Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 7 Fiduciary Funds Copyright © 2015 McGraw-Hill Education. All rights reserved.

7-2 Chapter 7 – Learning objectives Identify the fiduciary funds and describe when each is appropriate Apply the accrual basis of accounting in the recording of typical transactions of agency, private-purpose trust, investment trust, and pension trust funds Prepare the fund-basis financial statements for fiduciary funds Apply GASB standards for the measurement and reporting of investments

7-3 Overview of Fiduciary Funds Fiduciary funds report resources which do not belong to the government 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 position -- their accounting equation is Assets=Liabilities Pension trust funds only reflect the obligation for pension benefits currently due government retirees -- not the obligation to future retirees

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.

Fiduciary Funds are not included in government- wide Government-wide Statement of Net Position and Statement of Activities

7-6 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.

7-7 Common Uses of Agency Funds Collection of taxes to service special assessment debt Used when governments are not legally obligated to pay the debt in case of default by citizens. Tax agency fund When you have property taxes supporting governments in overlapping geographic areas, one unit typically agrees to do all of the tax collection and remit appropriate amounts to other units. For example, sales taxes are generally collected by the state government. That portion belonging to cities and counties is recorded in an agency fund until payment is made to the local governments.

7-8 Accounting Equation for Agency Funds Note: The accounting equation is: Assets = Liability There are no revenues, expenses, or net postion. Closing entries are not necessary.

7-9 Financial Statements for Agency Funds Agency assets and liabilities will be included in the Statement of Fiduciary Net Position. There are no revenues or expenses so agency funds do not appear in the Statement of Changes in Fiduciary Net Position. However, the Combining Statement of Changes in Assets and Liabilities for Agency Funds allows users to see activity for the year.

7-10 Private Purpose Trust Funds Used when the government administers funds used for beneficiaries other than the government and its citizens. For example, endowment investments providing income to be used for scholarships. In some cases the principal is held intact. These are called endowments or nonexpendable funds. In other cases, both the principal and income can be spent (expended) for specific purposes.

7-11 Private Purpose Trusts vs. Permanent Trusts Although Permanent and Private Purpose Trust Funds may appear similar, 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.

7-12 Investments in Trust Funds General Rule: 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”

7-13 Reporting of Investment Gains and Losses Unlike business accounting, the financial statements are not permitted to distinguish between realized and unrealized gains and losses: 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).

7-14 Escheat Property Escheat Properties are resources from unclaimed bank accounts, estates, etc. Escheat property is typically turned over to the state -- the state searches for owners. Typically the state may keep part of unclaimed amount and return some to the local level. The amount treated as net revenue to the state should be the amount they ultimately expect to be able to keep.

7-15 Escheat Property - continued The escheat property should be reported either in a private-purpose trust fund or in the fund where the property ultimately escheats. When the government takes over property, it records the asset at its FMV and an equal amount of gross contribution revenue. The $ amount expected to be distributed to owners should be estimated and treated as an expense and liability.

7-16 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 (not in an investment trust fund). External Investment Pools These represent amounts held for other governments participating in the investment pool. External moneys are reported in investment trust funds

7-17 Reporting by Investment Trusts Investment Trust funds use the 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.

7-18 Pensions: Types of Pension Plans Contributory vs. noncontributory funds -- refers to whether the ‘employee’ is required to contribute Defined benefit plans: The employer must pay a guaranteed level of benefit, computed using a formula. The risk of additional future liability is on the employer. Defined contribution plans: The employer pays based on assets accumulated with investment earnings The risk of insufficient retirement pay is on the employee, not the employer.

7-19 Pensions have two categories of reporting Plan Reporting applies only to governments administering pensions The Statement of Fiduciary Net Position reports the excess of currently available resources over benefits currently payable to retired employees The Statement does not report a liability for amounts expected to be paid to current employees when they retire in the future. Employer reporting applies whether a government manages its own plan or participates in a plan administered by another government The central issues of employer reporting are the measurement and presentation of the net pension liability in statements displaying financial position and the related recognition of pension expenditure or expense.

7-20 Plan Reporting: Pension (and other postemployment benefits) Trust Financial Statements Statement of Fiduciary Net Position Assets less short term accrued liabilities = Net position Statement of Changes in Fiduciary Net Position Takes the place of an income statement -- uses the terms Additions and Deductions instead of Revenues and Expenses.

7-21 Pension Funds – Additional Disclosures Required supplementary schedules: Ten year schedule of changes in net pension liability and related ratios Ten year schedule of employer contributions and Ten year schedule of investment returns.

7-22 Pensions: Employer Reporting Total Pension Liability: The actuarial present value of projected pension benefits that are attributable to years of service already performed. Fiduciary net position of the pension trust fund is the excess of these accumulated resources over benefits currently payable to retired employees. Net Pension Liability: Total pension liability minus fiduciary net position

7-23 Pensions: Employer Reporting Financial statements prepared using the economic resources measurement focus and accrual basis of accounting must report a liability equal to the net pension liability. Proprietary fund Statement of Net Position Government-wide Statement of Net Postion

7-24 Pensions: Employer Reporting Pension Expenditure (Governmental Funds) Pension expenditures for governmental type funds are equal to the amount paid to the pension fund for current year service plus any accruals for amounts to be paid from current financial resources.

7-25 Pensions: Employer Reporting Pension Expense (Proprietary funds and Government-wide Statements) Every year three items affect both the net pension liability and pension expense: current-period service cost, interest on the total pension liability, and the projected level of earnings on plan investments. Additional expense is recognized for changes in the benefit terms, changes in demographic and economic assumptions, and differences between projected and actual investment returns.

7-26 Pensions – Discount rate If pensions are being fully funded, then the appropriate discount rate is the long-term expected rate of return on pension plan investments. To the extent these conditions are not met, governments are required to use a discount rate based on municipal bond yields.

7-27 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 …. The manager 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: These resources are not shown in government financial statements if the plan is administered by an external party. If the government administers or participates in investment decisions, then a pension trust fund would be used.