What are Fiduciary Funds? Definition, Types, and Uses

Definition

Fiduciary Funds are used in governmental accounting to account for assets held in trust for others. In other words, these are the government’s funds as a trustee. They are held on behalf of others, and therefore, they cannot be used to fund the government’s expenses.

Governments continue to receive funds from the general public on various grounds. These funds are mostly used for specific purposes, and therefore, governments are not supposed to use these funds to fund government-related projects.

Given that governments utilize fiduciary funds to account for assets held and maintained by governments as trustees or agents of entities, they are often referred to as Trust Funds. Trust relationships are mostly created through formal trust agreements.

Fiduciary Funds are normal for every government, and they are specially categorized under different heads because they tend to serve different objectives.

Therefore, it is important to classify them separately so they are duly accounted for concerning their source.

Types of Fiduciary Funds

There are four main types of fiduciary funds that are accounted for. The types of fiduciary funds are mentioned below:

  • Agency Funds
  • Investment Trust Funds
  • Pension and Employment Benefit Trust Funds
  • Private-Purpose Trust Funds

A subsequent explanation of these fiduciary funds is given below:

Fiduciary FundExplanation of the Fund                   
Agency Funds  Also referred to as custodial funds, they are only held by the government in a custodian capacity. They are not supposed to be actively managed but just held on to.
Investment Trust Funds  Investment Trust Funds are investments of government, as well as other governments. They are mainly established for a particular cause, and as a gesture of goodwill by one government towards another.
Private-Purpose Trust Fund  Funds are arranged for a specific cause. They can be either expendable or non-expendable.

Agency Funds

Agency Funds are also referred to as custodial funds. This type of fiduciary fund is held in a custodial capacity. This implies that the funds are received temporarily, after which they might be temporarily invested and remitted to other parties.

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Therefore, these funds include resources not held in a trust agreement that meets specific criteria. Since they are disclosed in a custodial capacity, these funds are matched by subsequent liabilities to the owner of the assets. Agency Funds are only used for assets that are held for the benefit of others.

The funds held in agency funds can be used for pass-through grants, payroll deductions, and payments, as well as for settling the interest checking account.

Investment Trust Funds

As far as Investment Trust Funds are concerned, it can be seen that Investment Trust Funds are used to report the external portion of an investment pool that the government mainly manages.

In other words, investment trust funds exist when the government sponsors various multi-government investment pools and accounts for the external portion of those particular assets.

Investment Trust Funds are also used in cases where the government invests its own money, as well as resources that have been received from other governments.  

Pension and Employment Benefit Trust Funds

A pension and employee benefit trust fund exists when the government is the trustee for a designated pension fund.

This might also include the case where the government takes charge of different employment-related funds that are created in this regard.

The government in this regard is defined as a qualifying trust where the government is not considered a beneficiary of the pension fund itself.

This means that the government is supposed to act as a trustee in managing those funds to ensure that the funds are safe to be dispersed when needed by the rightful owner of those funds.

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In most cases, Pension Trust Funds are the fast-growing trust fund for most governments. They are managed at a state level mostly.

Private-Purpose Trust Funds

Private Purpose Trust results when a contributor and a government agree that principal or income derived from trust assets should be directed towards the betterment of individuals, organizations, or other governments.

In this aspect, it is important to consider that as suggested by the name, Private-Purpose Trust Funds are reserved for a specific purpose only.

As with other types of fiduciary funds, they cannot be used for any other purpose by the government.

Private Purpose Trust funds can either be expendable or nonexpendable. Expendable Private Purpose Trust Fund implies that principal and earnings might be spent.

On the other hand, as far as the nonexpendable private purpose trust fund is concerned, the principal must always be maintained.

However, earnings from this principle might be expendable or non-expendable.

Characteristics of Fiduciary Funds

Fiduciary Funds play a very important role in safeguarding the interests of the stakeholders at large. Therefore, they are supposed to undertake several different characteristics. These characteristics are given below:

Duty of Care

Duty of Care implies that the government is supposed to ensure that it can take care of these funds properly. In this regard, the board has the full right to investigate the stated decisions and ensure they can avoid any such decisions that might risk these funds.

Duty to Act in Good Faith

Since the government holds fiduciary funds as trust funds, governments must realize that they should act in good faith regarding these funds.

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If any actions need to be taken by the company, they should be aligned with the best interests of those these funds directly impact.

For example, ensuring that pension funds are safe and secure, and employment-related benefits are distributed in due time is an important metric that needs to be accounted for by the custodians of these funds.

Duty of Loyalty

Even though these funds cannot be used to fund any private projects, the funds should still be managed to avoid any fraudulent activity that might have a detrimental impact on the existing loyalty of the business.

Accounting Treatment for Fiduciary Funds

Accounting for Fiduciary Funds is considered an important task in ensuring that all disclosures have been properly accounted for.

In this regard, the following accounting steps need to be accounted for when it comes to accounting for fiduciary funds:

  • Proper identification of all government-related fiduciary activities: All activities should be included and should not be missed.
  • Determination of the respective type of fiduciary fund to categorize it in the correct fiduciary activity.
  • Presentation of financial statements that appropriately disclose fiduciary funds.

Governmental accounting requires all incoming and outgoing funds to be accounted for. In this regard, it is important to consider that for fiduciary statements too, financial statements need to be drawn.

The following financial statements are subsequently used when treating fiduciary funds.

They are as follows:

  • Statement of Fiduciary Net Position – This involves companies having a full accrual basis accounting statement representing all the assets, liabilities, and balances of the fiduciary activities.
  • Statement of Changes in Fiduciary Net Position – This financial statement shows how the fund’s net position has changed over the year.