Ab.az Chap008

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Chapter

8Accounting for Fiduciary

Activities—Agencyand Trust Funds

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Learning Objectives

After studying Chapter 8, 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 for and characteristics of agency funds

Explain the activities of and accounting and financial reporting for commonly used agency funds

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Learning Objectives (Cont’d)

Explain the purpose, 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

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Fiduciary activities benefit other individuals, organizations, or governments, rather than the reporting government. For this reason, Governmental Accounting Standards Board (GASB) standards exclude the reporting of fiduciary activities in the government-wide financial statements. However, fiduciary activities are reported in the fiduciary fund financial statements, the focus of this chapter.

Agency Funds

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Fiduciary funds are used to account for those activities in which a government holds assets as an agent or trustee.

To account for these private-purpose fiduciary activities agency funds, investment trust funds, private-purpose trust funds, and pension trust funds are used.

Resources that are held in trust for the benefit of the government’s own programs or its citizenry should be accounted for using a governmental fund rather than a fiduciary fund. Such public-purpose trusts should be accounted for as special revenue funds if the resources are expendable for the trust purpose or as permanent funds if the trust principal is permanently restricted.

Agency Funds

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In law, there is a clear distinction between an agency relationship and a trust relationship. In accounting practice, the legalistic distinctions between trust funds and agency funds are not of major significance.

Trust funds differ from agency funds principally in degree: Trust funds often exist over a longer period of time than an agency fund, represent and develop vested interests of a beneficiary to a greater extent, and involve more complex administration and financial accounting and reporting.

Agency funds are used only if a government holds resources in a purely custodial capacity for others

Agency Funds

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Agency Funds

Agency funds are used to account for assets held by a government acting as an agent for one or more other governments or for individuals or private organizations.

Assets that are held in an agency fund belong to the party or parties for which the government acts as agent. Therefore, agency fund assets are offset by liabilities equal in amount; no fund equity exists.

GASB requires agency fund assets and liabilities to be recognized on the accrual basis. Revenues and expenses are not recognized in the accounts of agency

funds, however.

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Agency Funds

Use an agency fund if: Dollar amount of transactions dictates use of

agency fund for accountability reasons Its use will improve financial management or

accounting Mandated by law, regulation, or GASB

standards Unless an agency relationship may be accounted

for within governmental and/or proprietary funds.

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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 (not as common

since GASBS 24 on grant accounting was issued)

Note: An agency fund is generally not needed for routine agency relationships such as payroll withholding

Agency Funds—Typical Uses

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To account for special assessments when only the benefited taxpayers, and not the government, 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

Special Assessment Agency Funds

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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

Special Assessment Agency Fund—Example

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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


Due to SA Bondholders—Interest 50,000

Special Assessment Agency Fund—Example (Cont’d)

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Special assessment bondholders were paid principal in the amount of $100,000 and interest in the amount of $50,000


Due to SA Bondholders—Principal 100,000

Due to SA Bondholders—Interest 50,000

Cash 150,000


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At the beginning of the following year, the next installment of assessments receivable was reclassified from deferred to current status:



Assessments Receivable—Deferred 100,000


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An agency relationship that logically results in the creation of an agency fund is the collection of taxes or other revenues by one government for several of the funds it operates and for other governments.

State governments commonly collect sales taxes, gasoline taxes, and many other taxes that are apportioned to state agencies and to local governments within the state.

Tax Agency Fund

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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 annual levies for the General Funds of each government totaled $500,000: $250,000 for Delta City (50%), $150,000 for the school district (30%), and $100,000 for the county (20%)

Tax Agency Fund— Illustrative Transactions

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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 Units500,000

Tax Agency Fund— Illustrative Transactions (Cont’d)

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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

Revenues240,000


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Delta R-5 CSD General Fund: Dr. Cr.



Revenues 144,000

Clinton County General Fund:



Revenues 96,000

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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) $198,000R-5 C.S.D. 150,000 30% $120,000 (1,200) 118,800County 100,000 20% 80,000 3,200 83,200

*Amount due is $400,000 X % of levy


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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


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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 198,000Due to R-5 CSD 118,800Due to County General Fund 83,200


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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

Cash400,000


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Upon receipt of the amounts due each government records:

Delta City General Fund: Dr. Cr.Cash 198,000Expenditures 2,000


Delta R-5 CSD General Fund:Cash 118,800Expenditures 1,200



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Clinton County General Fund: Dr. Cr.

Cash 83,200


Revenues 3,200

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Grants, entitlements, or shared revenues from the federal or a state government often pass through a lower level of government (primary recipient) before distribution to a secondary recipient.

