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U. Accounting for Fiduciary Funds

U. Accounting for Fiduciary Funds

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Module 21: Governmental (State and Local) Accounting



942



criteria for inclusion in a government financial statement, GASB Statement No. 34 requires that a pension trust

fund be used.

The financial reporting framework for postretirement benefits other than pensions is covered by

GASB Statement No. 45. Employers are required to measure and disclose the amount for annual other post

employment benefits (OPEB) cost on the accrual basis. Annual OPEB cost is equal to the employer’s annual

required contribution to the plan with certain adjustments if the OPEB obligation is under- or overfunded. This

is essentially the same as the accounting required by commercial enterprises under SFAS 106 (see Appendix A).

GASB Statement No. 45 discussed an alternative measurement method for employers with fewer than 100 total

plan members. GASB Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer

Plans, addressed issues related to the use of the alternative measurement method and the frequency and timing

of measurements by employers that participate in agent multiple-employer OPEB plans. GASB Statement No.

57 amended GASB Statement No. 45 to permit an agent employer that has an individual-employer OPEB plan

with fewer than 100 total plan members to use the alternative measurement method at its option regardless of

the number of total plan members in the agent multiple-employer OPEB plan in which it participates. GASB

Statement No. 57 also amended the GASB Statement No. 43 requirement that a defined OPEB plan obtain an

actuarial valuation. GASB Statement No. 57 indicates that this requirement can be met by reporting aggregated

individual-employer OPEB information determined by actuarial valuations or measurements using the alternative

measurement method for individual-employer OPEB plans that are eligible. In addition, GASB Statement No. 57

indicated that actuarially determined OPEB measures should be determined at a common date and at a minimum

frequency to satisfy the agent multiple-employer OPEB plan’s financial reporting requirements.

A government may decide to provide voluntary termination benefits, such as early-retirement incentives to

its employees. They may also provide involuntary termination benefits, such as severance pay. In governmental

financial statements prepared on the accrual basis, governments should recognize a liability and expense for

voluntary termination benefits when the offer has been accepted by the employees and the amount of liability

can be estimated. For involuntary termination benefits, the liability should be recognized when the plan has

been approved and communicated to the employees and the amount of the liability can be estimated. GASB

Statement No. 47, Accounting for Termination Benefits, provides that the liability for termination benefits should

be measured at the present value of the expected future benefit payments. In financial statements prepared on the

modified accrual basis, the liability and expenditures for termination benefits should be recognized to the extent

the liabilities are normally expected to be liquidated with expendable available financial resources.

Investment trust funds are required when a government sponsors an external investment pool; for example,

when a county sponsors an investment pool for all cities, school districts, and other governments within its

borders. The external portion of investment pools are to be reported (by the county) in a manner similar to

pension trust funds. The Statements of Net Fiduciary Assets and of Changes in Fiduciary Net Position are

required. However, Statements of Cash Flows are not required.

Private-purpose trust funds represent all other trust arrangements under which principal and income benefit

external individuals, private organizations, or other governments. Private-purpose trust funds may be nonexpendable

or expendable. A nonexpendable trust fund is one in which the principal cannot be expended but which provide that

income may be expended for some agreed-upon purpose. Sometimes, this is called an endowment.



EXAMPLE

Assume a donor gives $500,000 to a city with instructions that the principal be invested permanently and that the

income is to be used to provide scholarships for low-income children to attend a private, not-for-profit day care

program. The receipt and investment of the gift would be recorded as

Cash

Additions—Nonexpendable Donation

Investments

Cash



500,000

500,000

500,000

500,000



Assume $30,000 is received in investment income and expended.

Cash

Additions—Investment Income

Deductions—Awarding of Scholarships

Cash



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30,000

30,000

30,000

30,000



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Expendable private-purpose trust funds are accounted for in the same manner, except that the principal as

well as investment income may be expended. For example, a donor may give $10,000 to a school district with

instructions that each year $2,000 plus investment income be awarded to the top student in the senior class, as a

scholarship.

Another use of private-purpose trust funds, in some cases, is for escheat property. Escheat property is

property taken over by a government, usually state government, when the property is abandoned and the legal

owners cannot be found. GASB Statement No.  37 concluded that escheat property generally is recorded in the

governmental or proprietary fund to which the property ultimately escheats (e.g., an educational fund). A liability

is recorded for estimated amounts to potential claimants. A private-purpose trust fund is used when resources are

held for individuals, private organizations, or another government.

Agency funds are used to account for activities where the government is acting as an agent for others. Agency

funds have only assets and liabilities; no fund equity, revenue, or expenditure (expense) accounts are used. The

GASB requires the use of agency funds for special assessments where the government is not obligated in any

manner for the special assessment debt.

