and normally invested.
As income is earned or received, it is recorded. Allowable
expenditures are made. Investment income is accrued at
the end of the year, and investments are adjusted to fair
value.
- Control of Fund Activities:
Capital maintenance measurement focus and full accrual
basis of accounting are used for private purpose trust funds.
- Receive gift, invest it, and earn/receive interest and dividends
from it. Donations are treated as revenue, as is income from
investments.
Cash2,000,000
Addition- Contributions-gift2,000,000
(To record gift to establish an Education Principal Trust
Fund.)
Investments2,000,000
Cash2,000,000
(To record investment of resources for Educ. Prin. Trust
Fund.)
Cash35,000
Addition-Investment Income35,000
(To record income earned during first part of year.)
- To spend interest income for allowable purposes.
Deduction-Scholarship Awards25,000
Cash 25,000
(To record scholarship awards to qualified applicants.)
- May sell investments as needed and reinvest them, hopefully
making a profit on sales of investments. Accrue income earned
on investments at year end.
Cash507,000
Investments 500,000
Addition-Gain on sale of investment 7,000
(To record sale of investments.)
Investment507,000
Cash507,000
(To reinvest cash from sale of investments.)
Cash37,000
Addition-Investment Income 37,000
(To record income received in the second part of the year.)
Accrued Interest Receivable 1,000
Addition-Investment income 1,000
(To accrue investment income at end of the year.)
- Adjust investments to fair value at year end.
Investment15,000
Addition-net increase in
fair value of investments 15,000
(To adjust investments to fair value at year end.)
- Close Revenues and Transfer accounts to Net Position at the end
of the year.
Addition-Contributions-gift2,000,000
Addition-Investment income 73,000
Addition-Gain on sale of investments 7,000
Addition-Net Increase in FV of invest. 15,000
Deduction-Scholarship Awards25,000
Net Position-Held in Trust-Scholarship 2,070,000
(To close nominal accounts to Net Position account.)
- Financial Statements
Statement of Fiduciary Net Position (Ill. 2-12)
Lists assets, liabilities, and net position of private-purpose trust funds.
Statement of Changes in Fiduciary Net Position (Ill. 2-13)
Indicates additions and deductions to private–purpose trust funds during the period, resulting in the change in net position. The change in net position is added to beginning net position to get ending net position.
- Investment Trust Funds - used to report the external portion of investment pools of the reporting government, i.e., mutual fund-type arrangements in which a reporting government holds and invests the cash of several other governments.
This external portion is placed in a fiduciary fund called an
Investment Trust Fund, which are to be reported using the
capital maintenance (economic resources measurement) focus
and full accrual accounting basis. Investments are to be
reported at fair value, as discussed in this chapter, and there
are a number of footnote disclosures required.
There also will be internal investment pools within a
governmental entity that accounts for the investments of units
of that entity, which are accounted for differently. Internal
investment pools are to be included in the funds providing the
sources when preparing financial statements, e.g., the general
fund, enterprise fund, and private-purpose trust fund.
- Pension Trust Funds – accounts for Public Employee Retirement
Systems (PERS) operated by governmental units.
- Summary of Activities
Accumulate assets from contributions by gov’t units/employees, make investments, record returns, make payments to employees
- Control of fund activities
Must comply with legal requirements, which include (1) a statement of plan net position, (2) a statement of changes in plan net position, and 2 required supplementary schedules on (3) funding progress and (4) employer contributions.
- Type of Pension Plan
Pension plans may be contributory and noncontributory. Two types of pension plans. Defined benefit guarantees specific benefits when a person retires. Defined contribution benefits are determined by how much has accumulated in the fund at retirement. We will assume defined benefit plans.
- Receives money from employees and the government.
Cash500,000
Addition-Contributions-Employer250,000
Addition-Contributions-Plan Members250,000
(To record employer and plan members contributions.)
- Investment excess monies, receive interest and dividends on
investments, sell some investments, buy others, accrue
investments income receivable at year end, and also adjust
investments to net fair value at year end.
Investments300,000
Cash300,000
(To invest excess cash in investments.)
Cash40,000
Addition-Interest Income15,000
Addition-Dividend Income25,000
(To record interest and dividend income received.)
Cash50,000
Investments45,000
Addition-Gain on sale of investments 5,000
(To record sale of some investments.)
Investments60,000
Cash60,000
(Invest excess cash from sale of investments, dividends, and
interest.)
Accrued Interest Receivable 35,000
Addition-Interest Income35,000
(To accrue interest earned but not received at year end.)
Investments29,000
Addition-Net increase in fair
value of investments29,000
(To adjust investments to fair value at year end.)
- Pay retirement annuities
Deduction-Annuity benefits100,000
Deduction-Disability benefits 75,000
Accounts payable175,000
(To record benefits to retirees and disabled participants.)
Accounts payable175,000
Cash175,000
(To pay benefits to retirees and disabled participants.)
- Pay terminated employees whose benefits were not vested
Deduction-Refunds to termin. employees30,000
Cash30,000
(To pay refunds to terminated employees.)
- Pay administrative expenses
Deduction-Administrative expenses70,000
Cash70,000
(To pay administrative expenses of fund.)
- Closing entries
Addition-Contrib.-Plan Members250,000
Addition-Contributions-Employer250,000
Addition-Interest Income 50,000
Addition-Dividend Income 25,000
Addition-Gain on Sale of Investments 5,000
Addition-Net increase in FV
of investments 29,000
Deduction-Annuity Benefits100,000
Deduction-Disability Benefits 75,000
Deduction-Refunds to term. employees 30,000
Deduction-Administrative expenses 70,000
Net Position-Held in Trust-Pension334,000
(To close nominal accounts for year.)
- Financial Statements
Statement of Fiduciary Net Position (Ill. 7-4)
Assets less liabilities is equal to Net Position held in
trust for pensions benefits for Public Employee
Retirement Fund.
Statement of Changes in Fiduciary Net Position (Ill 7-5)
Total additions less total deductions is equal to
Change in Net Position, which is added to beginning
balance of Net Position to get ending balance of Net
Position for public employee retirement fund.
Schedule of Changes in Net Pension Liability and Related
Ratios (Ill. 7-6)
Supplemental schedule is required of all defined
benefit pension funds. The schedule presents details
total pension liability as well as contributions by
employer and employees and change in fiduciary net
position.
- Note Disclosure for defined benefit pension plans
Required disclosures of defined benefits plans are:
1)plan descriptions
2)summary of significant accounting policies
3)contributions and reserves
4)more than 5% concentrations of net assets
5)terms and outstanding contributions of any long-term contracts for contributions
6)actuarial methods used, significant assumptions, and changes in benefit provisions
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