1. 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.

2. Accounting for Fiduciary Activities – Agency and Trust FundsH A P T E R 8
Accounting for Fiduciary Activities – Agency and Trust Funds

3. 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

4. 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

5. Fiduciary Funds Fiduciary Funds Agency Funds
Private-purpose Trust Funds
Pension Trust Funds
Investment Trust Funds

6. 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.

7. 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.

8. Illustrative Transactions
Debits Credits
1. Assessments Receivable—Current ,000
Assessments Receivable—Noncurrent ,000
Due to Special Assessment Bondholders—Principal ,000
2. Cash ,000
Assessments Receivable—Current ,000
Due to Special Assessment Bondholders—Interest ,000
3. Due to Special Assessment Bondholders—Principal ,000
Due to Special Assessment Bondholders—Interest ,000
Cash ,000
4. Assessments Receivable—Current ,000
Assessments Receivable—Deferred ,000

9. 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.

10. 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.

11. 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
$3,529.50

12. Illustrative Transactions
Debits Credits
Tax Agency Fund:
1. Taxes Receivable for Other Funds
and Governments—Current ,468,000
Due to Other Funds and Governments ,468,000
State $ 10,000
Campbell County ,480,000
Washington School District ,060,000
City of Washington ,552,000
Other governments (should be itemized) ,000
$9,468,000

13. Illustrative Transactions
Debits Credits
Tax Agency Fund:
2. Cash ,734,000
Taxes Receivable for Other Funds and
Governments—Current ,734,000
Taxes Collected Collection Fee Cash to be
(50% of Levy) (Charged) Received Distributed
State $ ,000 $ (50) $ ,950
Campbell County , , ,940
Washington School District ,530,000 (25,300) ,504,700
City of Washington 1,276,000 (12,760) 1,263,240
Other governments , (1,830) ,170
$4,734,000 $ –0– $4,734,000

14. Illustrative Transactions
Debits Credits
Washington School District General Fund:
Cash ,227,500 Expenditures ,500
Taxes Receivable—Current ,250,000
2017 Rate Taxes Fee Paid Received
School Funds:
General $ $2,250, $22, $2,227,500
Capital projects , ,100
Debt service , , ,100
Total $ $2,530, $25, $2,504,700

15. Illustrative Transactions
Debits Credits
Campbell County General Fund:
Cash ,940
Taxes Receivable—Current ,000
Revenues ,940
Collections of Collection Cash
2014 Rate Taxes Fee Received
County Funds:
General $ $540, $39, $579,940
Capital Projects , –0– ,000
Debt Service , –0– ,000
Welfare , –0– ,000
Total $ $740, $39, $779,940

16. 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

17. 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.

18. 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.

19. 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.

20. 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

21. 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

22. 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.

23. 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

24. 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.

25. Assets Transferred to Create Drew County (CO) Investment Pool
Fair Value Fair Value Change in Accrued
Assets Transferred at at Fair Value Interest
Drew CO Debt Service Fund:
Cash $ 1,000, $ 1,000, $ –0– $ –0–
U.S. agency obligations ,373, ,425, , ,000
Calvin Debt Service Fund:
U.S. Treasury notes ,568, ,545, (23,000) ,000
U.S. agency obligations , , , ,000
Calvin Independent School
District Capital Projects Fund:
U.S. agency obligations ,789, ,800, , ,900
Repurchase agreements ,060, ,060, –0– ,100
Totals $28,948, $28,990, $ 41, $710,000

26. Illustrative Transactions
Debits Credits
Drew CO Debt Service Fund:
1a. Equity in Pooled Investments ,850,000
Cash ,000,000
Investments—U.S. Agency Obligations ,373,000
Revenues—Change in Fair Value of Investments ,000
Revenues—Investment Earnings ,000

27. Illustrative Transactions
Debits Credits
Drew County Investment Pool:
1b. Cash ,000,000
Investments—U.S. Treasury Notes ,545,000
Investments—U.S. Agency Obligations ,385,000
Investments—Repurchase Agreements ,060,000
Interest Receivable ,000
Due to Debt Service Fund ,850,000
Additions—Deposits in Pooled Investments—
Town of Calvin ,900,000
Calvin Independent School District ,950,000

28. Illustrative Transactions
Debits Credits
Drew County Investment Pool:
2. Cash ,000,000
Investments—U.S. Agency Obligations ,000
Investments—U.S. Treasury Notes ,000
Due to Debt Service Fund ,000
Due to Capital Projects Fund ,000,000
Additions—Change in Fair Value of Investments—
Town of Calvin ,000
Calvin Independent School District ,000

29. Illustrative Transactions
Debits Credits
Drew County Investment Pool:
3. Cash ,610,000
Interest Receivable ,000
Undistributed Earnings on Pooled Investments ,000
4a. Undistributed Earnings on Pooled Investments ,000
Due to Debt Service Fund ,000
Due to Capital Projects Fund ,000
Additions—Investment Earnings—
Town of Calvin ,000
Calvin Independent School District ,000

