Chapter

8
Accounting for Fiduciary
ActivitiesAgency
and Trust Funds

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All

Learning Objectives
After studying Chapter 8, you should be able to:

Explain how fiduciary funds are used to report on the

fiduciary activities of a government
`

Distinguish among agency funds and trust funds

(private-purpose, investment, and pension)

Describe the uses for and characteristics of agency funds

Explain the activities of and accounting and financial

reporting for commonly used agency funds
8-2

Learning Objectives (Contd)

Explain the purpose, creation, operation, accounting, and

financial reporting for:
A cash

and investment pool (including an investment trust

fund)
A private-purpose
A pension

trust fund

trust fund

Describe accounting for other post-employment benefits

8-3

Agency Funds
Fiduciary

activities benefit other individuals,

organizations, or governments, rather than the
reporting
government.
For
this
reason,
Governmental Accounting Standards Board (GASB)
standards exclude the reporting of fiduciary activities
in the government-wide financial statements.
However, fiduciary activities are reported in the
fiduciary fund financial statements, the focus of this
chapter.

8-4

Agency Funds
Fiduciary funds are used to account for those activities in
which a government holds assets as an agent or trustee.
To account for these private-purpose fiduciary activities agency
funds, investment trust funds, private-purpose trust funds, and
pension trust funds are used.
Resources that are held in trust for the benefit of the
governments own programs or its citizenry should be
accounted for using a governmental fund rather than a
fiduciary fund. Such public-purpose trusts should be accounted
for as special revenue funds if the resources are expendable
for the trust purpose or as permanent funds if the trust
principal is permanently restricted.

8-5

Agency Funds
In

law, there is a clear distinction between an agency

relationship and a trust relationship. In accounting practice,
the legalistic distinctions between trust funds and agency
funds are not of major significance.
Trust funds differ from agency funds principally in degree:
Trust funds often exist over a longer period of time than an
agency fund, represent and develop vested interests of a
beneficiary to a greater extent, and involve more complex
administration and financial accounting and reporting.
Agency funds are used only if a government holds
resources in a purely custodial capacity for others
8-6

Agency Funds
Agency

funds are used to account for assets held by a

government acting as an agent for one or more other
governments or for individuals or private organizations.
Assets that are held in an agency fund belong to the party
or parties for which the government acts as agent.
Therefore, agency fund assets are offset by liabilities
equal in amount; no fund equity exists.
GASB

requires agency fund assets and liabilities to be

recognized on the accrual basis. Revenues and expenses
are not recognized in the accounts of agency funds,
however.
8-7

Agency Funds
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
Unless an agency relationship may be accounted
for within governmental and/or proprietary funds.
8-8

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
8-9

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

8-10

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:
Assessments ReceivableCurrent
Assessments ReceivableDeferred
Due to SA BondholdersPrincipal

Dr.Cr.
100,000
900,000
1,000,000
8-11

Special Assessment Agency Fund

Example (Contd)
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:
Cash
Assessments ReceivableCurrent
Due to SA BondholdersInterest

Dr. Cr.
150,000
100,000
50,000

8-12

Special Assessment Agency Fund

Example (Contd)
Special assessment bondholders were paid principal
in the amount of $100,000 and interest in the
amount of $50,000
Agency Fund:
Dr.
Due to SA BondholdersPrincipal 100,000
Due to SA BondholdersInterest
50,000
Cash

Cr.

150,000

8-13

Special Assessment Agency Fund

Example (Contd)
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 ReceivableCurrent 100,000
Assessments ReceivableDeferred
100,000

8-14

Tax Agency Fund

An

agency relationship that logically results in the

creation of an agency fund is the collection of taxes
or other revenues by one government for several of
the funds it operates and for other governments.
State governments commonly collect sales taxes,
gasoline taxes, and many other taxes that are
apportioned to state agencies and to local
governments within the state.

8-15

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%)
8-16

Tax Agency Fund

Illustrative Transactions (Contd)
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

8-17

Tax Agency Fund

Illustrative Transactions (Contd)
Assuming each government estimates that 4% of
taxes levied will be uncollectible:
Delta City General Fund:
Dr.
Cr.
Taxes ReceivableCurrent
250,000
Estimated Uncollectible Current Taxes
10,000
Revenues
240,000

8-18

Tax Agency Fund

Illustrative Transactions (Contd)
Delta R-5 CSD General Fund:
Dr.
Cr.
Taxes ReceivableCurrent
150,000
Estimated Uncollectible Current Taxes
6,000
Revenues
144,000
Clinton County General Fund:
Taxes ReceivableCurrent
100,000
Estimated Uncollectible Current Taxes
4,000
Revenues
96,000
8-19

