Accounting for Governmental & Nonprofit Entities JACQUELINE L. RECK SUZANNE L. LOWENSOHN Accounting for Governmental & Nonprofit Entities 17/e Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounting for Fiduciary Activities – Agency and Trust Funds H A P T E R 8 Accounting for Fiduciary Activities – Agency and Trust Funds
Learning Objectives 8-1 Explain how trust and agency funds are used to report on the fiduciary activities of a government. 8-2 Distinguish among agency funds and trust funds (private-purpose, investment, and pension). 8-3 Describe the uses for and characteristics of agency funds. 1
Learning Objectives 8-4 Explain the activities of and accounting and financial reporting for commonly used agency funds. 8-5 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private- purpose trust fund; and a pension trust fund. 8-6 Describe accounting for other postemployment benefits plans. 2
Fiduciary Funds Fiduciary Funds Agency Funds Private-purpose Trust Funds Pension Trust Funds Investment Trust Funds
Agency Funds Agency funds are fiduciary funds used to account for assets held by a government acting as an agent for one or more other governments, for individuals, or for private organizations. Assets that are held in an agency fund belong to the party or parties for which the government acts as an agent. Agency fund assets are offset by liabilities equal in amount; no fund net position exists.
Agency Fund for Special Assessment Debt Service A government may perform the functions of billing property owners for the assessments, collecting installments of assessments and interest on the assessments, and from the collections, paying interest and principal on the special assessment debt.
Illustrative Transactions Debits Credits 1. Assessments Receivable—Current . . . . . . . . . . . . . . . . 48,000 Assessments Receivable—Noncurrent . . . . . . . . . . . . . 432,000 Due to Special Assessment Bondholders—Principal 480,000 2. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000 Assessments Receivable—Current . . . . . . . . . . . . . . . 48,000 Due to Special Assessment Bondholders—Interest . . 24,000 3. Due to Special Assessment Bondholders—Principal . . . 48,000 Due to Special Assessment Bondholders—Interest . . . . 24,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000 4. Assessments Receivable—Current . . . . . . . . . . . . . . . . . 48,000 Assessments Receivable—Deferred . . . . . . . . . . . . . 48,000
Tax Agency Fund Example School Taxes Port Authority County Operating Transit Authority Library Service A county official collects all property taxes for property owned within the county . . . Then distributes them to the appropriate fund or government.
Tax Agency Fund Accounting Managing a tax agency fund is complicated by the fact that tax payments are received at various times – some early, some on time, some late, some not at all. A further complication is that the rates for the various funds and governments may change from year to year. In addition, the collector is allowed to withhold a portion of the taxes collected to compensate for the resources used to facilitate the collection.
Real Estate Tax Bill Ad Valorem Taxes Taxing authority Millage rate Assessed Exemption Taxable Tax COUNTY OPERATING 5.7339 $220,736 $50,000 $170,736 $978.98 ENVIRONMENTAL LAND 0.0604 $10.31 COUNTY M.S.T.U. 4.3745 $746.88 LIBRARY-SERVICE 0.5583 $95.32 PARK BONDS - UNINCORPORATED 0.0259 $4.42 SCHOOL - LOCAL 2.2480 $25,000 $195,736 $440.01 SCHOOL - STATE 5.1050 $999.23 PORT AUTHORITY 0.1650 $28.17 TRANSIT AUTHORITY 0.5000 $85.37 CHILDREN’S BOARD 0.4589 $78.35 WATER MANAGEMENT 0.3658 $62.46 Total 19.5957 $3,529.50
Illustrative Transactions Debits Credits Tax Agency Fund: 1. Taxes Receivable for Other Funds and Governments—Current . . . . . . . . . . . . . . . . . . . . 9,468,000 Due to Other Funds and Governments . . . . . . . . . 9,468,000 State $ 10,000 Campbell County 1,480,000 Washington School District 5,060,000 City of Washington 2,552,000 Other governments (should be itemized) 366,000 $9,468,000
Illustrative Transactions Debits Credits Tax Agency Fund: 2. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,734,000 Taxes Receivable for Other Funds and Governments—Current . . . . . . . . . . . . . . . . . . . . . . 4,734,000 Taxes Collected Collection Fee Cash to be (50% of Levy) (Charged) Received Distributed State $ 5,000 $ (50) $ 4,950 Campbell County 740,000 39,940 779,940 Washington School District 2,530,000 (25,300) 2,504,700 City of Washington 1,276,000 (12,760) 1,263,240 Other governments 183,000 (1,830) 181,170 $4,734,000 $ –0– $4,734,000