30. Illustrative Transactions
Debits Credits
Drew CO Debt Service Fund:
4b. Equity in Pooled Investments ,000
Revenues—Investment Earnings ,000
Drew County Investment Pool:
5. Investments (specific investments should be debited
or credited here) ,000
Undistributed Change in Fair Value of Investments ,000

31. Illustrative Transactions
Debits Credits
Drew County Investment Pool:
6. Undistributed Change in Fair Value of Investments ,000
Due to Debt Service Fund ,000
Due to Capital Projects Fund ,000
Additions—Change in Fair Value of Investments—
Town of Calvin ,000
Calvin Independent School District ,000
7. Interest Receivable ,000
Undistributed Earnings on Pooled Investments ,000

32. Illustrative Transactions
Debits Credits
Drew County Investment Pool:
8. Undistributed Earnings on Pooled Investments ,000
Due to Debt Service Fund ,000
Due to Capital Projects Fund ,000
Additions—Investment Earnings—
Town of Calvin ,000
Calvin Independent School District ,000

33. Drew County Investment Pool
Debt service fund $15,690,000, or 3/9 of total
Capital projects fund ,690,000, or 3/9 of total
Town of Calvin ,460,000, or 2/9 of total
Calvin Independent School District 5,230,000, or 1/9 of total
Total $47,070,000

34. Illustrative Transactions
Drew County Investment Pool:
9a. Due to Debt Service Fund ,230,000
Cash ,230,000
Drew CO Debt Service Fund:
9b. Cash ,230,000
Equity in Pooled Investments ,230,000
Debits Credits

35. Drew County Investment Pool
Debt service fund $10,460,000, or 25% of total
Capital projects fund ,690,000, or 37.5% of total
Town of Calvin ,460,000, or 25% of total
Calvin Independent School District ,230,000, or 12.5% of total
Total $41,840,000

36. Illustrative Transactions
Drew County Investment Pool
10. Additions—Deposits in Pooled Investments—
Town of Calvin ,900,000
Additions—Deposits in Pooled Investments—
Calvin Independent School District ,950,000
Additions—Investment Earnings—Town of Calvin ,000
Additions—Investment Earnings—
Calvin Independent School District ,000
Additions—Change in Fair Value of Investments—
Town of Calvin ,000
Calvin Independent School District ,000
Net Position Held in Trust for Participants—
Town of Calvin ,460,000
Calvin Independent School District ,230,000
Debits Credits

37. 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.

38. 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

39. 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.

40. 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

41. Types of Pension Plans Defined Benefit Plans
Single- Employer Pension Plans
Multiple- Employer Pension Plans
Agent
Cost-Sharing

42. 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

43. Statement of Fiduciary Net Position
JOHNSON COUNTY EMPLOYEE RETIREMENT SYSTEM
Statement of Fiduciary Net Position
June 30, 2017
Assets
Cash $ ,213
Interest receivable ,507,612
Investments (at fair value):
Bonds ,603,976
Common stocks ,957,205
Commercial paper and repurchase agreements ,570,401
Total assets ,690,407
Liabilities
Accounts payable and accrued expenses ,581
Net position restricted for pensions $118,288,826

44. 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.

45. 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

46. 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.

47. 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.

48. Illustrative Transactions
Debits Credits
1. Cash ,507,612
Interest Receivable ,507,612
2. Cash ,135,692
Additions—Member Contributions ,009,400
Additions—Employer Contributions ,126,292
3. Deductions—Annuity Benefits ,134,448
Deductions—Disability Benefits ,590
Accounts Payable and Accrued Expenses ,422,038
4. Accounts Payable and Accrued Expenses ,571,969
Cash ,571,969

49. Illustrative Transactions
Debits Credits
5. Deductions—Refunds to Terminated Employees ,057,265
Cash ,057,265
6a. Cash ,440,769
Interest Receivable ,822,076
Additions—Investment Income ,262,845
6b. Investment in Common Stock ,427,600
Deductions—Change in Fair Value of Investments . . 2,198,782
Investment in Bonds ,626,382
7. Cash ,354,568
Commercial Paper and Repurchase Agreements ,354,568

50. Illustrative Transactions
Debits Credits
8a. Cash ,293,867
Investment in Common Stocks ,293,867
8b. Investment in Bonds ,987,470
Investment in Common Stocks ,536,364
Cash ,523,834
9. Deductions—Administrative Expenses ,219
Cash ,219

51. Illustrative Transactions
Debits Credits
10. Additions—Member Contributions ,009,400
Additions—Employer Contributions ,126,292
Additions—Investment Income ,262,845
Deductions—Annuity Benefits ,134,448
Deductions—Disability Benefits ,590
Deductions—Refunds to Terminated Employees ,057,265
Deductions—Administrative Expenses ,219
Deductions—Change in Fair Value of Investments ,198,782
Net Position Held in Trust for Pension Benefits ,152,233

52. 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.

53. 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.

54. 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

55. 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

56. 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.

57. 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.