chapter 10granof-5e1 chapter 10 fiduciary funds and permanent funds

Chapter 10 Granof-5e 1

Chapter 10

Fiduciary Funds and Permanent Funds


Thought to Ponder: Chapter 10“The trust funds that the federal government has

aren't the same as those you find in the private sector. You can't trust the federal government's and they aren't funded!”

David Walker, former Comptroller General of the United States and President & CEO of the

Peterson G. Foundation


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 postemployment health care benefits Agency Funds

Permanent Funds (a governmental fund)

1) Accounts for nonexpendable resources2) Resources benefit government3) Measurement focus: Current Financial

Resources

4) Basis of Accounting: Modified Accrual 5) Not all governmental entities have Permanent

Funds and these funds may be major or non-major funds.

6) Funds included in government-wide statements

Example: City of Boston, which has three non-major permanent funds.


Fiduciary Funds (NOT a governmental fund)

1) Accounts for both nonexpendable AND expendable resources

2) Resources benefit outside parties (i.e. government is acting as a trustee for a beneficiary)Beneficiary examples: employees and their survivors, individual citizens, other governments etc.

3) Measurement focus: Economic Resources4) Basis of Accounting: Full Accrual5) Funds Excluded from government-wide

statements.



Fiduciary FundsAdditional Information

4 major types:I) Private-Purpose Trust FundsII) Investment Trust FundsIII) Pension Trust FundsIV) Agency Funds

Required Financial Statements-Statement of Fiduciary Net Assets -Statement of Changes in Fiduciary Net Assets


Endowment Fund Definition: a contribution for which the donor requires that only the income from the investment may be expended, while the principal is preserved in perpetuity (i.e. remains intact.)

Endowments accounted for in nonexpendable fiduciary (or trust).

Endowment may also be accounted for in a permanent fund.

Examples of who maintains endowments:

-Universities

-Private foundations (Ford and Carnegie)

-Churches and synagogues

-Municipalities


Investment Income

Income from permanent (nonexpendable trust) funds is intended to benefit other funds.

Issue: should income be reported as A) revenue strictly in the receiving fund OR

B) a nonreciprocal transfer-out from the permanent (nonexpendable) fund and a nonreciprocal transfer-in to the recipient (expendable) fund.


Investment Gains/LossesWITH Donor Stipulations:

ACTION:--Donors may stipulate whatever they want

--Usual stipulations are that gains be reinvested and not expended.

ISSUE: None. REPORTING: Whatever is consistent with donor

stipulations.--I.E. if donor stipulation or law mandates gains permanently

restricted, then reported as additions to permanently restricted net assets

--If donor stipulation or law mandates gains temporarily restricted, then reported as additions to temporarily restricted net assets.


Investment Gains/Losses (Cont’d)WITHOUT Donor Stipulations:ACTION: Recipient can appropriate gains for current use.ISSUE:

In the absences of donor restrictions, should investment gains/losses be recognized as:

A) Expendable income ORB) Nonexpendable principal

REPORTING: (in the absence of donor restrictions) GASB:

--Gains: should be reported as unrestricted net assets--Losses: Unaddressed by FASB

o Government may allocate losses between expendable & nonexpendable resources

FASB: (Conflicting Standards)o Page 405

Gains/Losses: report both as unrestricted net assetso Page 406

Losses: (2 steps)1) Charge temporarily restricted net assets until it is depleted.2) Charge remainder to unrestricted assets


Non-profits Vs. Government

Non-profit: Interest income and investment gains—

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.


Definition: To account for assets the government holds as an agent or trustee for individuals, organization, or other governmental units (a beneficiary).

Basis of accounting eitherA) Full Accrual OR

B) Whatever basis is prescribed by state law or donor.

Investments:--GAAP requires that most be “marked to market” (i.e. reported at fair value) -- GASB Statement No. 31

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. --Permits a “prudent” portion of unrealized gains/losses to be used as

distributable income.

Trust Funds - Overview


Definition: 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).

