Fiduciary Funds

1
Chapter 10

• Fiduciary Funds Permanent Funds

2
Fiduciary Funds

• Fiduciary funds account for assets held by the
  government in a trustee capacity or as an agent
  for other individuals or entities.
• Endowments (non-expendable trust funds)
  principal must remain intact earnings are to be
  used for the purpose designated by the donor.
• Extendable trust funds similar to endowments,
  but principal can be used for the purpose
  designated by the donor.
• Pension Trust Funds defined benefit retirement
  funds for the benefit of government employees
• Agency Funds custodian or clearing accounts
  where cash related resources are held for other
  organizations.

3
Permanent Funds

• Permanent Funds are endowments or other
  nonexpendable trust funds where the donor
  specifies that the earnings ( perhaps principal)
  are to be used to benefit the government for
  example, to buy library books for the city
  library or support a government-owned museum.
• These are governmental funds, using modified
  accrual accounting.
• Earnings are often transferred to a Special
  Revenue Fund.

4
Journal Entries for a Permanent Fund

• Individual establishes an endowment of 900,000
  in cash to buy library books for the city
  library. Cash 900,000 Endowment
  Contributions 900,000
• Equity investments are bought, 900,000. Common
  Stock 900,000 Cash 900,000

5
Journal Entries for a Permanent Fund (2)

• Cash dividends are received, 18,000. Cash 18,0
  00 Revenue-Dividends 18,000
• Stock increase in value 12,000. Common
  Stocks 12,000 Revenue-Investments 12,000

6
Journal Entries for a Permanent Fund (3)

• Fund is closed out at year-end earnings
  transferred to a Special Revenue
  Fund. Revenue-Dividends
  18,000 Revenue-Investments
  12,000 Earnings Available to SRF
  30,000 Transfer Out 30,000 Cash
  30,000 Endowment Contributions
  900,000 Earnings Available to SRF
  30,000 Transfer Out 30,000 Fund
  Balance-Endowment 900,000

7
Earnings Issues with Permanent Funds

• A percentage of earnings may be maintained in the
  endowment to compensate for inflation, usually
  calculated as an annual percentage (see pp.
  366-7).
• An alternative to distributing earnings is a
  fixed return approach, distributing a fixed
  percentage based on expected long-term return
  (see pp 363-4).

8
Should All Investment Gains Losses be
Distributed?

• There is no definitive answer based on GAAP.
• This may be specified in the trust agreement or a
  specific requirement by the government holding
  the endowment.

9
Trust Fund Accounting Issues

• Endowments ( expendable trust funds) where the
  earnings benefit other individuals or groups are
  accounted for as Trust Funds.
• Trust Funds use full accrual accounting
  generally, the accounting is similar to the
  Permanent Funds.
• There are some differences relative to Permanent
  Funds, such as accruing interest before its
  received in cash depreciating any capital
  assets used for the fund.

10
Types of Pensions

• Defined contribution plans employers /or
  employees make tax deductible cash (or stock)
  contributions to the employees retirement
  planthe government has no further obligations.
• Defined benefit plans employer agrees to fund
  the employees retirement, usually based on final
  salary length of service the government has
  complete responsibility for the obligation
  substantial accounting is required.

11
Pension Accounting Issues

• Governments may account for their defined benefit
  pension plans (often Public Employee Retirement
  System or PERS).
• The pensions of local governments are often run
  by the state as a separate system, such as
  CalPERS.
• The accounting is different than for commercial
  accounting (GASB 25 27 vs. FASB 35, 87
  others).

12
Pension Accounting Issues (2)

• The two major components are (1) the plan assets
  which are invested in stock, bonds other
  earnings assets (using fair value) and (2) the
  pension obligations associated with current
  future retirement-related payments.
• The difference between the assets liabilities
  is the net assets availablewhether the plan is
  over- or under-funded is a key factor for analysis

13
Pension Contributions

• A major issue is the amount of pension
  contributions calculated each year, based on
  actuarial assumptions other issues. The
  calculation includes normal cost plus a provision
  for amortizing the unfunded actuarial accrued
  liability.
• Normal cost is the portion of the present value
  of pension plan benefits allocated to this fiscal
  year by some actuarial method (6 methods are
  alloweddetermined by actuaries, not the
  accountants). Unfunded actuarial accrued
  liability includes transitional losses, actuarial
  losses, improvements in pension benefits,
  special termination benefits (see p. 375).

