8
Chapter
Accounting for Fiduciary Activities—
Agency and Trust Funds
McGraw-Hill © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
After reading this chapter, you should be able to:
Explain how fiduciary funds are used to report on the
fiduciary activities of a government.
`
Distinguish among agency funds and trust funds (private-
purpose, investment, and pension).
Describe the uses and characteristics of agency funds.
8-2
Learning Objectives (cont’d)
Explain the creation, operation, accounting, and
financial reporting for:
A cash and investment pool (including an investment trust
fund).
A private-purpose trust fund.
A pension trust fund.
Describe accounting for Other Post-Employment
Benefits.
8-3
Agency Funds
Purpose
To account for assets held by a government acting
as an agent for one or more other governments,
individuals, or private organizations
8-4
Agency Funds
Use an agency fund if:
Dollar amount of transactions dictate use of
agency fund for accountability reasons
Itsuse will improve financial management or
accounting
Mandated by law, regulation, or GASB standards
8-5
Agency Funds—
Typical Uses
Special assessment accounting when the
government is not obligated in any manner for special
assessment debt
Tax agency funds (very common usage)
Pass-through agency funds (but not as common
since GASBS 24 on grant accounting was issued)
Note: Agency fund generally not needed for routine agency
relationships such as payroll withholding
8-6
Special Assessment Agency Funds
To account for special assessments when only the
benefited taxpayers, and not the governmental
unit, are obligated to pay interest and principal on
the special assessment debt
The government must not have indicated in any
way its intent to be responsible for the debt
The government is simply acting as an agent for
the benefited property owners, as well as the
special assessment bondholders
8-7
Special Assessment Agency Fund—
Example
Assume that $1,000,000 of special assessment (SA)
taxes are levied, payable in ten equal installments of
$100,000 each, with 5% interest charged on the previous
balance of deferred installments.
Interest on taxes is intended to cover interest on the
special assessment bonds. When the taxes are levied:
Agency Fund: Dr. Cr.
Assessments Receivable—Current 100,000
Assessments Receivable—Deferred 900,000
Due to SA Bondholders—Principal 1,000,000
8-8
Special Assessment Agency Fund—
Example (Cont’d)
Assume all current special assessment taxes were
collected in cash, along with 5% interest on the previous
unpaid balance. The required agency fund entry is:
Agency Fund: Dr. Cr.
Cash 150,000
Assessments Receivable—Current
100,000
Due to SA Bondholders—Interest
50,000
8-9
Special Assessment Agency Fund—
Example (Cont’d)
Special assessment bondholders were paid principal in
the amount of $100,000 and interest in the amount of
$50,000.
Agency Fund: Dr. Cr.
Due to SA Bondholders—Principal 100,000
Due to SA Bondholders—Interest 50,000
Cash 150,000
8-10
Special Assessment Agency Fund—
Example (Cont’d)
At the beginning of the following year, the next installment
of assessments receivable was reclassified from deferred
to current status:
Agency Fund: Dr. Cr.
Assessments Receivable—Current 100,000
Assessments Receivable—Deferred 100,000
8-11
Tax Agency Fund—
Illustrative Transactions
The Clinton County tax collector acts as property
tax collection agent for Delta City, the Delta R-5
Consolidated School District, and the county's own
General Fund. Delta City and the school district are
charged a 1% collection fee which is passed to the
county's General Fund as revenue.
The levy for the year for the General Fund of each
government was $500,000, which was $250,000 for
Delta City (50%), $150,000 for the school district
(30%), and $100,000 for the county (20%).
8-12
Tax Agency Fund—
Illustrative Transactions (Cont’d)
At the time of the tax levy:
Clinton County Tax Agency Fund: Dr. Cr.
Taxes Receivable for Other
Funds and Units 500,000
Due to Other Funds and Units 500,000
8-13
Tax Agency Fund—
Illustrative Transactions (Cont’d)
Assuming each government estimates that 4% of
taxes levied will be uncollectible:
Delta City General Fund: Dr. Cr.
Taxes Receivable—Current 250,000
Estimated Uncollectible Current Taxes 10,000
Revenues 240,000
8-14
Tax Agency Fund—
Illustrative Transactions (Cont’d)
Delta R-5 CSD General Fund: Dr. Cr.
Taxes Receivable—Current 150,000
Estimated Uncollectible Current Taxes 6,000
Revenues 144,000
Clinton County General Fund:
Taxes Receivable—Current 100,000
Estimated Uncollectible Current Taxes 4,000
Revenues 96,000
8-15
Tax Agency Fund—
Illustrative Transactions (Cont’d)
During the first six month of the year, $400,000 was
collected from current taxes. Calculate the amount to
be distributed to each government.
