Ch08_LN_517.pptx

Accounting for Fiduciary Activities – Custodial and Trust Funds Chapter 8  Fiduciary Fund Types Custodial Fund: Funds consisting of resources received and held by the government as an custodian/agent for others. For example, taxes collected and held by a municip...

Accounting for Fiduciary Activities – Custodial and Trust Funds Chapter 8  Fiduciary Fund Types Custodial Fund: Funds consisting of resources received and held by the government as an custodian/agent for others. For example, taxes collected and held by a municipality for a school district. Investment Trust Fund: Funds used to account for the external assets, liabilities, net position, and changes in net position of a multi-organizational investment pool. Pension Trust Fund: Funds that collect retirement and other employee benefit contributions from government employers and employees, manage assets, and make payments to qualified retirants, beneficiaries, and disabled employees. Private-Purpose Trust Fund: Funds that account for contributions received under a trust agreement that don’t qualify as an investment trust fund or pension trust fund.  Custodial Funds Custodial funds are fiduciary funds that are not reported as one of the three types of trust funds. Assets that are held in a custodial fund benefit a party or parties that are not a part of the government administering the custodial fund. Hence, an agency role. The government administering the custodial fund cannot be involved in administrative decision making with regard to the use or distribution of fund assets.  Custodial Fund for Special Assessment Debt Service A government may perform the functions of billing property owners for the assessments, collecting installments of assessments and interest on the assessments, and from the collections, paying interest and principal on the special assessment debt. Special Assessments BACKED by taxing authority (DSF) Special Assessments NOT BACKED by taxing authority (CF) Special Assessment – Debt Service Fund Assume that special assessment bonds, secondarily backed by the general taxing authority of a certain city, were previously issued to complete a street-widening project in a housing development within the city. Upon completion of the project the city levied assessments amounting to $480,000, payable in 10 equal installments with 5 percent interest on unpaid installments, on owners of properties within the housing development to pay for the outstanding bonds.  Special Assessment – Debt Service Fund As shown in Entry 1, all receivables are recorded at the time of the levy, but Revenues is credited only for the amount expected to be collected within one year from the date of the levy; Deferred Inflow of Resources is credited for the amount of deferred installments.  Special Assessment – Debt Service Fund All current assessments receivable due at year-end were collected along with interest of $24,000. Any amounts not collected by the due date should be reclassified by a debit to Assessments Receivable—Delinquent.  Special Assessment – Debt Service Fund Special assessment bond principal in the amount of $48,000 and bond interest payable of $24,000 were paid on schedule.  Special Assessment – Debt Service Fund The second installment of assessments receivable was reclassified from the unavailable category to the current category. A corresponding amount of Deferred Inflow of Resources was reclassified as Revenues.  Illustrative Transactions To illustrate custodial fund accounting for special assessment debt service activities, assume the same information except that the government is not obligated in any manner for the special assessment debt. Note that no entries are made in the government-wide journal because fiduciary funds are not reported in the government-wide financial statements.  Illustrative Transactions To illustrate custodial fund accounting for special assessment debt service activities, assume the same information except that the government is not obligated in any manner for the special assessment debt. Note that no entries are made in the government-wide journal because fiduciary funds are not reported in the government-wide financial statements.  Tax Custodial Fund A county official collects all property taxes for property owned within County Transit Port Authority Library SchoolService Taxes the county... Operating Authority Then distributes them to the appropriate fund or government. Tax Custodial Fund Accounting Managing a tax custodial fund is complicated by the fact that tax payments are received at various times – some early, some on time, some late, some not at all. A further complication is that the rates for the various funds and governments may change from year to year. In addition, the collector is allowed to withhold a portion of the taxes collected to compensate for the resources used to facilitate the collection. Illustrative Transactions Illustrative Transactions Illustrative Transactions Illustrative Transactions Illustrative Transactions Pass-through Custodial Funds Grants, entitlements, or shared revenues from the federal or a state government often pass through one government (primary recipient) before distribution to a secondary recipient. A question arises as to type of involvement.  Administrative or Direct Financial? A 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 allocation of funds. 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.  Administrative or Direct Financial? When the criteria for administrative or direct financial involvement are met, the primary recipient government must recognize a revenue for the receipt and an expenditure or expense for the transfer in a governmental fund, private- purpose trust fund, or proprietary fund. If neither administrative nor financial involvement is deemed to exist, then a pass- through agency fund must be used and no revenue or expenditure/expense is recognized.  