CHAPTER

TRUST & AGENCY

(FIDUCIARY) FUNDS

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 Agency Funds
Purpose
To account for assets held by a government acting as an
agent for one or more other governments, individuals, or
private organizations
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

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 Agency Funds—
Typical Uses

 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

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 Special Assessment Agency Funds

 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

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 Special Assessment Agency Fund—
Example

 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

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 Special Assessment Agency Fund—
Example (Cont’d)

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
Assessments Receivable—Current
100,000
Due to SA Bondholders—Interest
50,000

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 Special Assessment Agency Fund—
Example (Cont’d)

Special assessment bondholders were paid principal in

the amount of $100,000 and interest in the amount of
$50,000

Agency Fund: Dr. Cr.

Due to SA Bondholders—Principal 100,000
Due to SA Bondholders—Interest 50,000
Cash 150,000

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 Special Assessment Agency Fund—
Example (Cont’d)

At the beginning of the following year, the next installment

of assessments receivable was reclassified from deferred
to current status:

Agency Fund: Dr. Cr.

Assessments Receivable—Current 100,000
Assessments Receivable—Deferred 100,000

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 Tax Agency Fund—
Illustrative Transactions

 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%)

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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

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 Units 500,000

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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

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
Revenues 240,000

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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

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

Taxes Receivable—Current 150,000
Estimated Uncollectible Current Taxes 6,000
Revenues 144,000

Clinton County General Fund:

Taxes Receivable—Current 100,000
Estimated Uncollectible Current Taxes 4,000
Revenues 96,000

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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

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) $198,000

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

Amount due is $400,000 X % of levy

*

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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

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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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

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

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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

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
Cash 400,000

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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

Upon receipt of the amounts due each government records:

Delta City General Fund: Dr. Cr.

Cash 198,000
Expenditures 2,000
Taxes Receivable—Current 200,000

Delta R-5 CSD General Fund:

Cash 118,800
Expenditures 1,200
Taxes Receivable—Current 120,000
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 Tax Agency Fund—
Illustrative Transactions (Cont’d)

Clinton County General Fund: Dr. Cr.

Cash 83,200
Taxes Receivable—Current 80,000
Revenues 3,200

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 Pass-Through Agency Funds

 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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 Fiduciary Funds—
Required Financial Statements

 Statement of Fiduciary Net Assets

 Statement of Changes in Fiduciary Net Assets

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Types of Trust Funds and Need for it

 Investment
 Private-purpose
 Pension
 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

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 Investment Trust Funds

Used to account for the balance sheet and

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

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 Private-Purpose Trust Funds

 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)

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 Accounting for Private-purpose
Trust Funds

 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

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 Pension Trust Funds

 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

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 Employer Pension Accounting

GASB accounting and financial reporting

standards for the employer provide guidance for:

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

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 Employer Pension Accounting

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
 pension plans themselves if they are also employers

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 Reporting for Defined
Benefit Pension Plans
 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
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 Reporting for Defined Benefit
Pension Plans (Cont’d)

 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
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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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 Employer Pension Accounting—
Key Terms

Annual Required Contributions (ARC)—

Employer’s required contribution to a defined benefit
pension plan, calculated in accordance with certain
parameters. 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)

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 Employer Pension Accounting—
Key Terms (Cont’d)

Net Pension Obligation (NPO)—Cumulative

difference 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)

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 Employer Pension Accounting—
Key Terms (Cont’d)

Annual Pension Cost—A calculated amount of the

employer'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

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 Employer Pension Accounting—
Calculating Annual Pension Cost

 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

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

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

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 Employer Pension Accounting—
Expenditure/Expense

Employer pension expenditures/expense may

include one or both of the following:

 Contributions in relation to ARC

 Payments of pension-related debt (not included in

ARC or NPO)

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

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

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 Employer Pension Reporting

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

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 Employer Pension Reporting (Cont’d)

 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

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Other Postemployment Benefits (OPEB)

 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

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 Managing Investment Trust Funds
and 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 Funds
and Pension Funds (Cont’d)

A sound investment policy allows managers of the fund

to maximize total return consistent with the defined
level 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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 Concluding Comments

 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

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