McGraw-Hill/Irwin©2007, The McGraw-Hill Companies, All Rights Reserved Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 7: Fiduciary Funds

7-2 Overview of Chapter 7 Overview of fiduciary funds Agency funds Private-purpose trusts Investment trust funds Pension (employee benefit) funds Re-cap of Fiduciary Financial Statements

7-3 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

7-4 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.

7-5 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.

7-6 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.

7-7 Accounting equation for agency funds Note: Accounting equation is: Assets = Liability There are no revenues, expenses, or fund balances. 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 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.

7-9 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.

7-10 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.

7-11 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).

7-13 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.

7-14 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.

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. External Investment Pools –These represent amounts held for other governments participating in the investment pool. –External moneys are reported as investment trust funds

7-16 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.

7-17 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.

7-18 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.

7-20 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

7-21 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

7-22 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.

7-23 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 government- wide statements