Financial Reporting of Custodial Funds Fiduciary activities are reported only in the fiduciary fund financial statements, not at the government-wide level. Custodial fund financial information is reported in aggregate form in a separate column of the statement of fiduciary net position. Only financial information for external parties is reported by custodial funds in the fiduciary fund statements. An exception to aggregating custodial information occurs if there is an investment trust fund that must be reported as a custodial  Trust Funds Trust funds account for assets received by a government under a trust agreement Private- Investment Pension Trust purpose Trust Trust fund fund fund  What is Trust Fund? A trust fund is a legal entity that can hold property on behalf of someone or some group. The creator of the trust may be called grantor, trustor, settlor or trust maker. This person determines the trust agreement. The person or persons ultimately benefiting from the trust is the beneficiary. The person or entity that oversees the trust and enforces the trust agreement is the trustee. The TRUST AGREEMENT specifies how the trust should be managed. It normally states the (1) purpose for the trust, (2) the assets in the trust, and (3) the responsibilities of the trustee(s). http://www.businessdictionary.com/definition/trust-agreement.html https://meetfabric.com/blog/what-is-a-trust-fund Comparing Governmental Funds & Trust Funds Benefits government’s own programs Special or citizenry revenue fund Both earnings and principal can be spent Benefits government’s own programs Permane or citizenry nt fund Only earnings can be spent Benefits those other than the government’s own programs or Trust citizenry fund Use of earnings and principal depend upon trust agreement  Investment Pools Funds within a government may have a combination of idle cash, short-term investments, and long-term investments. To improve management of investments, funds may pool their investments with an investment manager, such as a treasurer or external professional investment manager. These investment pools may be either internal investment pools or external investment pools.  External Investment Pool Earnings on pooled investments and changes in fair value of investments are allocated to the participants having an equity interest in the pool in proportion to their relative contributions to the pool. To ensure an equitable division of earnings and changes in fair value it is necessary to revalue fund assets whenever contributions or distributions occur. Investment pools that are administered through a trust agreement are reported as investment trust funds; if there is no trust agreement they are reported as custodial funds. Assets Transferred to Create Drew County (CO) Investment Pool Assets Transferred to Create Drew County (CO) Investment Pool Illustrative Transactions Illustrative Transactions Illustrative Transactions  Private-Purpose Trust Funds Individuals or organizations may establish trust agreements to confer assets (or management of the assets) to another party at the present time or at a future date. The fair value of assets placed in the trust is referred to as the principal or corpus of the trust. If the principal of the trust must be held intact (nonexpendable) to produce income, the trust is often called an endowment. The income from the assets of an endowment may be used only for the purposes specified by the trustor.  Pension Trust Funds Current guidance for pension fund accounting shifts to an accounting-based approach of reporting pension liabilities and expense under the economic resources measurement focus. This provides a broader perspective of the employers' net pension position than the prior funding-based approach, whose focus was primarily on employer contributions and progress toward funding benchmarks.  Types of Pension Plans Defined Contribution Plans Amount or rate of contribution is specified Benefits payable depend on contributions made and performance of member’s account Defined Benefit Plans Amount of benefits is specified Contribution is based on actuarial calculations so that funding of future benefits is adequate  Required Reporting for Defined Benefit Pension Plans Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position Detailed notes to the financial statements Required supplementary information Statement of Fiduciary Net Position Statement of Fiduciary Net Position  Statement of Changes in Fiduciary Net Position This statement reports employer and employee contributions and investment income as additions to net position rather than as revenues. Similarly, benefits paid, refunds of contributions, and administrative expenses are reported as deductions from net position rather than as expenses.  RSI: Schedule of Changes in Net Pension Liability & Related Ratios This schedule displays elements of total pension liability, net pension liability, and changes in fiduciary net position for each of the last 10 fiscal years. Total Pension Liability: Projected value of benefit payments for past service Service Cost: Changes in total pension liability due to adding the projected benefit payments attributed to the current year. Plan Fiduciary Net Position: The market value of plan assets. Net Pension Liability: The difference between the total pension liability and plan fiduciary net position. Covered Payroll: The payroll on which contributions to a pension plan are based.  RSI: Schedule of Employer Contributions & Schedule of Investment Returns Employer Contributions: Actuarially determined contribution and the amount that the employer has contributed in each of the last 10 fiscal years presented as a percentage of covered payroll. Investment Returns: This schedule presents the annual money-weighted rate of return on pension plan investments for each of the last 10 fiscal years.  Employer’s Pension Accounting Employer pension-related expenses, expenditures, deferred outflows of resources, applicable liabilities, and deferred inflows of resources are recorded within fund and government- wide financial statements. Primary measures to be calculated and reported are the net pension liability and the pension expense or expenditure. Employer’s Pension Accounting Other Postemployment Benefits (OPEB) OPEB includes benefits other than pensions, such as health care, life insurance, and long- term care, among others. Although GASB issues separate standards, the accounting for OPEB has historically been very similar to that of defined benefit pension plans. GASB also provides a standard for accounting for voluntary and involuntary termination benefits. Questions?