14
Reporting Pension Costs

• During the fiscal year the government will
  contribute some amount of cash to the pension
  fund, which may or may not be the same as the
  actuarial calculated annual pension cost. Assume
  a fund contributed 90,000 in cash, but the
  actuarially determined amount is 98,000. How
  this is accounted for depends on the fund making
  the entry.

15
Reporting Pension Costs (2)

• Journal entryGeneral Fund Expenditures-Pension
  90,000 Cash 90,000
• Journal entryEnterprise Fund Operating
  Expense-Pension 98,000 Cash
  90,000 Net Pension Obligation 8,000
• Governmental funds recognize only the cash
  contribution note that the net pension
  obligation is included in the Government-wide
  statements Proprietary Fund record the entire
  obligation.

16
Post-employment Benefits

• In addition to pensions, government often pay for
  health care other insurance costs, as well as
  other benefits to former employees
• These are considered obligations called
  post-employment benefits.
• Final GASB pronouncements have not been issued
  however, accounting is expected to be similar to
  pensions.

17
Agency Funds

• Agency funds are custodial, where the government
  acts as an agent for other funds or governments
  thus, serving as a conduit for cash other
  financial assets.
• Agency funds are commonly used when one
  government collects the taxes for all governments
  within its jurisdiction remits the funds to
  those governments (e.g., a county maintains the
  property tax records for all local governments in
  the county).
• Pass-through grants are commonly allocated
  through Agency Funds.

18
Agency Fund Accounting

• Only current assets liabilities are usedthere
  are no operating entries recorded.
• Assume a county collect 5,000 in cash for the
  city 3,000 for the school district in cash for
  property tax. The entry would be Cash
  8,000 Due to City 5,000 Due to
  ISD 3,000
• When remitted in cash Due to
  City 5,000 Due to ISD 3,000 Cash 8,0
  00

19
Chapter 11

• Reporting, Disclosure Financial Analysis

20
Reporting Issues

• The Reporting Entity what must be included in
  the CAFR?
• Financial Reporting what information is included
  in the CAFR?
• Financial Analysis what information is useful
  to evaluate the government? Issues include
  relative efficiency, services provided vs. taxes,
  fiscal stress.

21
Primary Government

• Primary government government unit that is
  issuing a CAFR.
• It is legally separate fiscally independent
  from other governmental units. Fiscally
  independent means it has the authority to
  determine its budget, levy taxes set rates,
  issue bonds

22
Component Unit

• Component unit a legally separate government,
  but the elected officials of a primary government
  are financially accountable can impose their
  will or the component unit can provide special
  benefits or impose specific financial burdens on
  the primary government.
• Key criteria primary government appoints a
  voting majority of the units governing board or
  a majority of the units governing body is
  composed of primary government officials.

23
Financially Accountable Component Unit (CU)

• Primary government can impose its will e.g., it
  can remove appointed CU members modify or
  approve the CU budget veto, overrule or modify
  CU decisions hire the CUs managers.
• CU benefits or specific financial burdens (the CU
  is fiscally dependent) primary government is
  entitled to the CUs financial resources legally
  obligated for the CU deficits, operations or debt
  obligations.

24
Reporting Component Units

• Discrete presentation CUs are reported in one
  column of the financial statements of the primary
  government. This is the more common form of
  presentation.
• Blending combining the CUs operations as if it
  were a part of the primary government. Note that
  the General Fund of the CU would be treated as a
  Special Revenue Fund of the primary government.
• Additional disclosures on the CUs can be made in
  the government-wide statement, notes or in
  combining statements.

