UNIT 8:

8 TRUST AND AGENCY FUNDS

Contents
8.0 Aims and Objectives
8.1 Introduction
8.2 Agency Funds
8.3 Trust Funds
8.4 Summary
8.5 Answers to Check Your Progress Questions

8.0 AIMS AND OBJECTIVES

This unit indicates the fiduciary funds and the different types of funds under this category.
There are 4 types of Fiduciary Funds:

1. Agency Funds
2. Expendable Trust Fund
3. Nonexpendable Trust Funds
4. Pension trust Funds

The four types of funds will be discussed in brief since a detail discussion of these Fund
types is beyond the scope of the course, but the student should at least be aware of their
existence and nature.

After completion of this unit, the student should be able to;

1. clearly understand the concept of Fiduciary funds
2. determine and analyse between Trust and Agency funds.
3. explain theoretical and other important issues related to these funds.

8.1 INTRODUCTION

The principle indicates that “Fiduciary Funds account for assets held by governmental unit,
acting as trustee or an agent for individuals, organizations, other governmental units or other
funds of the same governmental unit”. For that reason fiduciary funds are often identified in
governmental financial report as Trust and Agency Funds. Generally, the word agent
indicate some body or a person who acts on behalf of another. Trustee means someone
holding legal title to property but is not its beneficial owner. They may not profit from their

154
position, but act for the benefit of the beneficiary, who is the real owner of the property. The
term fiduciary also means one who acts not for his own profit but to safeguard the interest of
an other. 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. The important and perhaps the sole
consideration from an accounting stand point is: what can and what cannot be done with the
fund’s asset in accordance with laws and other pertinent regulations? The name of a
particular fund is not a reliable criterion for determining the correct accounting basis for trust
and agency funds merely, calling a fund by one name or another has no influence on the
transactions in which it may engage. In fact the word trusts and Agency funds are frequently
omitted from the titles of funds in this classification. Examples are “Public Employees
Retirement System”. And “Condemnation and Grading Fund”: the former, a Trust fund, the
later, an Agency Fund, each classified according to the circumstances under which its assets
are held. It is sometimes said that practical basis for distinguishing between the two types is
the length of time specific assets are held. But this is not a wholly reliable guide, since there
is no generally recognized pronouncement stating the maximum time restriction for holding
assets to constitute an Agency Fund; nor is there a minimum time to constitute a fund of the
trust variety. As suggested earlier if not explicitly stated, the exact name of designation of a
given fund is of little significance in establishing its accounting procedure and limitations.
This depends on the enactment that brought about creation of the Fund, plus all other
regulations under which it operates. Regulations include pertinent statutes, Ordinances, wills,
Trust Indentures, and other instruments of endowment, resolutions of the governing body,
statement of purposes of the fund, kinds and amounts of assets held and others. This
aggregate of factors, or such as are applicable to a given fund, determines the transaction in
which it may and should engage.

8.2 AGENCY FUNDS

GASB standard provides as one of the four types of Fiduciary funds, Agency funds. Agency
funds are used to account assets held by a governmental unit acting as agent for one or more
other governmental unit or for individuals or private organizations. Similarly, if a fund of a
governmental unit regularly receives assets that are to be transmitted to other funds of that
unit, an agency relationship exists. Assets accounted for in an Agency Fund belongs to the
party or parties for which the governmental unit acts as agent. Therefore Agency fund Assets

155
are offset by Liabilities equal in amount. No Fund Equity exists. Typically, there are no
Revenues, Expenditure or Expenses recognized by an Agency Fund. GASB’s standard
require Agency fund to use the modified accrual basis of accounting. As with Governmental
Funds, unless an agency fund is required law or administrative decision, the funds which are
held maybe simply accounted for within governmental or Proprietary funds. Even if the
nature of the case is fiduciary, if the agency relationship is only incidental (not vital or
essential), no agency fund is needed. For example, Payroll tax withholdings from deductions
from salary until payment to the tax authority need no special agency fund, even though their
nature is fiduciary.

Agency Fund for Special Assessment Debt Service - A Special Assessment is a

compulsory levy made against a certain property to defray part or all of the cost of a specific
improvement or service that is presumed to be of general benefit to the public and a
particular benefit to the property against which the special assessment is levied. GASB’s
standard specify that a governmental unit which has no obligation to assume debt service on
special assessment debt in the event of property owners’ default, but does perform the
functions of billing property owners for the assessments, collecting instalment of assessments
and interest on the assessment, and from the collections, paying interest and principal on the
special assessment debt, should account for those activities by use of an Agency Fund. if the
special assessment debt is special-special assessment debt, then the government acts only as
an agent to collect the special assessment and pay the creditors. The government as a whole
does not take responsibility for the debt. The collections and payments of it should therefore
be accounted for in an Agency Fund.

