Chapter 10 1

Chapter 10

Fiduciary Funds and Permanent Funds

Chapter 10 2

Learning Objectives

Endowment Permanent and Fiduciary Funds Expendable and Nonexpendable Trust Funds Accounting for these Funds Accounting for Investment Gains and Losses Pensions and the distinction between Defined Contribution

and Defined Benefit Pension Plans Accounting for Pensions Accounting for post-employment health care benefits Agency Funds

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Endowment Fund Definition: a contribution for which the donor requires that only the income from the investment may be expended, while the principal remains intact.

Principal is preserved in perpetuity. Nonexpendable fiduciary or trust fund is used to account

for endowment. Examples:

-University maintained endowments

-Private foundations such as Ford and Carnegie

-Churches and synagogues maintain endowments.

-Municipalities establish endowments.

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Endowment for Non-profits Vs. Government

Non-profit: Interest income and investment gains are

reported in statement of activities as increases in temporarily restricted resources.

Interest income and investment gains are expendable.

Investment income is aggregated and reported on a single line.

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Permanent Funds

Permanent funds: Used to account for nonexpendable resources

that must be used in supporting government programs.

Only income, but not the principal, may be spent.

Are unique to governments and are classified as governmental funds

Measurement focus: current financial resources. Accounted for on a modified accrual basis.

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Fiduciary Funds Can be either expendable or nonexpendable Used to account for resources held in a trustee capacity Mainly for outside parties - like employees and their survivors, individual

citizens, other governments etc. Focus on all economic resources concept Follow the full accrual basis. 4 major types:

-Pension trust funds-Investment trust funds-Private-purpose trust funds -Agency funds

Required Financial Statements-Statement of Fiduciary Net Assets -Statement of Changes in Fiduciary Net AssetsNOTE: Since these funds benefit outside parties instead of the government itself, they are not included in the government-wide statements.

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Fiduciary Funds: City of Atlanta

General Employees’ Defined Benefits Pension FundTo account for the operations of the defined benefits pension

plan covering general officers and employees of the City. General Employees’ Defined Contribution Pension Fund

To account for the operations of the defined contribution pension plan covering general officers and employees of the City.

Firefighter’s Pension FundTo account for the operations of the defined benefit pension

plan covering fire fighting employees of the City. Police Officer’s Pension Fund

To account for the operations of the defined benefit pension plan covering sworn police employees of the City.

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Investment Income

Income from a government’s permanent nonexpendable trust funds is intended to benefit other funds.

Issue: should it be reported as revenue or nonreciprocal transfer in the recipient governmental fund?

If Investment income is reported as revenue, the organization’s ongoing operations may appear to be generating a larger surplus or incurring a

smaller deficit. If investment income is shown as a nonreciprocal transfer-

in, then it is included among “other financing sources.” In both cases the impact on Fund Balance is the same.

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Nonexpendable FundsPrior to issuance of GASB Stmt. # 34: Governments traditionally accounted for all

endowments in fiduciary funds. Endowments were accounted under the full

accrual basis. Thus interest and dividends were recognized as

earned and not when cash is received. According to GASB Stmt. # 34, Permanent

funds are accounted for on a modified accrual basis and Fiduciary funds are accounted for on a full accrual basis.

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Investment Gains Primary issue:

In absence of specific donor or legal stipulations, should investment gains/losses be recognized as expendable income or nonexpendable principal.

Parties establishing endowments:usually stipulate that gains from investment only be reinvested but not be expended.

In absence of the stipulations: the recipient is free to appropriate investment gains for current use. GASB:

in absence of donor restrictions, gains should be reported as unrestricted net assets.

FASB: If no donor restrictions, gains/losses reported as unrestricted net assets.If donor restricted - it is reported as permanently or temporarily restricted net assets.

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Characteristics: To account for assets the government holds as an

agent or trustee for individuals, organization, or other governmental units.

Uses accrual accounting under GAAP; another basis of accounting may be prescribed by state law or the donor.

GAAP requires that most investments be reported at fair value (GASB Statement # 31)

Trust Funds

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Measurement of nonexpendable 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

Accounting for Trust Funds

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GASB Statement No. 34, it may be an expendable or nonexpendable trust fund.

Created by a donor for the benefit of an individual, organization, or other government- as opposed to one that benefits the government’s own program(s) or its citizenry.

Resources held for the benefit of outsiders. Examples:-Scholarships-Escheat property funds-Endowments for needy employees

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 nonexpendable - i.e. an endowment) or Special Revenue Fund (if the gift is expendable.)

Private-purpose Trust Funds

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Pension trust funds: -Independent, legal, financial, and accounting entity. -Liabilities of pension trust fund are those of the employer.

The authoritative guidance for pension accounting and reporting is provided by three GASB Statements:

-Accounting for Pensions by State and Local governmental Employers (GASB Statement No. 27)-Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans (GASB Statement No. 25)-Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans (GASB Statement No. 26)

Example: For the City of Atlanta, the Pension trust funds accumulate resources for pension benefit payments to qualified general employees, police and firefighters for the City.