Illustrative Transactions Debits Credits Washington School District General Fund: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,227,500 Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500 Taxes Receivable—Current . . . . . . . . . . . . . . . . . . 2,250,000 2017 Rate 2017 Taxes Fee Paid Received School Funds: General $4.50 $2,250,000 $22,500 $2,227,500 Capital projects 0.18 90,000 900 89,100 Debt service 0.38 190,000 1,900 188,100 Total $5.06 $2,530,000 $25,300 $2,504,700
Illustrative Transactions Debits Credits Campbell County General Fund: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579,940 Taxes Receivable—Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540,000 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,940 Collections of Collection Cash 2014 Rate 2014 Taxes Fee Received County Funds: General $1.08 $540,000 $39,940 $579,940 Capital Projects 0.09 45,000 –0– 45,000 Debt Service 0.20 100,000 –0– 100,000 Welfare 0.11 55,000 –0– 55,000 Total $1.48 $740,000 $39,940 $779,940
Pass-through Agency Funds Grants, entitlements, or shared revenues from the federal or a state government often pass through one government (primary recipient) before distribution to a secondary recipient. A question arises as to type of involvement. Primary Recipient Administrative involvement Direct Financial Involvement
Administrative or Direct Financial? A recipient government has administrative involvement if, for example, it: (a) monitors secondary recipients for compliance with program-specific requirements, (b) determines eligibility of secondary recipients or projects, even if using grantor-established criteria, or (c) has the ability to exercise discretion in allocation of funds. A recipient government has direct financial involvement if, for example, it finances some direct program costs because of a grantor-imposed matching requirement or is liable for disallowed costs.
Administrative or Direct Financial? When the criteria for administrative or direct financial involvement are met, the primary recipient government must recognize a revenue for the receipt and an expenditure or expense for the transfer in a governmental fund, private-purpose trust fund, or proprietary fund. If neither administrative nor financial involvement is deemed to exist, then a pass-through agency fund must be used and no revenue or expenditure/expense is recognized.
Financial Reporting of Agency Funds Fiduciary activities are reported only in the fiduciary fund financial statements, not at the government-wide level. Agency fund financial information is reported in a separate column of the statement of fiduciary net position. Only those assets held for external parties are reported by agency funds in the statement of fiduciary net position. Agency funds are not included in the statement of changes in fiduciary net position because they have no net position (assets equal liabilities) and therefore cannot have changes in net position.
Private-purpose Trust fund Trust Funds Trust funds account for assets received by a government under a trust agreement Investment Trust fund Private-purpose Trust fund Pension Trust fund
Comparing Governmental Funds & Trust Funds Special revenue fund Benefits government’s own programs or citizenry Both earnings and principal can be spent Permanent fund Only earnings can be spent Trust fund Benefits those other than the government’s own programs or citizenry Use of earnings and principal depend upon trust agreement
Investment Pools Funds within a government may have a combination of idle cash, short-term investments, and long-term investments. To improve management of investments, funds may pool their investments with an investment manager, such as a treasurer or external professional investment manager. These investment pools may be either internal investment pools or external investment pools.
Investment Pools Internal Investment Pool Participating funds are all within the same government Agency fund All funds must report their own share of pooled investments as fund assets rather than including them as investment pool assets External Investment Pool May include governments or organizations other than the government administering the pool Investment trust fund Assets, liabilities, net position, and changes in net position interests of external participants are reported but the administering government’s interests are considered internal and not included in trust fund financial statements
External Investment Pool Earnings on pooled investments and changes in fair value of investments are allocated to the participants having an equity interest in the pool in proportion to their relative contributions to the pool. GASB standards define fair value as the amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. To ensure an equitable division of earnings and changes in fair value it is necessary to revalue fund assets whenever contributions or distributions occur.
