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.

  1. 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.

  1. 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.

  1. 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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