May be either expendable or nonexpendable trust fund Established for: Scholarships, Escheat property funds,

Endowments for needy employees, NFP Historical societies, museums

Examples: The District of Columbia has a private purpose trust fund through which it “offers a tax-advantaged 529 College Savings Investment Plan (named after Section 529 of the Internal Revenue code). The plan is designed to help families save for the higher education expenses of designated beneficiaries and is available to DC residents as well as non-residents nationwide,” (CAFR, 2007). The city of Boston has several private purpose trust funds, one of which is used for scholarship awards, the purchase of educational equipment and the aid of needy students.

I) Private-Purpose Trust Funds

Public (i.e. Governmental) Purpose Permanent Fund

• NOT a Fiduciary Fund• If the government or its citizenry (i.e. Public) is

the primary beneficiary, then account for the gift in either a “Public-purpose”:• A) Permanent Fund

– if the gift is nonexpendable

• B) Special Revenue Fund – if the gift is expendable



Used to account for “investment pools.” Used to account for the balance sheet and operating

statement transactions affecting the external participants of a centrally managed investment pool.

A fund type created by GASB Statement No. 31 in 1997, Accounting and Financial Reporting for Certain Investments and for External Investment Pools.

Example: The City of San Francisco’s Investment Trust Fund accounts for the external portion of the Treasurer’s office investment pool, the funds of the San Francisco

Community College District, San Francisco

Unified School District, and the Trial courts.

II) Investment Trust Funds


Pension trust funds are a(n): Independent Entity Legal Entity Financial Entity Accounting entity

Liabilities of Pension Trust Fund: Responsibility of the EMPLOYER

The authoritative guidance for pension accounting and reporting is provided by 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) Pension Disclosures—an amendment of GASB Statements No. 25 and No.

27 (GASB Statement No. 50)

III) Pension Trust Funds

Pension Trust Funds – ExamplesFor the City of Houston Pension trust funds are used to account for

the operation of the employee pension retirement programs. The funds include: Houston Firefighters’ Relief and Retirement, Houston Municipal Employees’, and Police Officers’ funds.

The City of Chicago (CAFR 2006) has four single-employer defined benefit pension plans and eligible city employees participate in one of the four plans. These plans are the Municipal Employees’, the Laborers’ and Retirement Board Employees’, the Policemen’s and Firemen’s Annuity and Benefit Funds.

The city of Atlanta has four Pension Trust Funds: General employees’ defined benefit pension fund, General employees’ defined contribution pension fund, Firefighters’ pension fund and Police officers’ pension fund.

The District of Columbia, Washington D.C. has Other Postemployment Benefit trust fund (OPEB) along with two other Pension trust funds.



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

10-6)

Financial Reporting


GASB standards require note disclosures relating to:

1) The plan description and funding policy (including annual pension cost and the components of annual pension cost.)

2) Trends in annual pension cost and NPO.

3) Additional data that must be provided as part of required supplemental disclosures

Financial Reporting(cont’d)Note Disclosures


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.


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.


GASB standards provide guidance for defined benefit plans that are either: (1) included as part of an employer's financial report OR(2) included in stand-alone reports

GASB 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

Defined Benefit Pension Plans (cont’d)Financial Reporting


Annual Pension Cost A calculated amount of the employer's periodic cost.

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

NOTE: GASB said that a government’s annual pension cost should be based mainly on its annual required contributions.

Key Terms


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

Key Terms (cont’d)


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 standards provide guidance for: Pension expenditures/expenses Pension liabilities and assets Required supplementary information Note disclosures

GASB requires that the pension plans include: Plan assets, liabilities, and net assets available for

benefits Changes in Net assets Contribution requirements of employers and employees Funded status of plan

Accounting – Overview


Annual Required Contribution (ARC) is calculated each

period and consists of the following 2 components:

1) Actuarial present value of total projected benefits i.e. "normal costs" based on the particular

actuarial method used

any of several actuarial methods is

acceptable

Accounting (cont’d)Annual Required Contribution


2) Amortization of Unfunded Actuarial Accrued Liability

May use either of 2 methods which are both based on projected payroll:

A) Level Dollar Amounts ORB) Level Percentage Amounts

For amortization of the total unfunded actuarial liability, the amortization period must not exceed 40 years.