Pension Trust Funds

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Defined Contribution Plan Employer makes series of pension contributions. Employer defines inputs and contributions. Employer reports annual expense for the amount obligated to

contribute to pension fund. Example, for the City of Atlanta, the

Defined Contribution Plan:

--Employee contributions for FY 2004 = $2,805,763

--Employer contributions for FY 2004 = $2,810,795

---The Defined Contribution Plan uses the accrual basis of accounting. Investments are reported at fair value, based on quoted market prices and there were no nongovernmental individual investments that exceeded 5% of the net assets of the plan.

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Defined Benefit Pension Plan Employer specifies the payments that the employee will receive. Employer guarantees ONLY the outputs and not the inputs. Interperiod equity: Pension costs must be allocated to the periods in

which the employees perform services and earn pension benefits. Amount to be contributed to meet future pension obligations are

calculated by actuaries. Actuarial method: allocation of total cost of expected benefits over the

total years of employee service. Example: For the City of Atlanta, the City’s defined benefit plans

provide retirement benefits based on the average of the highest 36 months earnings based on the following: – General employees – 2% for each year of service– Firefighters- 2% for each year of service prior to March 31, 2001

plus 3% for each year of service subsequent to March 31, 2001.– Police Officers – 3% for each year of service to a maximum of

26.67 years.

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GASB standards provide guidance for defined benefit plans that are either

-included as part of an employer's financial report or

-are included in stand-alone reports Standards distinguish between two categories of

pension information: (1) current financial information about plan assets and activities and

(2) actuarially determined information about the funded status of the plan and progress in accumulating assets

Financial Reporting for Defined Benefit Pension Plans

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GASB accounting and financial reportingstandards for the employer provide guidance for:

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

According to GASB a government’s annual pension cost should be based mainly on its annual required contributions.

Key Terms: Annual Pension Cost A calculated amount of the

employer's periodic cost.

Employer Pension Accounting

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Annual Required Contributions (ARC) Employers required contribution to a defined benefit pension plan, calculated in accordance with certain parameters.

Actuarial deficiencies (excesses) Difference between the annual required contributions and the actual contributions

Net Pension Obligation (NPO) Cumulative difference measured from the effective date of the new statement between

-the annual pension cost and -the employer's contributions plus (minus) -any transition pension liability (asset) and excluding (a) short-term differences and (b) unpaid contributions that have been converted to pension-related debt.

Transition liability/asset is based on funding relative to prior actuarial requirements--retroactive application of the new requirements is not necessary.

Employer Pension Accounting (Cont’d)

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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, and pension plans themselves if they are also employers.

GASB requires that the pension plans provide information on: Plan assets, liabilities, and net assets available for

benefits Year-to-year changes in Plan Net assets Contribution requirements of employers and employees Funded status of the plan

Accounting for Pension Plans

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GASB standards also require note disclosures relating to plan description and funding policy, including annual pension cost 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 supplemental disclosures.

Accounting for Pension Plans (cont’d)

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Additionally, for employer pension plan expenditures/expense:

NPO allocated to employees accounted for in governmental funds should be reported as a liability in the government-wide statement of net assets if the NPO is positive.

If negative, it should first be used to reduce any previous liability to the same plan; any excess should then be reported as an asset.

NPO allocated to proprietary funds should be reported as a fund liability if positive or as an asset if NPO is negative. Positive (negative) NPO is also reported as a liability (asset) in the government-wide statement of net assets

Accounting for Pension Plans (cont’d)

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Statement of Fiduciary Net Assets (Table 10-5) Statement of Changes in Fiduciary Net Assets Schedule of Funding Progress (Table 10-6) Schedule of Employer Contributions (Table 10-6)

Financial Reporting for Pension Plans

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

GASB: The disclosure requirements in notes and supplementary schedules are similar to those for pensions.

2 basic statements are required: -Statement of plan net assets-Statement of changes in plan net assets

If the OPEB is administered by a defined benefit pension plan, it follows the standards set forth in GASB Statement No. 26 (and GASB Codification Sec. P.50)

Financial reporting is similar to those for a defined benefit pension plan.

Other Postemployment Benefits (OPEB)

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The City of Atlanta provides certain health/dental care for retired employees, their dependents and their beneficiaries. The City also provides life insurance for retired employees and their dependents. These benefits are funded on a pay-as-you-go basis.

The city contributes 75% of the premium cost for the least expensive health care provider coverage and contributes $4.05 per thousand of the premium cost for a retiree’s life insurance coverage in amounts ranging from $1000 to $10,000.

The City does not contribute to the cost of dependent life insurance. The cost of retiree health/dental care and life insurance benefits is recognized as premiums are paid to the private insurers and such costs totaled $29,289,509 in 2004.

The city’s contribution to this cost for FY 2004 = $20,659,162.