Another common use of agency funds is to account for property taxes. Property taxes are usually remitted

to a county treasurer who places the monies in a county Tax Agency Fund. The taxes are held until such time as

they are remitted to each of the other local governments located within the county. Often, a fee is charged, which

decreases the amount that is distributed to the other local governments and increases the amount that is distributed

to the County General Fund.



















V. Reporting Interfund Activity

Under GASB Statement No. 34, interfund activity is shown between individual funds in fund financial statements

and between business-type and governmental-type activities in the government-wide financial statements. GASB

provides for two major types of interfund activity, each with two subtypes.

1. Reciprocal interfund activity

a. Interfund loan and advances

b. Interfund services provided and used

2. Nonreciprocal interfund activity

a. Interfund transfers

b. Interfund reimbursements

Interfund loans and advances are transactions in which one fund provides resources with a requirement for

repayment. Short-term loans are recorded with “Due from” and “Due to” accounts.



EXAMPLE

Assume a donor gives $500,000 to a city with instructions that the principal be invested permanently and that the

income is to be used to provide scholarships for low-income children to attend a private, not-for-profit day care

program. The receipt and investment of the gift would be recorded as



Assume an enterprise fund made a short-term loan to the general fund. The entry would be

Enterprise Fund

Due from General Fund

Cash



General Fund

100,000



Cash

100,000



Due to Enterprise Fund



100,000

100,000



Long-term interfund receivables and payables use the terms “Advance to” and “Advance from.” If a

governmental fund makes a long-term loan to another fund, it is necessary to reserve fund balance in the amount

of the advance, as the resources are not “available” for expenditure in the current period.



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EXAMPLE

Assume the general fund advances $50,000 to an internal service fund. The entries would be

General Fund



Internal Service Fund



Advance to Internal Service Fund

Cash

Fund Balance—Unreserved

Fund Balance—Reserved for

Long-Term Advances



50,000

50,000



Cash

Advance from General Fund



50,000

50,000



50,000

50,000



Loans and advances to and from component units are to be separately identified in the government-wide

financial statements.

Interfund services provided and used represent transactions in which sales and purchases of goods and

services between funds are made at prices approximating their external exchange price. Examples would include

the sale of water from an enterprise fund to the general fund, the provision of services by an internal service fund

to a governmental fund, a payment in lieu of taxes from an enterprise fund to the general fund (where payment

is approximately equal to services provided), and the payment of a retirement fund contribution from the general

fund to a pension trust fund. Revenues (or additions) are recognized by one fund, and an expenditure or expense

is recorded by another fund. As a result, the operating statements will include these revenues and expenditures/

expenses.



EXAMPLE

Assume an internal services fund charges the general fund for goods or services provided.

Internal Service Fund

Due from General Fund

Operating Revenues—Charges

for Services



General Fund

30,000



Expenditures

Due to Internal Service Fund



30,000



30,000



30,000



Interfund transfers are nonreciprocal transfers between funds, where payment is not expected. Examples

would include an annual subsidy from an enterprise fund to the general fund or an annual transfer from the general

fund to a debt service fund. To illustrate the latter in the amount of $300,000

General Fund

Other Financing Uses—Transfer to

Debt Service Fund

300,000

Cash



Debt Service Fund



300,000



Cash

Other Financing Sources—

Transfer from General Fund



300,000

300,000



Transfers are reported as “Other Financing Sources (Uses)” in the governmental funds statement of revenues,

expenditures, and changes in fund balance.

Interfund reimbursements are repayments from funds responsible for expenditures or expenses to those

funds that initially paid for them.



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EXAMPLE

Assume the general fund paid an enterprise fund for a consultant’s fee that was initially paid by the enterprise

fund and charged to expense.

General Fund

Expenditures

Cash



Enterprise Fund

50,000



Cash

50,000



50,000



Consultant Fee Expense



50,000







W. Accounting for Investments

GASB’s rules for investment accounting are included in GASB Statement No. 31, Accounting and Financial

Reporting for Certain Investments and for External Investment Pools. GASB Statement No. 31 provides that

investments in debt securities and in equity securities with determinable fair values be reported at fair value.

Changes in fair value should be reported as a part of operations, using modified accrual or accrual accounting, as

appropriate. No distinction is to be made on the face of the financial statements between realized and unrealized

gains and losses, although disclosure may be made of realized gains in the notes. Investment income should be

reported in the fund for which investments are held, when investments are pooled.







X. Conversion from Fund Financial Statements to Government-Wide Financial Statements

Most state and local governments will keep their books on a fund basis in order to facilitate the preparation

of fund financial statements and to prepare the budget-actual schedule as a part of RSI. This will mean that

governments will record transactions on the modified accrual basis for governmental funds and on the accrual

basis for proprietary and fiduciary funds. Many governments will make changes, on a worksheet basis, in order

to prepare the government-wide financial statements (Statement of Net Position and Statement of Activities).