25
Other Types of Entities

• Joint ventures are contracts that create a new
  entity to carry out a specific activity (e.g.,
  construct an airport).
• If the funding comes from proprietary fund
  resources, the JV would be recorded in a
  proprietary fund. If the funding comes from a
  governmental fund, the JV would be recorded in a
  governmental fund.
• Related government similar to a CU, but it does
  not meet all the criteria. It is not reported as
  a CU, but the relationship is disclosed.

26
Comprehensive Annual Financial Report (CAFR)

• CAFR has 3 sections Introductory
  section Financial section Statistical
  section
• The most recent authority for the composition of
  the CAFR is GASB 34.

27
Introductory Section

• Table of Contents
• Letter of Transmittalusually from the city
  manager or CFO, usually focusing on current
  operations fiscal/economic conditions.
• Other Certificate of Achievement indicates that
  the CAFR meets the standards of the GFOA.

28
Financial Section

• Auditors Report (should be an unqualified
  opinion)
• Management discussion analysisa new section
  required by GASB 34, with potentially useful
  additional information.
• Financial statements
• Required supplementary information, including
  budget-to-actual comparisons, infrastructure
  condition pension valuation
• Combining individual statements schedules
• Statistical data

29
Financial Statements

• Government-wide statements Statement of net
  assets Statement of activities
• Governmental funds Balance
  sheet Statement of revenues, expenditures
  changes in fund balances
• Proprietary funds Balance sheet Statemen
  t of revenues, expenses, changes in net
  assets Statement of cash flows
• Fiduciary Funds Statement of fiduciary net
  assets Statement of changes in fiduciary net
  assets

30
Statistical Section

• Financial trends, including net assets
• Revenue capacity, including tax rates, tax levies
  collections, property values
• Debt capacity, including leverage ratios,
  overlapping debt debt margin
• Demographic economic data, such as population
  per capital income
• Operating information such as number of employees

31
Financial Analysis

• Analysis of financial condition will the
  government be able to finance its services meet
  its obligations? Could be useful to voters
  taxpayers, as well as debt holders.
• Analysis includes detailed review of economic
  demographic information, the CAFR ( operating
  budget), plus additional calculations, trends
  ratios that provide additional insight.
• See Table 11-5 for a detailed example (pp.
  422-424).

32
Economic/Demographic Factors

• Economic conditions include population,
  population changes, average income, unemployment
  rate.
• Demographic factors include relative age
  (especially dependent populationunder 16 over
  65) education levels.
• Political factors include the government
  structure (e.g., city manager vs. mayor-council
  for cities), voting characteristics

33
Overall Financial Characteristics

• Budget information (from operating budget)
  balanced budget, changes from year-to-year for
  both revenues spending, obvious problems.
• Financial statement trends surplus or deficit
  (especially in the General Fund
  government-wide), relative fund balance/ net
  assets (especially in the General Fund
  government-wide),

34
Some Key Ratios

• Fiscal effort, such as own-source revenues
  divided by net assessed value
• Adequacy stability of revenues, such as
  property tax revenue to total operating revenues
  uncollected property tax to total tax levies.
• Spending patterns, such as expenditures for
  specific function divided by total expenditures.
• Liquidity leverage, such as current assets to
  current liabilities long-term debt divided by
  population.

35
Chapter 12

• Other Not-for-Profit Organizations

36
Not-for-Profit Organizations (NPs)

• Typical NPs Colleges universities
  (private public) NP
  Hospitals/healthcare Voluntary health
  welfare organizations All other
  churches, labor unions, industry groups, hobby
  groups, museums, etc.

37
Accounting Jurisdiction

• Historically, each NP industry developed a
  separate set of GAAP the AICPA issued audit
  guides statements of position. To some extent,
  current AICPA audit guides are authoritative.
• The GASB assumed jurisdiction for
  government-owned NPs (public colleges,
  government-owned hospitals, etc.).
• The FASB began issuing GAAP for NPs in 1987 (FASB
  93) assumed jurisdiction for all other NPs. It
  has not issued comprehensive guidance for all
  issues all NPs.

38
GAAP Adopting Issues

• Voluntary health welfare all otheraccounting
  model developed by AICPA not much different
  than commercial GAAP.
• NP hospital model developed by American Hospital
  Association, with a unique full accrual model.
  Primary revenue source is charges for services
  generally similar to commercial accounting.