OPEB: City of Atlanta Example

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Agency funds are the simplest of funds, custodial in nature, and assets equal liabilities with no measure of the results of operations or financial position.

One of the main category of fiduciary funds Its Purpose:

-To account for assets held by a governmental unit acting as an agent for one or more other governmental units, individuals, or private organizations

-Use an agency fund if:Dollar amount of transactions dictate use of agency fund for

accountability reasons,

Its use will improve financial management or accounting,

Mandated by law, regulation, or GASB standards

Agency 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 (but not as common since

GASB Statement 24 on grant accounting was issued). Example: For the City of Houston agency funds include

Payroll Revolving, City Deposits, and Tax Clearing Funds.

Note: Agency funds are generally not needed for routine agency relationships such as payroll withholding

Agency Funds - Typical Uses

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The Alpha County tax collector acts as property tax collection agent for Beta City, the Beta Independent School District, and the County Library. Beta 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 governmental unit was $500,000, which was $250,000 for Beta City (50%), $150,000 for the school district (30%), and $100,000 for the Library (20%)

Tax Agency Fund - Example

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At the time of tax levy:

County Tax Agency Fund: Dr. Cr. Taxes Receivable for Other

Funds and Units 500,000

Due to Other Funds and Units 500,000

Tax Agency Fund - Example (cont’d)

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Assuming each governmental unit estimates that 4% of taxes levied will be uncollectible:

Beta City General Fund: Dr. Cr.Taxes Receivable-Current $250,000 Estimated Uncollectible Current Taxes 10,000 Revenues 240,000

Beta ISD General Fund:Taxes Receivable-Current 150,000 Estimated Uncollectible Current Taxes 6,000 Revenues 144,000

County Library General Fund:Taxes Receivable-Current 100,000 Estimated Uncollectible Current Taxes 4,000 Revenues 96,000

Tax Agency Fund-Example (cont’d)

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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 governmental unit.

Fund/Unit Levy Amt % of levy Amt Due* Fees Net Due

Beta City $250,000 50% $200,000 $(2,000) $198,000Beta ISD 150,000 30% 120,000 (1,200) 118,800Library 100,000 20% 80,000 80,000County GRF 3,200

*Amount due is $400,000 x Percentage of Levy

Tax Agency Fund - Example (cont’d)

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The following entries are required in the Alpha County Tax Agency Fund to record the collection and allocation.

Alpha County Tax Agency Fund: Dr. Cr.Cash $400,000 Taxes Receivable for Other Funds and Units 400,000

Following entry in the agency fund shows the allocation of collected amounts to each participating fund and unit.

Alpha County Tax Agency Fund: Dr. Cr.Due to Other Funds and Units 400,000

Due to Beta City 198,000Due to Beta ISD 118,800Due to County Library 80,000Due to County GRF 3,200

Tax Agency Fund - Example (cont’d)

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When the County Tax Agency Fund disburses the amounts due to each governmental unit, it makes the following entry:

Alpha County Tax Agency Fund: Dr. Cr.

Due to Beta City $198,000

Due to Beta ISD 118,800

Due to County Library 80,000

Due to County GRF 3,200

Cash 400,000

Tax Agency Fund - Example (cont’d)

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Upon receipt of the amounts due each government

Beta City General Fund: Dr. Cr.

Cash $198,000

Expenditures 2,000

Taxes Receivable-Current 200,000

Beta ISD General Fund:

Cash 118,800

Expenditures 1,200

Taxes Receivable-Current 120,000

County Library General Fund:

Cash 80,000

Taxes Receivable-Current 80,000

County GRF

Cash 3,200

Revenues 3,200

Tax Agency Fund - Example (cont’d)

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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.

GASB Stmt. # 24: A government accounts for proceeds of pass-

through grants in an agency fund ONLY if it merely transmits funds without any administrative involvement.

If government has administrative involvement, it accounts as revenues and expenditures/expenses.

Pass-Through Agency Funds

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A fund type created by GASB Statement No. 31 in 1997. Used to account for “investment pools.” Investment pool investments, both equity and debt securities,

must be “marked to market.” Changes in market values must be recognized as gains and losses as they occur.

Governments that maintain external investment pools must, of course prepare stand-alone financial reports for the benefit of the other government participants. These reports must

include a statement of net assets and a statement of

changes in net assets prepared under

the accrual basis of accounting.

Investment Trust Funds

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Fiduciary funds are maintained to account for assets that governments and NFPs hold in a trustee capacity. They can be expendable or nonexpendable.

Permanent funds, a new fund, unique to governments account only for nonexpendable resources that benefit activities of the government itself and are thus classified as governmental funds and follow modified accrual basis.

Nonexpendable trust funds are also called endowments. Expendable trust funds by definition are expendable. There are three types of trust funds - private-purpose, investment, and

pension. All trust funds essentially follow full accrual basis. 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.

Agency funds are used only for significant agency relationships in which a governmental units acts as an agent for another party.

Summary

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