Essentials of Accounting for Governmental and Not-for-Profit Organizations

1
Essentials of Accounting for Governmental and
Not-for-Profit Organizations

• Chapter 7
• Fiduciary Funds

2
Overview of Chapter 7

• Overview of fiduciary funds
• Agency funds
• Private-purpose trusts
• Investment trust funds
• Pension (employee benefit) funds
• Re-cap of Fiduciary Financial Statements

3
Overview of Fiduciary Funds

• Fiduciary funds hold resources which belong to
  other parties but which are being held by the
  government as agent or trustee.
• As a general rule accrual basis and flow of
  economic resources is used
• Agency funds do not have revenues, expenses or
  net assets -- their accounting equation is
  AssetsLiabilities
• Another exception for liabilities of pension plans

4
Fiduciary Funds and the Government-wide Financial
Statements

• Fiduciary assets are NOT included in the
  entity-wide statements because the resources are
  not available for general use
• They are reported at the fund level only.

5
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.

6
Common uses of agency funds

• Collection of special assessments
• Used when SLG not legally obligated to pay the
  debt in case of default by citizens.
• Tax agency fund
• When you have property tax on city, county,
  library etc in overlapping geographic areas, one
  unit typically agrees to do all of the tax
  collection and remit appropriate amounts to other
  units.

7
Accounting equation for agency funds

• Note Accounting equation is
• Assets Liability
• There are no revenues, expenses, or fund
  balances. Closing entries are not necessary

8
Financial Statements for Agency Funds

• Agency assets and liabilities will be included in
  the Statement of Fiduciary Net Assets.
• There are no revenues or expenses, however, use
  of a Combining Statement of Changes in Assets and
  Liabilities for Agency Funds allows users to see
  increase and decrease activity for the year.

9
Private Purpose Trust Funds

• Used when the government administers funds used
  for beneficiaries other than the SLG and its
  citizens.
• In some cases the principal is held intact.
• Called endowments or nonexpendable funds.
• In other cases, both the principal and income can
  be spent (expended) for specific purposes.

10
Private Purpose Trusts vs Permanent Trusts

• In addition to differing in purpose, 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.

11
Investments in Trust Funds

• The primary guidance on reporting investments is
  GASB 31
• 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

12
Reporting of Investment Gains and Losses

• Unlike business accounting, the main financial
  statements are not permitted to distinguish
  between
• 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).

13
Escheat Property

• Escheat Property is resources from unclaimed bank
  accounts, estates, etc. is typically turned over
  to the state -- the state searches for owners.

• The state may keep part of unclaimed amount and
  return some to local level.
• The amount treated as net revenue to the state
  should be the amount they ultimately expect to be
  able to keep.

14
Escheat Property - continued

• When the government takes over property, it
  records the assets at its FMV and an equal amount
  of gross contribution revenue.
• The escheat property should be reported either in
  a private-purpose trust fund or in the fund where
  the property ultimately escheats.
• The amount for which the government expects to
  find owners should be estimated and treated as an
  expense and liability.

15
Investment Trust Funds

• Internal Investment Pools
• If SLG money is pooled for efficient management,
  the individual investment balances should be
  shown on the balance sheets of the contributing
  funds of the SLG.

• External Investment Pools
• These represent amounts held for other
  governments participating in the investment pool.
• External moneys are reported as investment trust
  funds

16
Reporting of Investments

• Use 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.

17
Public Employee Retirement Systems (PERS)

• Contributory vs. noncontributory funds -- refers
  to whether the employee has to contribute
• Defined benefit plans
• employer must pay formula amount whether or not
  the asset return is sufficient to make payments
• risk of additional future liability is on the
  employer.
• Defined contribution plans
• pays based on assets accumulated with interest
  earnings --
• risk of insufficient retirement pay is on the
  employee, not the employer.

18
Pension Trust Financial Statements

• Statement of Plan Net Assets
• Assets less short term accrued liabilities Net
  assets
• Statement of Changes in Plan Net Assets
• Takes the place of income statement -- uses the
  terms Additions and Deductions instead of
  Revenues and expenses.

19
Pension Funds Additional Disclosures

• Required supplementary schedules
• Schedule of Funding Progress
• Shows trends over long time period
• Schedule of Employer Contributions
• Shows difference in what SLG is contributing and
  what the actuary says should be contributed -
  Annual Required Contribution
• PERS note disclosures are required even if the
  PERS is considered part of a separate reporting
  entity.

20
Pension note disclosures

• Descriptions of plan details
• Accounting policies
• Lists of investments which exceed 5 of net
  assets
• If have over 5, those investments are more risky
  because the portfolio may be insufficiently
  diversified.
• Description of actuarial methods used

21
Employer Reporting

• Previous section discussed how to handle pension
  moneys once in the pension trust, but those
  moneys have to be transferred in from an
  employer fund.
• In general, the employer fund contribution is
  considered a quasi-external transaction.
• The amount of the required contribution is an
  expenditure in government type funds and an
  expense in proprietary types

22
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 . 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
• Not shown in SLG financial statements if
  administered by an external party.
• If SLG administers or participates in investment
  decisions, then a pension trust fund would be
  used.

23
Re-cap of Fiduciary Fund Financial Statements

• Statement of Fiduciary Net Assets
• Statement of Changes in Fiduciary Net Assets
• Supplemental Schedules
• Schedule of Pension Funding Progress
• Schedule of Employer Pension Contributions
• Note Fiduciary Funds are NOT included in
  government-wide statements