39
Adopting IssuesColleges Universities (CU)

• Unique model developed by NACUBO, somewhat
  similar to governmental model used by both
  public private CUs.
• Now split jurisdiction public CUs under the
  GASB private CUs under the FASB.
• Significant issues problems adopting either a
  FASB or GASB approach. Public colleges often
  account for most activities as Proprietary Funds.

40
FASB Financial Statement Requirements

• Required statements (FASB 117) Statement of
  financial position Statement of
  activities Statement of cash flows
• Net assets classified into 3 categories Unrestri
  cted net assets Temporarily restricted net
  assets Permanently restricted net assets

41
Analysis of Net Assets

• Most operating resources are unrestricted, such
  as charges for services, tuition, unrestricted
  contributions, and so on.
• Resources restricted for a current use are
  temporarily restricted, such as a donor
  restricted gift to be used specifically for
  scholarships this year.
• An endowment is permanently restricted.
• Separate fund can be created for temporarily
  permanently restricted funds.
• See Table 12-1 (pp. 454-5) for a typical
  presentation.

42
Disclosing Revenues Expenses

• Revenues expenses are reported in a statement
  of activity.
• Revenue reporting depends on donor restrictions.
  Most revenues are unrestricted however,
  donor-restricted revenues are either temporarily
  or permanently restricted.
• All expenses are reported as unrestricted. See
  Tables 12-1 2 (pp. 454-7) for financial
  statements of a Voluntary health welfare
  organization (VHWO).
• VHWOs also report a statement of function
  expenses, cross-classified by program support
  services line item (see Table 12-3, p. 458).

43
Unrestricted Revenue Journal Entries

• A donor to a VHWO makes a cash contribution of
  3,000 with no restrictions. This is recorded
  in the unrestricted fund as Cash 3,000
  Revenue from Contributions 3,000
• A NP hospital charges a patient for service,
  8,000. Accounts Receivable 8,000 Patien
  t Revenues 8,000

44
Restricted Fund Journal Entries

• A gift restricted for a specific purpose would be
  recorded in a temporarily restricted fund
  however, all expenses are recorded as
  unrestricted funds. If 10,000 in cash was
  donated to provide health education, the entry
  would be in a temporary restricted
  fund Cash 10,000 Revenue from
  Contributions 10,000

45
Restricted Fund Journal Entries (2)

• The cash is spent for health education the cash
  would be used, while the expense is recorded in
  the unrestricted fund Temporarily
  Restricted Fund Resources Released from
  Restriction 10,000 Cash 10,000
  Unrestricted Fund Program Expenses-Health
  Education 10,000 Resources
  Released from Restriction 10,000

46
Statement of Cash Flows

• FASB 117 modifies FASB 95 to make cash flow
  reporting more relevant to NPs.
• The same 3 categories are used Cash flows from
  operations Cash flows from financing Cash
  flows from investing
• Cash flows from financing include contributions
  restricted to long-term purposes interest
  dividends from investments restricted to
  long-term purposes.
• NPs are encouraged to use the direct method. See
  Tables 12-4 12-5 (pp. 460-1).

47
Contributions

• Contributions are the major source of revenue for
  most VHWOs. Contributions are nonreciprocal
  receipts of assets or services that it, the
  recipient gives nothing in return.
• This contrasts to exchange transaction, the
  primary revenue source for most NPs, such as NP
  hospitals.

48
Pledges

• Pledges are unconditional promises to contribute
  cash or other assets or services in the future.
• Based on FASB 116, unrestricted pledges are
  reported as revenue in the period received, based
  on present value (estimated future cash flows
  discounted for relative risk). Pledges expected
  to be collected within one year need not be
  discounted.