Accounting for such “pass-through” grants depends on whether the primary recipient government is deemed to have administrative involvement or direct financial involvement in the grants.

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

Pass-Through Agency Funds

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According to GASB standards: 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 how the funds are

allocated. 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.


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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 GASB’s criteria for administrative involvement or direct financial involvement


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Statement of Fiduciary Net Assets

Statement of Changes in Fiduciary Net Assets

Fiduciary Funds—Required Financial Statements

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Investment

Private-purpose

Pension

Types of Trust Funds

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Purpose—To account for assets the government holds as an agent or trustee for individuals, organizations, or other governments

Basis—GAAP requires 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

Trust Funds

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Used to account for the balance sheet and operating statement transactions affecting the external participants of a centrally managed investment pool

Investment Trust Funds

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A 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)

Private-Purpose Trust Funds

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Accounting for expendable private-purpose trusts is similar to the accounting for investment trusts

Accounting for endowment funds is similar to accounting for permanent funds as illustrated in Chapter 4

Accounting for Private-purpose Trust Funds

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GASB provides authoritative guidance for both the employer and the pension trust administrator

Guidance is provided for both defined contribution plans and defined benefit plans

Pension Trust Funds

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GASB accounting and financial reporting standards for the employer provide guidance for:

Pension expenditures/expenses Pension liabilities and assets Note disclosures Required supplementary information

Employer Pension Accounting

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GASB pension accounting standards apply not onlyto general purpose government employers but alsoto government-owned or affiliated healthcare entities colleges and universities public benefit corporations and authorities utilities pension plans themselves if they are also employers

Employer Pension Accounting

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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

Reporting for Defined Benefit Pension Plans

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Statement of plan net assets (see Ill. 8-8) Statement of changes in plan net assets (see Ill. 8-

9) Schedule of funding progress (see Ill. 8-11) Schedule of employer contributions (see Ill. 8-12)

Due to the complexity of defined benefit plans, relative to defined contribution plans, the remainder of the pension plan discussion focuses on defined benefit plans

Reporting for Defined Benefit Pension Plans (Cont’d)

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Evaluating Defined Benefit Pension Plans

The schedule of funding progress provides the funded ratio

Calculated as the actuarial value of assets divided by the actuarial value of the accrued liability (see Ill. 8-11)

A rule of thumb is that a ratio of 80% or better indicates a financially sound pension plan

A comparison of the annual required contribution, found on the schedule of employer contributions, to the actual annual contribution made to the plan shows whether annual contributions are funding the annual benefits earned

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Annual Required Contributions (ARC)— Employer’s required contribution to a defined benefit pension plan, calculated in accordance with certainparameters. 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)

Employer Pension Accounting— Key Terms

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Net Pension Obligation (NPO)—Cumulativedifference 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)

Employer Pension Accounting—Key Terms (Cont’d)

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Annual Pension Cost—A calculated amount of theemployer'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

Employer Pension Accounting—Key Terms (Cont’d)

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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)

Employer Pension Accounting—Calculating Annual Pension Cost

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In the previous calculation, i is the interest rate used in calculating ARC and PV of

NPObeg

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 an Unfunded Actuarial Liability

Employer Pension Accounting—Calculating Annual Pension Cost (Cont’d)

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Employer pension expenditures/expense mayinclude one or both of the following:

Contributions in relation to ARC

Payments of pension-related debt (not included in ARC or NPO)

Employer Pension Accounting— Expenditure/Expense

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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

Employer Pension Accounting— Expenditure/Expense (Cont’d)

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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

Employer Pension Reporting

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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

Employer Pension Reporting (Cont’d)

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Benefits, such as health care for retirees, may represent a material liability

Financial reporting is similar to that for a defined benefit pension plan, with the exception that the standards will not be applied retroactively

The liability related to OPEB is huge, estimated by some to be $1 trillion

Other Postemployment Benefits (OPEB)

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Managing Investment Trust Fundsand Pension Funds

A sound investment policy will:

Identify investment objectives

Define risk tolerance

Assign responsibility of the investment function

Establish control over the investment process

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Managing Investment Trust Fundsand Pension Funds (Cont’d)

A sound investment policy allows managers of the fundto maximize total return consistent with the definedlevel of risk tolerance. Types of risk to consider:

Credit risk—the risk of loss due to the issuer, or a counterparty, not meeting its payment obligations

Market risk—the risk the fair value of the investments will decline

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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

Concluding Comments

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Ab.az Chap008