10 years after the effective date of the Pension Plan standard, the maximum period drops to 30 years

For amortization of any significant decrease in the unfunded actuarial liability resulting from changes in actuarial method, a minimum amortization period of ten years is imposed.

Accounting (cont’d)Annual Required Contribution (cont’d)


If more than one fund contributes to a plan, the

government must apportion the ARC-related

contributions to each fund. NPO (a reduction/addition to ARC), must be

allocated between business-like and

governmental activities based on

proportionate share of beginning balance of

NPO

Accounting (cont’d) – Annual Required Contribution (cont’d)


NPO allocated to governmental funds: If NPO is positive:

--Then it should be reported as a liability in the government-wide statement of net assets

If NPO is negative:--Then it should first be used to reduce any previous liability to

the same plan, and secondly, any excess should then be reported as an asset in government-wide statement of net assets.

NPO allocated to proprietary funds If NPO is positive:

--Then it should be reported as an asset If NPO is negative:

--Then it should be reported as a liability

Accounting (cont’d) – Net Pension Obligation (NPO)


This is an adjustment to ARC calculated by using the same amortization method, actuarial assumptions, and amortization period used in determining the ARC for that year.

If NPOb is positive (a funding deficiency), the adjustment is a deduction from ARC

If NPOb is negative (a funding excess), the adjustment is an addition to ARC

Regardless of whether NPOb is positive or negative, it is referred to as an “Unfunded Actuarial Liability.”

Accounting (cont’d) – NPOb


Employer pension expenditures/expense

may include one or both of the : 1) ARC Contributions AND/OR

2) Payments of pension-related debt (not

included in ARC or NPO).

Accounting (cont’d) – Pension Expense/Expenditure


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)


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 (i.e. custodial in nature)

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

accountability reasonso Its use will improve financial management or accountingo Mandated by law, regulation, or GASB standards

Assets = liabilities Since it is held on behalf of another party, all

assets it has, are someone else’s.

IV) Agency Funds


The City of Houston Agency funds include: Payroll Revolving, City Deposits, and Tax Clearing Funds.

The City and County of San Francisco has seven different Agency funds (Assistance Program Fund, Deposits Fund, Payroll Deduction Fund, State Revenue Collection Fund, Tax Collection Fund, Transit Fund, and Other Agency Funds).

Agency Funds – Examples


Special assessment accounting when the government is not obligated in any manner for special assessment debtTax Agency Funds

--Very common usagePass-through agency funds

--(but not as common since GASB Statement 24 on grant accounting was issued).

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

Agency Funds – Typical Uses


The Clinton County tax collector acts as property tax collection agent for Delta City, the Delta R-5 Consolidated School District, and the County Library. 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 governmental unit was $500,000, which was $250,000 for Delta City (50%), $150,000 for the school district (30%), and $100,000 for the Library (20%)

Tax Agency Funds -Example 1


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

Example 1 (cont’d)


Assuming each governmental unit 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

Delta R-5 CSD 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



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

Delta City $250,000 50% $200,000 $(2,000) $ 198,000R-5 C.S.D. 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



The following entries are required in the 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



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 Library 80,000Due to County GRF 3,200



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

Clinton County Tax Agency Fund: Dr. Cr.Due to Delta City $198,000Due to R-5 CSD 118,800Due to County Library 80,000Due to County GRF 3,200

Cash 400,000



Upon receipt of the amounts due each government Delta City General Fund: Dr. Cr.

Cash $198,000Expenditures 2,000

Taxes Receivable-Current 200,000 Delta -5 CSD General Fund:

Cash $118,800Expenditures 1,200

Taxes Receivable-Current 120,000 County Library General Fund:

Cash $ 80,000 Taxes Receivable-Current 80,000County GRF

Cash $ 3,200Revenues 3,200



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 NO. 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


There are three types of trust fundsI) Private-Purpose Trust FundsII) Investment Trust FundsIII) Pension Trust Funds

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

chapter 10granof-5e1 chapter 10 fiduciary funds and permanent funds

Documents

major permanent funds

epermanent funds

accrual5 funds

efiduciary funds

nonexpendable fiduciary

nonmajor funds

permanent nonexpendable

permanent fundsgranof