Assets Transferred to Create Drew County (CO) Investment Pool Fair Value Fair Value Change in Accrued Assets Transferred at 12-31-16 at 1-10-17 Fair Value Interest Drew CO Debt Service Fund: Cash $ 1,000,000 $ 1,000,000 $ –0– $ –0– U.S. agency obligations 3,373,000 13,425,000 52,000 425,000 Calvin Debt Service Fund: U.S. Treasury notes 9,568,000 9,545,000 (23,000) 192,000 U.S. agency obligations 158,700 160,000 1,300 3,000 Calvin Independent School District Capital Projects Fund: U.S. agency obligations 2,789,000 2,800,000 11,000 76,900 Repurchase agreements 2,060,000 2,060,000 –0– 13,100 Totals $28,948,700 $28,990,000 $ 41,300 $710,000
Illustrative Transactions Debits Credits Drew CO Debt Service Fund: 1a. Equity in Pooled Investments . . . . . . . . . . . . . . . . . 14,850,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 Investments—U.S. Agency Obligations . . . . . . . 13,373,000 Revenues—Change in Fair Value of Investments 52,000 Revenues—Investment Earnings . . . . . . . . . . . . 425,000
Illustrative Transactions Debits Credits Drew County Investment Pool: 1b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 Investments—U.S. Treasury Notes . . . . . . . . . . . . . . . 9,545,000 Investments—U.S. Agency Obligations . . . . . . . . . . . 16,385,000 Investments—Repurchase Agreements . . . . . . . . . . . .2,060,000 Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 710,000 Due to Debt Service Fund . . . . . . . . . . . . . . . . . . . . 14,850,000 Additions—Deposits in Pooled Investments— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,900,000 Calvin Independent School District . . . . . . . . . . . . . 4,950,000
Illustrative Transactions Debits Credits Drew County Investment Pool: 2. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000,000 Investments—U.S. Agency Obligations . . . . . . . . . . . . 310,000 Investments—U.S. Treasury Notes . . . . . . . . . . . . 10,000 Due to Debt Service Fund . . . . . . . . . . . . . . . . . . . 150,000 Due to Capital Projects Fund . . . . . . . . . . . . . . . . . 15,000,000 Additions—Change in Fair Value of Investments— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Calvin Independent School District . . . . . . . . . . . . 50,000
Illustrative Transactions Debits Credits Drew County Investment Pool: 3. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,610,000 Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . 710,000 Undistributed Earnings on Pooled Investments . . . 900,000 4a. Undistributed Earnings on Pooled Investments . . . . . 900,000 Due to Debt Service Fund . . . . . . . . . . . . . . . . . . . 300,000 Due to Capital Projects Fund . . . . . . . . . . . . . . . . . 300,000 Additions—Investment Earnings— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 Calvin Independent School District . . . . . . . . . . . . 100,000
Illustrative Transactions Debits Credits Drew CO Debt Service Fund: 4b. Equity in Pooled Investments . . . . . . . . . . . . . . . . . . . 300,000 Revenues—Investment Earnings . . . . . . . . . . . . . . 300,000 Drew County Investment Pool: 5. Investments (specific investments should be debited or credited here) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000 Undistributed Change in Fair Value of Investments . 450,000
Illustrative Transactions Debits Credits Drew County Investment Pool: 6. Undistributed Change in Fair Value of Investments . . . . 450,000 Due to Debt Service Fund . . . . . . . . . . . . . . . . . . . . 150,000 Due to Capital Projects Fund . . . . . . . . . . . . . . . . . . 150,000 Additions—Change in Fair Value of Investments— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Calvin Independent School District . . . . . . . . . . . . . 50,000 7. Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,000 Undistributed Earnings on Pooled Investments . . . . 720,000
Illustrative Transactions Debits Credits Drew County Investment Pool: 8. Undistributed Earnings on Pooled Investments . . . . . . . 720,000 Due to Debt Service Fund . . . . . . . . . . . . . . . . . . . . . 240,000 Due to Capital Projects Fund . . . . . . . . . . . . . . . . . . . 240,000 Additions—Investment Earnings— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 Calvin Independent School District . . . . . . . . . . . . . . 80,000
Drew County Investment Pool Debt service fund $15,690,000, or 3/9 of total Capital projects fund 15,690,000, or 3/9 of total Town of Calvin 10,460,000, or 2/9 of total Calvin Independent School District 5,230,000, or 1/9 of total Total $47,070,000
Illustrative Transactions Drew County Investment Pool: 9a. Due to Debt Service Fund . . . . . . . . . . . . . . . . . . . . 5,230,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,230,000 Drew CO Debt Service Fund: 9b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,230,000 Equity in Pooled Investments . . . . . . . . . . . . . . . . 5,230,000 Debits Credits