49
Pledges Journal Entries

• Pledges of 100,000 are received. 60,000 will be
  collected this year Unrestricted
  Fund Pledges Receivable 60,000 Revenue
  from Contributions 60,000 Cash 60,000
  Pledges Receivable 60,000

50
Pledges Journal Entries (2)

• 40,000 will not be collected this year, of which
  10,000 is expected to be uncollectible Tem
  porarily Restricted Fund Pledges Receivable
  40,000 Allowance for Uncollectible
  Pledges 10,000 Revenues from
  Contributions 30,000

51
Pledges Journal Entries (3)

• Pledges of 18,000 are collected released from
  TR category Temporarily Restricted
  Fund Resources Released from
  Restrictions 18,000 Pledges
  Receivable 18,000 Unrestricted
  Fund Cash 18,000 Resources Released
  from Restrictions 18,000
• For use of PV calculations, see pp. 465-6.

52
Service Contributions

• When people volunteer their time (services), this
  is usually not recorded.
• Volunteer services (FASB 116) can be recorded
  only if they are profession in nature the NP
  would have to pay for the service otherwise.
  Assume an accountant donates his/her services to
  audit a NP, valued at 10,000. This would be
  recorded (unrestricted) as Expense-Profession
  al Services10,000 Revenue-Contributed Services
  10,000

53
Conditional Promises

• A condition promise means the donor will
  contribute only is specific conditions are
  satisfied. For example, A corporation promises
  to match the contributions on a fund drive for a
  local museum. The museum received contributions
  of 20,000 from other donors. Since the
  stipulations have been substantially met (FASB
  116), the corporations matching donation would be
  recorded (unrestricted) Pledges
  Receivable 20,000 Revenues-Contributions 20,000

54
Investment Gains Losses

• Investment accounting generally follows
  commercial accounting. Investments are normally
  recorded as fair value gains losses are
  recognized. Note the use of the equity method
  marketable securities held to maturity as
  exceptions.
• An unrestricted gain of 1,000 on investment
  would be recorded as Investments 1,000 Inve
  stment Earnings 1,000 (Appreciation in fair
  value)
• Investments associated with restricted resources
  may be restricted or unrestricted, depending on
  the circumstances.
• Derivatives usually are recorded at fair value
  detailed disclosures are required, based on FASF
  119.
• Charitable remainder trusts are split interest
  agreements, where the assets are given to the NP,
  with the stipulation that an annuity is paid to
  the donor ( usually the spouse) for the
  remainders of their lives reverts to the NP at
  their deaths. This is recorded at present value.

55
Depreciation

• Depreciation on capital assets must be recognized
  as expense for NPs (FASB 93). The expense is
  unrestricted, even if the capital assets are
  restricted.
• Assume a foundation records annual depreciation
  of 5,000. The entry is (unrestricted)
• Depreciation Expense 5,000 Accumulated
  Depreciation 5,000

56
Reporting Entity Issues

• Generally based on AICPA Statement of Position
  94-3, where the key criteria are exercising
  significant influence. The important factors in
  the SOP are Consolidate when a controlling
  financial interest exists (usually based on
  ownership or voting rights). Consolidate
  when it has both a voting majority an
  economic interest. It may consolidate with
  other means of control, such as contractual.

57
Museum Accounting

• Book reviews Museum of American Culture (pp.
  479-4987). A museum is an other non-profit.
  There are few industry-related issues the
  accounting is relatively straight forward.
• The museum reports no restricted funds (see
  statement of financial position, p. 480).
  However, there are restricted contributions,
  which are temporarily restricted (see statement
  of activity, p. 485)

58
Museum Revenues

• Note revenue sources for museum admissions
  memberships are the major source investment
  earnings, including gains losses
  unrestricted restricted contributions.
• Auxiliary enterprises typically are business-type
  activities such as gift shop sales for a museum.
  These may be accounted for separately, but
  summarized in the unrestricted fund for financial
  reporting.

59
Museum-Restricted Contributions

• Contributions can be a major revenue source,
  including pledges that can be time-restricted
  use-restricted contributions. These would
  normally be recorded in the temporarily
  restricted fund. See pp. 483-4.
• Time-restricted pledges are usually associated
  with pledges that will be collected in future
  periods, but the use is unrestricted revenue is
  recognized in the temporarily restricted fund,
  net of uncollectible pledges. When the cash is
  received the resources are released from
  restrictions available in the unrestricted
  fund.
• Contributions that are use-restricted are
  recognized as revenue in the temporarily
  restricted fund the resources are released when
  the cash is used for the designated purpose in
  the unrestricted fund.

