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 Assets=Liabilities • Another exception for liabilities of pension plans • Fiduciary assets are NOT included in the entity-wide statements because they are not available for general SLG use -- reported at fund level only.

4. 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 a wise investment program to gain a reasonable return on the principal.

5. Typical uses of agency funds • May be used to hold withholding and payroll amounts due to government agencies. • If not accounted for in general fund or other funds paying payroll. • 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.

6. Tax agency fund entries • Note: Accounting equation is Assets = Liabilitiy, these are the only two types of accounts … no revenues, fund bal. Etc. • Entry #1: Record the GROSS amount to be collected for all participating SLGs -- no allowance for uncollectibles • Entry #2: Collection of a portion of the taxes

7. Tax agency fund entries • Entry #3: County receives ‘revenue’; village and school district pay equal amount of ‘expenditure’ BUT cannot call these revenues and expenditures in an agency fund -- adjust the liability (due to xxx) accounts instead. • The amount of expenditure and revenue shows up in the General Fund of each participating SLG unit. • Note: some citizens may pay last year’s taxes late -- accounting system must have a means of keeping tax collections separate by year of levy.

8. Financial Statements for Agency Funds • Agency assets and liabilities will be included in the Statement of Changes in Fund Net Assets. • There are no revenues or expenses, however, use of a Combining Statement of Changes in Assets and Liabilities for Agency Funds per p. 183 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. • Works essentially like ‘permanent’ funds but income used for private non-government purposes. • In other cases, both the principal and income can be spent (expended) for specific purposes.

10. Investments in Trust Funds • The primary guidance on investments for SLGs - all fund types -- is GASB 31 • Investments are carried at fair value -- usually measured by a quoted market price • Unlike business accounting, the main financial statements do not 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).

11. Private-Purpose Trust Entries • Entry 1: Contribution treated as essentially a type of revenue • Entries 2 & 3: Because bonds pay full 6 months of interest to whoever owns them on interest date -- sales between interest days require purchase of the interest since last interest date. • Entry 4: Scholarships is an outflow similar to expense/expenditure

12. Private-Purpose Trust Entries • Entry 5: Interest Income received • Entry 6: Adjusting entry at year end for accrued interest • Entry 7: Increases investment account for the amount of the fair value increase. • Entry 8: Closing entry

13. Escheat Property • Resources from unclaimed bank accounts, estates, etc. is typically turned over to the state -- the state searches for owners, 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. • When state takes over property, record the assets and an equal amount of gross contribution revenue. • The $ amount for which the state expects to find owners should be estimated and treated as an expense and liability. • Result is similar to estimated warranty expense treatment in business accounting.

14. Investment Trust Funds • Internal Investment Pools • If SLG money is pooled for efficient management, the individual investment balances should be shown on the balance sheet of the contributing funds of the SLG. • External Investment Pools • External moneys reported as investment trust funds • Internal balances spread out to contributing funds of the SLG.

15. Basic Investment Accounting Principles • Use accrual basis • Investments at fair value • Must constantly adjust assets to fair value every time money is added or withdrawn from the fund as well as at year end. • Special note disclosures show categories of investments etc.

16. 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. • PERS note disclosures required even if the PERS is considered part of a separate reporting entity.

17. Example PERS entries • Entry 1: Collection of accrued interest • Entries 2 & 3: Receipt of contributions and Accrual of benefits to be paid • Entry 4: Payment of accrued liability for benefits • Entry 5: Outflow for refunds • Entry 6: Receipt of interest, dividends, and accrual of addition interest at year end

18. Example PERS entries • Entry 7: Investments mature • Entry 8: Sale of investments and purchase of additional investments -- note gain on sale treated as ‘increase in fair value’ • Entry 9: Paid administrative expense • Entry 10 & 11: Year end fair value adjustments and closing

19. Pension Trust Fin. Reporting • 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 • Required supplementary schedules • Schedule of Funding Progress • p. 192 -- 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

20. Criticism of Pension Trust Accounting • Some have severely criticized the current approach because the Statement of Fiduciary Net Assets for Defined Benefit Plans does not give any indication of the overall size of the employer liability. • Some information on the liability is in the footnotes but even the required annual contribution is somewhat subjective if different actuaries choose different methods.

21. 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

22. Employer Reporting • Previous section discussed how to handle pension moneys once in the pension trust, but those money’s 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 • How would you record this? A General Fund was supposed to contribute $100,000, but only contributed $80,000 this year with $20,000 to be contributed early next year? • Expenditure 100,000 • Pension liability 20,000 • Cash 80,000

23. 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 the accounting requirements were for these moneys 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.

24. Re-cap of FiduciaryFinancial 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 NOT included in entity wide statements

25. Slides prepared by • Dr. Louella Moore • Arkansas State University