Drew County Investment Pool Debt service fund $10,460,000, or 25% of total Capital projects fund 15,690,000, or 37.5% of total Town of Calvin 10,460,000, or 25% of total Calvin Independent School District 5,230,000, or 12.5% of total Total $41,840,000
Illustrative Transactions Drew County Investment Pool 10. Additions—Deposits in Pooled Investments— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,900,000 Additions—Deposits in Pooled Investments— Calvin Independent School District . . . . . . . . . . . . . . . . . . 4,950,000 Additions—Investment Earnings—Town of Calvin . . . . . 360,000 Additions—Investment Earnings— Calvin Independent School District . . . . . . . . . . . . . . . . . . 180,000 Additions—Change in Fair Value of Investments— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 Calvin Independent School District . . . . . . . . . . . . . . . . . . . 100,000 Net Position Held in Trust for Participants— Town of Calvin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,460,000 Calvin Independent School District . . . . . . . . . . . . . . . 5,230,000 Debits Credits
Private-purpose Trust Funds Individuals or organizations may establish trust agreements to confer assets (or management of the assets) to another party at the present time or at a future date. The fair value of assets placed in trust is referred to as the principal or corpus of the trust. If the principal of the trust must be held intact (nonexpendable) to produce income, the trust is often called an endowment. The income from the assets of an endowment may be used only for the purposes specified by the trustor.
Public versus Private Trust Funds Public Trust Like Funds Principal, income, or both must be used for a public purpose Governmental activities Private Trust Funds Beneficiaries are private individuals, organizations, or governments Fiduciary activities
Pension Trust Funds Current guidance for pension fund accounting shifts to an accounting-based approach of reporting pension liabilities and expense under the economic resources measurement focus. This provides a broader perspective of the employers' net pension position than the prior funding-based approach, whose focus was primarily on employer contributions and progress toward funding benchmarks.
Defined Contribution Plans Types of Pension Plans Defined Contribution Plans Amount or rate of contribution is specified Benefits payable depend on contributions made and performance of member’s account Defined Benefit Plans Amount of benefits is specified Contribution is based on actuarial calculations so that funding of future benefits is adequate
Types of Pension Plans Defined Benefit Plans Single- Employer Pension Plans Multiple- Employer Pension Plans Agent Cost-Sharing
Required Reporting for Defined Benefit Pension Plans Statement of Fiduciary Net Position Detailed notes to the financial statements Statement of Changes in Fiduciary Net Position Required supplementary information
Statement of Fiduciary Net Position JOHNSON COUNTY EMPLOYEE RETIREMENT SYSTEM Statement of Fiduciary Net Position June 30, 2017 Assets Cash $ 51,213 Interest receivable 2,507,612 Investments (at fair value): Bonds 71,603,976 Common stocks 31,957,205 Commercial paper and repurchase agreements 12,570,401 Total assets 118,690,407 Liabilities Accounts payable and accrued expenses 401,581 Net position restricted for pensions $118,288,826
Statement of Changes in Fiduciary Net Position This statement reports employer and employee contributions and investment income as additions to net position rather than as revenues. Similarly, benefits paid, refunds of contributions, and administrative expenses are reported as deductions from net position rather than as expenses.
RSI: Schedule of Changes in Net Pension Liability & Related Ratios This schedule displays elements of total pension liability, net pension liability, and changes in fiduciary net position for each of the last 10 fiscal years. Total Pension Liability Projected value of benefit payments for past service Service Cost Changes in total pension liability Net Pension Liability Total pension liability minus plan net position Covered Payroll Payroll costs on which the contributions to the pension plan are based
RSI: Schedule of Employer Contributions Actuarially determined contribution is a target or recommended contribution to a defined benefit pension plan for the reporting period, based upon external actuarial calculations. Amount that the employer has contributed in each of the last 10 fiscal years presented as a percentage of covered payroll.