The following are the worksheet changes that will be necessary to convert from governmental fund statements to

the governmental activities portion of the government-wide statements. It should be emphasized that the journal

entries illustrated below are made only for worksheet purposes and will not be posted to the funds ledger.



1.

Capitalization of Capital Outlay Expenditure

Costs incurred for capital assets acquired or constructed by governmental funds are recorded as expenditures.

Governmental funds do not record capital assets. Therefore it will be necessary to record capital outlay

expenditures as capital assets in the governmental activities column of the government-wide Statement of

Net Position. A worksheet adjusting entry needs to be made to reduce capital outlay expenditures to zero and

capitalize the costs in appropriate capital asset accounts. These capital assets will increase the net position of the

governmental activities. Assuming the amount is $10,000,000, the entry would be

Fixed Assets (Land, Buildings, Equipment, etc.)

Expenditures



10,000,000

10,000,000



In addition, depreciation expense will be required to be recorded for the buildings and equipment.

2. Issuance of general long-term debt

When general long-term debt is issued, governmental funds credit Proceeds of Debt, which is an Other

Financing Source. Also, premiums and discounts are not amortized but simply add to or deduct from the amount

of resources available. On a worksheet it will be necessary to eliminate Other Financing Sources—Proceeds of

Bonds and record the debt as a liability. Moreover, any premium or discount must be associated with the liability

and amortized over the life of the bonds. The worksheet entry to convert the sale of bonds from governmental fund

accounting to government-wide statements, assuming a sale of $5,000,000 bonds at par, would be

Other Financing Sources—Proceeds of Bonds

Bonds Payable



5,000,000

5,000,000



3.

Debt service payments

When making principal payments on long-term debt, governmental funds debit Expenditures—bond principal

retirement. Those expenditures will need to be eliminated and replaced with a debit to the bond principal when

preparing the government-wide statements. Bond principal retirement does not affect the government-wide



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Module 21: Governmental (State and Local) Accounting

Statement of Activities but reduces the bonds payable balance in the Statement of Net Position. In addition,

governmental funds do not accrue interest payable but record expenditures on the maturity date. Accrual of interest

payable will be required for the government-wide statements, including adjustments for amortization of premiums

and discounts. Assuming that a payment of $100,000 was made for the retirement of bond principal, then the

worksheet entry to convert the $100,000 principal payment from governmental fund accounting to governmentwide statements would be

Bonds Payable

Expenditures—Bond Principal Retirement



100,000

100,000



4.

Adjustment of revenue recognition

Governmental funds recognize revenues only when measurable and available to finance expenditures of the

current period. In the case of property taxes, revenues cannot be recognized if those revenues will be collected

more than sixty days after the end of the fiscal year. When preparing the government-wide financial statements,

some adjustments will be required to recognize all revenues, net of uncollectible receivables, in accord with

revenue accounting for exchange and nonexchange transactions, as described earlier in this module. Assume

a government levied $10,000,000 in property taxes for the year 2012 with 2% uncollectible. The amount to be

recognized on the government-wide statements is $9,800,000. Assume that during 2012 and the first sixty days

of 2013, $9,600,000 had been and was expected to be collected, limiting the amount reported as revenues in the

governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balances to $9,600,000. The

$200,000 would have been shown as deferred inflow of resources in the Governmental Funds Balance Sheet. The

worksheet entry would be

Deferred Inflow—Property Taxes

Revenues—Taxes



200,000

200,000



5.

Accrual of expenses

Under modified accrual accounting, expenditures are recorded for items that are current, capital outlay, and

debt service. As indicated earlier, adjustments must be made to convert expenditures for capital outlay and debt

service principal payments to the accrual basis. In addition, adjustments must be made to record the noncurrent

portion of certain liabilities (claims and judgments, compensated absences, etc.). These worksheet entries would

debit expenses and credit liabilities.

6.Other

Some governments use the purchases method to record governmental fund inventories, and these must be

changed to the consumption method when using accrual accounting. Other governments do not record and

amortize certain prepaid items, such as prepaid insurance and prepaid rent. Adjustments must also be made for

these items.

7.

Reclassifications

Fund financial statements are presented separately for governmental, proprietary, and fiduciary fund categories.

Government-wide financial statements have columns for governmental activities, business-type activities, and

component units. In order to make the transition from fund financial statements, the fiduciary funds will be

eliminated. Internal service funds, which are proprietary funds, are to be classified as governmental activities in

the government-wide statements. Discretely presented component units, which are not presented at all in the fund

financial statements, will be added when preparing the government-wide financial statements.

NOW REVIEW MULTIPLE-CHOICE QUESTIONS 69 THROUGH 134







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Y. Public College and University Accounting (Governmental)—GASB Statement No. 35

GASB Statement No. 35, Basic Financial Statements—and Management’s Discussion and Analysis—for Public

Colleges and Universities, established accounting and financial reporting standards for public colleges and

universities within the guidelines of GASB Statement No. 34.



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