Tax Agency Fund

Illustrative Transactions (Contd)
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*

Delta City
R-5 C.S.D.
County

$250,000
150,000
100,000

50%
30%
20%

Fees

Net Due

$200,000 $(2,000) $198,000

$120,000 (1,200) 118,800
80,000 3,200
83,200

Amount due is $400,000 X % of levy

8-20

Tax Agency Fund

Illustrative Transactions (Contd)
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

8-21

Tax Agency Fund

Illustrative Transactions (Contd)
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

8-22

Tax Agency Fund

Illustrative Transactions (Contd)
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:
Due to Delta City
Due to R-5 CSD
Due to County General Fund
Cash

Dr.
198,000
118,800
83,200

Cr.

400,000

8-23

Tax Agency Fund

Illustrative Transactions (Contd)
Upon receipt of the amounts due each government records:
Delta City General Fund:
Cash
Expenditures
Taxes ReceivableCurrent
Delta R-5 CSD General Fund:
Cash
Expenditures
Taxes ReceivableCurrent

Dr.
Cr.
198,000
2,000
200,000

118,800
1,200
120,000
8-24

Tax Agency Fund

Illustrative Transactions (Contd)
Clinton County General Fund:
Cash
Taxes ReceivableCurrent
Revenues

Dr.
83,200

Cr.
80,000
3,200

8-25

Pass-Through Agency Funds

Grants, entitlements, or shared revenues from the federal or a
state government often pass through a lower level of government
(primary recipient) before distribution to a secondary recipient.
Accounting for such pass-through grants depends on whether
the primary recipient government is deemed to have
administrative involvement or direct financial involvement in the
grants.
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

8-26

Pass-Through Agency Funds

According to GASB standards:

recipient government has administrative involvement if, for

example, it:
(a) monitors secondary recipients for compliance with
program-specific requirements,
(b) determines eligibility of secondary recipients or projects,
even if using grantor-established criteria, or
(c) has the ability to exercise discretion in how the funds are
allocated.
A recipient government has direct financial involvement if, for
example, it finances some direct program costs because of a
grantor-imposed matching requirement or is liable for disallowed
costs.
8-27

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 GASBs criteria for administrative

involvement or direct financial involvement
8-28

Fiduciary Funds
Required Financial Statements

Statement of Fiduciary Net Assets

Statement of Changes in Fiduciary Net Assets

8-29

Types of Trust Funds

Investment

Private-purpose

Pension

8-30

Trust Funds

PurposeTo account for assets the government

holds as an agent or trustee for individuals,
organizations, or other governments

BasisGAAP requires accrual accounting;

another basis of accounting may be prescribed by
state law or the donor

Fair Value ReportingGAAP requires that most

investments be reported at fair value
8-31

Investment Trust Funds

Used to account for the balance sheet and
operating statement transactions affecting the
external participants of a centrally managed
investment pool

8-32

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 publicpurpose permanent fund (if the gift is an
endowment) or special revenue fund (if the gift is
expendable)

8-33

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

8-34

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

8-35

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

8-36

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

8-37

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
8-38

Reporting for Defined Benefit

Pension Plans (Contd)

Statement of plan net assets (see Ill. 8-8)

Statement of changes in plan net assets (see Ill. 89)

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
8-39

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)

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
8-40

Employer Pension Accounting

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

Normal costsactuarial present value of benefits

allocated to the current year
Unfunded actuarial liabilitypresent value of projected
benefits other than normal costs (i.e., underfunding and
changes in plans)

8-41

Employer Pension Accounting

Key Terms (Contd)
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)

8-42

Employer Pension Accounting

Key Terms (Contd)
Annual Pension CostA 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

8-43

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 (see Ill.

8-13 for a diagram of this calculation)

8-44

Employer Pension Accounting

Calculating Annual Pension Cost (Contd)
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

8-45

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)

8-46

Employer Pension Accounting

Expenditure/Expense (Contd)
Employer pension expenditures/expense (contd):

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

8-47

Employer Pension Reporting

Employer pension expenditures/expense (contd):

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

8-48

Employer Pension Reporting (Contd)

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

8-49

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

8-50

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

8-51

Managing Investment Trust Funds

and Pension Funds (Contd)
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

riskthe risk of loss due to the issuer, or a

counterparty, not meeting its payment obligations

Market

riskthe risk the fair value of the investments

will decline

8-52

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 fundsprivate-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

END
8-53