RSI: Schedule of Investment Returns This schedule presents the annual money- weighted rate of return on pension plan investments for each of the last 10 fiscal years. This internal rate of return on pension plan investments is calculated net of pension plan investment expense and is adjusted for the changing amounts actually invested.
Illustrative Transactions Debits Credits 1. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,507,612 Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 2,507,612 2. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22,135,692 Additions—Member Contributions . . . . . . . . . . . . . 8,009,400 Additions—Employer Contributions . . . . . . . . . . . . 14,126,292 3. Deductions—Annuity Benefits . . . . . . . . . . . . . . . . . . 3,134,448 Deductions—Disability Benefits . . . . . . . . . . . . . . . . . 287,590 Accounts Payable and Accrued Expenses . . . . . . . 3,422,038 4. Accounts Payable and Accrued Expenses . . . . . . . . . 3,571,969 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,571,969
Illustrative Transactions Debits Credits 5. Deductions—Refunds to Terminated Employees . . . .2,057,265 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,057,265 6a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,440,769 Interest Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 4,822,076 Additions—Investment Income . . . . . . . . . . . . . . . 14,262,845 6b. Investment in Common Stock . . . . . . . . . . . . . . . . . . 3,427,600 Deductions—Change in Fair Value of Investments . . 2,198,782 Investment in Bonds . . . . . . . . . . . . . . . . . . . . . . . 5,626,382 7. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,354,568 Commercial Paper and Repurchase Agreements. 1,354,568
Illustrative Transactions Debits Credits 8a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,293,867 Investment in Common Stocks. . . . . . . . . . . . . . 6,293,867 8b. Investment in Bonds . . . . . . . . . . . . . . . . . . . . . . . . 33,987,470 Investment in Common Stocks . . . . . . . . . . . . . . . . 1,536,364 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,523,834 9. Deductions—Administrative Expenses . . . . . . . . . . 568,219 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,219
Illustrative Transactions Debits Credits 10. Additions—Member Contributions . . . . . . . . . . . . . . 8,009,400 Additions—Employer Contributions. . . . . . . . . . . . . 14,126,292 Additions—Investment Income . . . . . . . . . . . . . . . . 14,262,845 Deductions—Annuity Benefits . . . . . . . . . . . . . . . 3,134,448 Deductions—Disability Benefits . . . . . . . . . . . . . . 287,590 Deductions—Refunds to Terminated Employees. 2,057,265 Deductions—Administrative Expenses . . . . . . . . 568,219 Deductions—Change in Fair Value of Investments 2,198,782 Net Position Held in Trust for Pension Benefits . . 28,152,233
Employer’s Pension Accounting Employer pension-related expenses, expenditures, deferred outflows of resources, applicable liabilities, and deferred inflows of resources are recorded within fund and government-wide financial statements. Primary measures to be calculated and reported are the net pension liability and the pension expense or expenditure.
Net Pension Liability Net pension liability represents the employer’s unfunded pension liability, which is the difference between the total pension liability and the amount of fiduciary net position held for future pension payments. Total pension liability represents the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service based on actuarial valuations generally required to be performed at least every two years.
Amounts paid by the employer to the pension plan Pension Expenditure Amounts paid by the employer to the pension plan The change between the beginning and ending balances of amounts normally expected to be liquidated with expendable available financial resources Pension Expenditure
Pension Expense Service cost (actuarially determined benefits related to current year) + Interest on total pension liability + Plan changes (recognized immediately) + Changes in fiduciary net position from other than investments (e.g., admin expenses, member contributions) - Projected earnings on plan investments +/- Recognition of portion of deferred inflows/outflows Pension expense for the period
Other Post-Employment Benefits (OPEB) OPEB includes benefits other than pensions, such as health care, life insurance, and long-term care, among others. Although GASB issues separate standards, the accounting for OPEB has historically been very similar to that of defined benefit pension plans. GASB also provides a standard for accounting for voluntary and involuntary termination benefits.
Looking Forward This chapter has discussed how agency and trust funds are used to account for a government’s fiduciary activities, which included tax agency funds, pass-through agency funds, investment pools, private-purpose trust funds, and pension and other employee benefits trust funds. The next chapter, Chapter 9, explores financial reporting of state and local governments.