SU 12: Fiduciary Funds Flashcards
Fiduciary funds
Account for assets that governments hold as trustees or agents for individuals, private organizations, or other parties.
Resources must be to benefit outside parties - not governments own programs
Fund accounts for both expendable and non-expendable resources
major types of fiduciary funds
Private purpose trust funds
Investment trust funds
Pension (and other employee benefit) trust funds
Trust fund
fund in which one party (trustee) holds resources for the benefit of another (usually under a formal agreement)
Are fiduciary funds reported in government-wide financial statements?
No
Resources are not available for government use so it would be misleading
Escheat fund
kind of private purpose fiduciary fund. holds abandoned money or assets that will revert to the state in the absence of legal heirs or claimants
Investment trust
investment pools where multiple governments / government agencies pool their money to get better rates
Risks associated with fiduciary funds
- large amounts of highly-liquid (cash and investment) financial resources increases risk of loss from fraud or just decline in FMV (especially if government invests in risky assets)
Fiduciary assets
- cash
- ST & LT equity securities
- ST & LT debt securities
- tangible and intangible assets
Endowment trust fund
contribution where the donor requires that the principal is invested and remain intact (non-expendable) but income from the investment may be used (expended)
types of endowments
Perpetuity (principal/ corpus never used)
vs
Term endowment (principal is preserved for a specified period and then may be used)
Classifications of endowment trust income
Restricted (for a specific purpose transferred to Special Revenue fund or Capital Projects Fund)
vs
Unrestricted (any purpose - transferred to general fund)
Gains on unrestricted income
if unrestricted income is reinvested and earns gains the gains remain unrestricted
Revenue accounts for endowment income
Restricted (in special revenue fund/ capital products) - Revenue account
Unrestricted (general fund): investment income
General endowment fund
more relaxed rules about distributions
Addition
Anything that increases the fiduciary fund investment
(instead of revenue)
Deduction
Anything that comes out of the fiduciary fund investment
(instead of expense)
Types of gains in fiduciary funds
Realized (transaction related to something that has appreciated in value)
vs
Unrealized (change in FMV of assets)
Treatment of fiduciary fund gain
Donor may stipulate if gains are to be added to principal (non-expendable) or added to income (expendable)
unless specified otherwise GASB defaults to added to income
Spending rate
percentage of endowment money that can be taken out in the current year
Fixed rate of return approach to determine spending rate
Spending rate = % of principal = Annual ROI % - Annual inflation %
(Annual ROI% = interest + dividends + appreciation)
ROI factors = revenue, but only part is unrestricted. Discretionary restriction applied to inflation %
Accounting for pension trust fund
if maintained by government: full accrual accounting AND GOES INTO GOV-WIDE STATEMENTS
if maintained by outside institution: disclosure notes only
Pension assets
Cash
income producing investments
Pension “Normal cost”
Money that needs to be added to a pension fund for the benefits accrued by employees in the fiscal year based on analysis
calculated on annual % of PV of pension benefits found using entry age actuarial cost method
Pension costs
Shares of benefits per period (calculated with actuarial cost method)
Pension expenditures
(Not sure when this would be used?)
costs paid with current financial resources
Pension expenses
GASB defined pension costs
GOV required annual pension contribution + GASB adjustment
Components of Defined benefit pension expense
Annual required contribution = normal cost + underfunded actuarial liability
Underfunded actuarial liability
= PV (project benefit payments) - Pension Assets FMV
basically whatever of previously earned benefits (PV) is not covered by current assets
What affects underfunded actuarial liability?
- normal (service) cost
- expected earnings on plan assets
- interest on liability (time value of money interest)
- actuarial gains and losses (changes in estimates)
- changes in pension benefits (prior period costs)
Additions to pension trust
interest
dividends
gains on sales of investments
increase in FMV of investments
Deductions from pension trust
Depreciation
administrative costs
investment costs
losses on sales of investments
payments of retirement benefits
Decrease in FMV of investments
GASB 67 and 68 updates
- Amortization of unfunded liability only allowed if caused by employee changes (remaining service life of employees) or difference between actual vs projected earnings
- Multi employer plans: each employer’s liability = % of collective liability (determined by relative contribution percentage)
Employer liability in multiple-employer plans
% of collective liability to each employer determined by that employer’s contributions / total contributions
Disclosures required for pension trusts
- financial statements focus on net assets with disclosures showing actuarial information
- schedule of funding process
- schedule of employer contributions
essentially how they’re doing and how they plan to adjust
Schedule of funding progress
Shows actuarial value of plan assets vs actuarial liability - 10 years of data
Gives funded ratio
Funded ration
= plan assets / actuarial liability
ideally 100%, less than 80% considered bad
Schedule of employer contributions
Shows if contributions were lower than necessary and how they changed the funded ratio
Pension plan structures
- single employer
- agent multi-employer (one employer acts as agent)
- Cost sharing plans (assets and liabilities pooled with % allocated)
what pension plan structure REQUIRES full annual required contribution
Cost-sharing plan
Legal restrictions on pension trust funds
- Government contributions are irrevocable (cannot be withdrawn)
- assets are legally restricted to paying retirees
- assets are legally protected from government’s creditors
Annual defined benefit pension amount
Final average salary (average of 3 (or 5) highest paid years)
x
Years of service (years employed)
x
Benefit multiplier (% of salary guaranteed by pension)
for monthly divide by 12!
Qualifying pension plan
standard pension funds that obey all federal rules for pensions
Effect if pension is accounted for in general fund
- ONLY pension contributions paid with current resources would be recognized
- would not be a qualified pension fund
- would not be compliant with to use fiduciary fund
Net pension liability
= total pension liability - Plan fiduciary net position
aka
= actuarial estimation of plan - FMV of assets
Could be a net asset but that’s unlikely
Defined contribution plan contribution
GOV contribution % of employee salary
Employee contribution (varies, must often match GOV)
Defined contribution plan
Gov (and potentially employee) make regular contributions into a 401k- like investment account and at retirement the employee gets a monthly annuity based on the fun balance at requirement
commonly held by a private financial instutution
Annual Pension liability (Defined contribution plan)
= Annual contribution - Required contribution
OPEB
Other post-employement benefit
same accounting as pension trust complete with disclosures for schedule of funding progress and schedule of employer contributions
Criteria for investment trust fund
- Gov with fiduciary relationship controls assets
- Assets do NOT come solely from government revenue or from government mandated/ voluntary non-exchange transactions
- assets are held in a qualifying trust
GASB standard for investment trust funds
GASB 84
Allocation of income in an investment trust fund
based on proportionate investments (or per trust agreement)
Agency Funds
aka custodial
Purpose to account for assets held by government acting as an agent for other entity (principal)
basically a pass-through account
When are agency funds not appropriate
If government acting as agent has any responsibility for the outcomes (principal should have the responsibility)
When are agency funds required
- dollar amount of transaction is high (requires accountability)
- use will improve financial management or accounting
- mandated by law, regulation, GASB standards
Custodial funds
AKA Agency funds
Accounting equation for Agency (Custodial) funds
Assets = liabilities
NO FUND BALANCE all assets belong to the principal so every asset creates a liability
Agency (custodial) fund journal entries
DR Asset
CR Liability
Typical transactions for Agency fund
ST investments of money purchased and sold
Gains and losses increase or decrease liability to principal