%
Fund/Unit Levy Amt of Levy Amt Due* Fees Net Due
Delta City $250,000 50% $200,000 $(2,000)
$198,000
R-5 C.S.D. 150,000 30% $120,000 (1,200) 118,800
County 100,000 20% 80,000 3,200
83,200
8-16
Tax Agency Fund—
Illustrative Transactions (Cont’d)
The following entries are required in the Clinton County
Tax Agency Fund to record the collection and allocation.
Clinton County Tax Agency Fund:Dr. Cr.
Cash 400,000
Taxes Receivable for
Other Funds and Units 400,000
8-17
Tax Agency Fund—
Illustrative Transactions (Cont’d)
Following entry in the agency fund shows the allocation of
collected amounts to each participating fund and unit.
Clinton County Tax Agency Fund:Dr. Cr.
Due to Other Funds and Units 400,000
Due to Delta City 198,000
Due to R-5 CSD 118,800
Due to County General Fund 83,200
8-18
Tax Agency Fund—
Illustrative Transactions (Cont’d)
When the Clinton County Tax Agency Fund disburses the
amounts due to each government, it would make the
following entry:
Clinton County Tax Agency Fund: Dr. Cr.
Due to Delta City 198,000
Due to R-5 CSD 118,800
Due to County General Fund 83,200
Cash 400,000
8-19
Tax Agency Fund—
Illustrative Transactions (Cont’d)
Upon receipt of the amounts due each government records:
Delta City General Fund: Dr. Cr.
Cash 198,000
Expenditures 2,000
Taxes Receivable—Current
200,000
Delta R-5 CSD General Fund:
Cash 118,800
Expenditures 1,200
Taxes Receivable—Current 120,000
8-20
Tax Agency Fund—
Illustrative Transactions (Cont’d)
Clinton County General Fund: Dr. Cr.
Cash 83,200
Taxes Receivable—Current 80,000
Revenues 3,200
8-21
Pass-Through Agency Funds
Used only if the intermediate (“pass through”)
government has no administrative involvement or
direct financial involvement in the grant
The pass-through government must simply be acting
as a conduit before an agency fund is used
In the text, see GASBS 24 criteria for administrative
involvement or direct financial involvement
8-22
Fiduciary Funds
Required Financial Statements
Statement of Fiduciary Net Assets
Statement of Changes in Fiduciary Net Assets
8-23
Types of Trust Funds
Investment
Private-purpose
Pension
8-24
Trust Funds
Purpose—To account for assets the government
holds as an agent or trustee for individuals,
organization, or other governments
Basis—Under GAAP uses accrual accounting;
another basis of accounting may be prescribed by
state law or the donor
Fair Value Reporting—GAAP requires that most
investments be reported at fair value
8-25
Investment Trust Funds
Used to account for the balance sheet and
operating statement transactions affecting the
external participants of a centrally managed
investment pool
8-26
Private-Purpose Trust Funds
An trust fund in which the gift (principal) is
maintained (endowment), or spent (expended) for
the “private-purposes” specified by the donor
If the government or its citizenry is the primary
beneficiary, then account for the gift in a “public-
purpose” permanent fund (if the gift is an
endowment) or special revenue fund (if the gift is
expendable)
8-27
Accounting for Private-purpose
Trust Funds
Measurement of endowment trust fund income:
Most states have adopted a version of either the
Uniform Management of Institutional Funds Act or
the Uniform Prudent Investors Act
These acts permit a prudent portion of unrealized
gains and losses to be used as distributable income
8-28
Pension Trust Funds
The authoritative guidance for pension accounting
and reporting is provided by two GASB Statements:
Accounting for Pensions by State and Local
Governmental Employers (GASBS 27)
Financial Reporting for Defined Benefit Pension
Plans and Note Disclosures for Defined Contribution
Plans (GASBS 25)
8-29
Employer Pension Accounting
GASB accounting and financial reporting
standards for the employer provide guidance for:
Pension expenditures/expenses
Pension liabilities and assets
Note disclosures
Required supplementary information
8-30
Employer Pension Accounting
GASB pension accounting standards apply not
only to general purpose government employers
but also to
government-owned or affiliated healthcare entities
colleges and universities
public benefit corporations and authorities
utilities
pension plans themselves if they are also
employers
8-31
Reporting for Defined
Benefit Pension Plans
GASB standards provide guidance for defined
benefit plans that are either
a part of an employer's financial report, or
are included in stand-alone reports
Standards distinguish between two categories
of pension information:
current financial information about plan assets
and activities, and
actuarially determined information about the
funded status of the plan and progress in
accumulating assets
8-32
Reporting for Defined Benefit
Pension Plans (Cont’d)
Statement of Plan Net Assets (see Ill. 8-10)
Statement of Changes in Plan Net Assets (see Ill.