Tax Agency Funds - An agency relationship that does, logically, result in creation of an
agency fund is the collection of Taxes, or other Revenues, by one governmental unit for the
several of the funds it operates and for other governmental units.

To record the assessment of the taxes, the collecting fund may deduct a fee (often a
percentage of the amounted collected) in order to cover its cost of collecting the taxes:
Mailing bills, Receiving Payments, bookkeeping, etc... (This is Revenue for the collecting
fund). If the fee deduction is assumed to be a certain percentage, the remaining percentage
balance amount will be payable to the funds for which the taxes are collected.

Cash and Investment Pools-

Pools- Earnings on pooled investments and gains or loses on sales of
investments are allocated to the funds having an equity in the pool in proportion to their

156
relative contributions to the pool. To ensure an equitable division of earnings, gains and
losses, it is customary to revalue all investments in the pool, and all investment being brought
into the pool or removed from the pool, to market value as of the time that investments of a
fund are being brought into or removed from the pool. (Some pools carry investments at
market, revaluing them daily).

8.3 TRUST FUNDS

Trust funds differ from agency funds primarily in degree. Frequently a trust fund is in
existence over a longer period of time than an agency fund; it represents and develops vested
interest to a greater extent and it involves more complex administrative and financial
problems.

An important reasons as to why governmental units accept assets in trust is that the donation
of assets to be used to produce income for some cultural or educational purpose. The
donations are sometimes made at the death of a person, as part of the will. Other times, they
are made while the person is still living. For example, suppose a wealthy elderly person
wants his name to be remembered long after his death, he could make a large donation to an
organization, insisting that the donation be invested in an income generating Investment.
Each year the income could be used for different humanitarian or other developmental
activity, while the principal is reinvested to earn income for the years, which follow. These
types of donations are called Endowment Funds.

The basic idea of an Endowment Fund is that the principal must be held intact, either forever
or for a predetermined length of time, so that it continually produces income for the desired
purpose. The principal is therefore Nonexpendable.
Nonexpendable. The income generated by the principal
is to be used according to the trustor’s purposes, so it is Expendable.
Expendable. Since the nature of the
principal and the income is different, accounting treatment in separate fund is required. The
Nonexpendable principal should be accounted for like a Proprietary Fund, the
Expendable income like a Governmental Fund.

Pension Trust Funds on the other hand are expendable for a specified purpose in both
principal and income, retirees may be paid from both. They are account for like a proprietary
fund. Pension Trust Funds are sometimes called - Public Employee Retirement Systems
(PERS) when a pension trust fund is considered to be part of the governmental reporting

157
entity, its financial data are included in the combined financial statements and the combining
financial statements prepared for fiduciary funds accounted for on the full accrual basis.

Accounting for pension trust Funds should be distinguished from the governmental unit’s
responsibility as an employer to account for Expenditures, Expenses and liabilities related to
Pension plans, and to disclose in the notes to the financial statements a long list of items
specified in GASB’s statements. Reporting requirements are complex and are in a process of
change. Further, reporting requirements vary depending on whether the plan is administered
by a unit of the reporting entity or by another entity. The GASB’s disclosure standards are
based on the conclusions that the primary objectives of pension disclosures by Pension Trust
Funds and governmental employers is to provide users with information needed to assess:
A. Funding Status of a Pension Trust Fund on a Going-concern Basis,
B. Progress made in accumulating sufficient Assets to pay Benefits when due,
C. Whether Employers are making actuarially determined contributions.

Check Your Progress

1. Explain the concept of Fiduciary funds in relation to Governmental Accounting.

________________________________________________________________________
________________________________________________________________________
2. Compare and Contrast Agency and Trust funds
________________________________________________________________________
________________________________________________________________________
3. Describe how the collection of Taxes would be accounted for in Fiduciary Funds.
________________________________________________________________________
________________________________________________________________________
4. Discuss the similarities and differences between Expendable and nonexpendable
Trust Funds.
________________________________________________________________________
________________________________________________________________________

5. Explain the concept of an Endowment Fund as part of the Trust fund.

________________________________________________________________________
________________________________________________________________________

158
6. Explain the nature of the accounting characteristics of Fiduciary Funds and their
resemblance with that of Gov`tal funds and Proprietary Funds.
________________________________________________________________________
________________________________________________________________________

8.4 SUMMARY

Full treatment of accounting and reporting requirements for both governmental employers
and pension trust funds particularly is considerably beyond the scope of this course. This unit
is intended to introduce the topic and present a general overview of current standards and
concepts of fiduciary Funds.

8.5 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. Refer to the topic 8.1 & 2.3.3

2. Refer to the topic 8.2 & 8.3
3. Refer to the topic 8.2
4. Refer to the topic 8.3
5. Refer to the topic 8.3
6. Refer to the topic 2.3.3

159