60
Museum Expenses

• All expenses are recognized in the unrestricted
  fund.
• Full accrual accounting is used, which includes
  depreciation.
• Supplies prepaid items are recorded on a
  consumption basis (as used).

61
Healthcare Accounting

• Healthcare represents over 15 of GDP has
  significant public policy issues.
• Most payments are made by third party providers,
  including insurance companies, Medicare
  Medicaid.
• About 15 of the population is uninsured
  therefore, bad debts is a significant issue.
• Restricted funds are associated primarily is
  donations

62
Healthcare Revenues

• Primary revenue source is patient care revenue,
  charges for services for routine services, other
  nursing services, professional services (e.g.,
  pharmacy, radiology)
• Other revenue includes contributions, educational
  services, other.
• Revenue is reduced by contractual adjustments
  (negotiated payment schedules with specific third
  party payors that are less than the standard
  rates).
• Charity care need not be recorded.

63
Healthcare Expenses

• The major function categories are nursing
  services other professional services general,
  administrative fiscal services (including
  accounting) bad debts depreciation interest.
  
• Expenses are cross-classified by object,
  including salaries, employee benefits, supplies,
  etc.

64
Patient Care Journal Entries

• Basic entry for providing healthcare services for
  50,000 would be Accounts Receivable 50,000
  Patient Revenues 50,000
• Assume that 30 of these receivables are expected
  to be uncollectible Bad Debts
  Expense 15,000 Accounts Receivable- Allowan
  ce for Bad Debts 15,000

65
Patient Care Journal Entries (2)

• Hospitals typically negotiate lower rate with
  specific insurance companies. Assume that the
  hospital gives contractual adjustments of 20 to
  ABC Insurance the standard rate charges are
  100,000. The entries would be Accounts
  Receivable 100,000 Patient Revenues 100,000 P
  atient Revenues-Estimated Contractual
  Adjustments 20,000 Accounting
  Receivable-Allowance for Contractual
  Adjustments 20,000

66
Malpractice

• Malpractice charges can be substantial for
  hospitals other healthcare professionals.
  Generally, healthcare organizations purchase
  malpractice insurance, which is recorded as an
  expense.
• Beyond insurance coverage, malpractice liability
  is governed by FASB 5 on contingencies.
  Liabilities would be recorded if it is probable
  that a liability has been incurred the amount
  of the loss can be reasonably estimated.
• The journal entry for an estimated malpractice
  loss of 150,000 would be Anticipated Legal
  Expense 150,000 Contingency Liability 150,000

67
Colleges Universities (CU)

• Public CUs can be accounted for in an enterprise
  fund (GASB 34).
• Private CUs follow FASB pronouncements,
  including the use of unrestricted, temporarily
  restricted permanently restricted funds.
• Because endowments are common in CUs,
  permanently restricted accounts can be
  extensive.
• See Tables 12-11 12 for CU financial
  statements (pp. 507-8).

68
CU Revenues Expenditures

• Major revenue categories include tuition
  fees, government appropriations (public),
  government grants, gifts private grants,
  endowment income, auxiliary enterprises (e.g.,
  bookstores), investment gains losses.
• Expenses are primarily education general, which
  includes instruction departmental research,
  libraries, student services extension public
  services. Other expense categories are sponsored
  research, operation maintenance of plant
  (capital assets), general.

69
Revenues From Tuition Fees

• The journal entry for tuition fees of 500,000
  in cash would be Cash 500,000 Revenue-Tui
  tion Fees 500,000
• Prepaid tuition fees for a semester in the next
  fiscal year would be deferred (25,000) Cas
  h 25,000 Deferred Revenue 25,000

70
Research Grants

• Most grants reimburse for actual research costs.
  Assume that expenses total 40,000 on a 100,000
  federal grant the government department is
  notified for reimbursement Expenses-Sponsored
  Research 40,000
  Cash 40,000 Due From Federal Govt.
  40,000 Revenue-Govt. Grant 40,000