8-11)
Schedule of Funding Progress (see Ill. 8-8)
Schedule of Employer Contributions (see Ill. 8-9)
Due to the complexity of defined benefit plans, the
remainder of the pension plan discussion focuses
on defined benefit plans.
8-33
Employer Pension Accounting—
Key Terms
Annual Required Contributions (ARC)—
Employers required contribution to a defined
benefit pension plan, calculated in accordance with
certain parameters. ARC includes
Normal costs—actuarial present value of benefits
allocated to the current year
Unfunded actuarial liability—present value of
projected benefits other than normal costs (i.e.,
underfunding and changes in plans)
8-34
Employer Pension Accounting—
Key Terms (Cont’d)
Net Pension Obligation (NPO)—Cumulative
difference measured from the effective date of the
new statement; two components of which are
Any difference between the annual pension cost and
the employer's contributions
Any transition pension liability (asset)
8-35
Employer Pension Accounting—
Key Terms (Cont’d)
Annual Pension Cost—A calculated amount of the
employer's periodic cost, based on
ARC, plus
Interest on beginning-of-the year NPO, plus (minus)
An adjustment factor related to amounts already
included in ARC
8-36
Employer Pension Accounting—
Calculating Annual Pension Cost
Annual pension cost must be measured and
reported in an amount calculated as follows:
ARC +/- (i X NPOb) -/+ PV of NPOb
Next slide explains the symbols used above. (See
Ill. 8-13 for a diagram of this calculation)
8-37
Employer Pension Accounting—
Calculating Annual Pension Cost (Cont’d)
In the previous calculation,
i is the interest rate used in calculating ARC and PV
of NPOb,
the present value of the beginning of year NPO, is
an adjustment to ARC calculated using the same
amortization method, actuarial assumptions, and
amortization period used in determining the ARC for
that year
If NPO is positive (a funding deficiency) the
adjustment is a deduction from ARC; opposite if
NPO is negative (funding excess)
Either case is referred to as Unfunded Actuarial
Liability
8-38
Employer Pension Accounting—
Expenditure/Expense
Employer pension expenditures/expense may
include one or both of the following:
Contributions in relation to ARC
Payments of pension-related debt (not included in
ARC or NPO)
8-39
Employer Pension Accounting—
Expenditure/Expense (Cont’d)
Employer pension expenditures/expense
(cont’d):
If more than one fund contributes to a plan, the
government must determine which portion of
ARC-related contributions apply to each fund
NPO, if any, must be allocated between business-
like and governmental activities, based on
proportionate share of beginning balance of NPO
8-40
Employer Pension Reporting
Employer pension expenditures/expense
(cont’d):
Governmental funds should report any NPO
allocated to the governmental funds in
governmental activities if NPO is positive, but only
disclose in the notes if negative
NPO allocated to proprietary funds should be
reported as a fund liability if positive or as an asset
if NPO is negative
8-41
Employer Pension Reporting (Cont’d)
GASB standards require note disclosures relating
to plan description and funding policy, including
annual pension cost (as calculated above) and the
components of annual pension cost
Trends in annual pension cost and NPO must also
be disclosed
Additional data must be provided as part of
required supplementary disclosures
8-42
Other Postemployment Benefits (OPEB)
Benefits, such as health care for retirees, may
represent a material liability
GASBS 43 has been issued for OPEB plans and
is effective for periods beginning after 12/15/2005
GASBS 45 has been issued for OPEB employers
and is effective for periods beginning after
12/15/2006
Financial reporting is similar to that for a defined
benefit pension plan, with the exception that the
standards will not be applied retroactively
8-43
Concluding Comments
Agency funds normally are used only for significant
agency relationships in which a government acts
as an agent for another party
There are three types of trust funds—private-
purpose, investment, and pension
All trust funds essentially follow proprietary fund
accounting principles.
Accounting and financial reporting requirements for
defined benefit pension plans and the related
employer requirements are complex, relying on
actuarial estimates for much of the information
reported.
END
8-44
