Definition

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

Governments continue to receive funds from the general public on various different 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 the fact that fiduciary funds are utilized by governments in order to account for assets that are held and maintained by governments as a trustee, or an agent 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 separately so that they are duly accounted for with respect to 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

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 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 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 on a temporary basis, after which they might be temporarily invested and then subsequently remitted to other parties.

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Therefore, these particular funds include resources that are 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 that are held in agency funds can be used for pass-through grants, payroll deduction 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 is mainly managed by the government. In other words, investment trust funds exist when the government sponsors various different multi-government investment pools and accounts for the external portion of those particular assets.

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

Pension and Employment Benefit Trust Funds

Pension and employee benefit trust fund exists when the government takes place as 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 as a beneficiary of the pension fund itself.

This means that the government is just supposed to act as a trustee in managing those funds in order to ensure that the funds are safe to be dispersed when needed by the rightful owner of those funds. In most cases, Pension Trust Funds are said to be the fast-growing trust fund for most governments. They are managed at a state level mostly.

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Private-Purpose Trust Funds

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

In this aspect, it is important to consider the fact 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 be maintained at all times. 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 they are able to take care of these funds with proper ease. In this regard, the board has the full right to investigate the stated decisions and ensure that they are able to avoid any such decisions that might risk these funds.

Duty to Act in Good Faith

Since fiduciary funds are held by the government as trust funds, it is important for governments to realize the fact that they are supposed to act in good faith when it comes to 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 who are directly impacted by these funds. 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, yet the funds should still be managed to avoid any fraudulent activity that might have a detrimental impact on the existing loyalty of the business, to say the least.

Accounting Treatment for Fiduciary Funds

Accounting for Fiduciary Funds is considered to be an important task in terms of 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 they should not be missed out upon.
  • Determination of the respective type of fiduciary fund to categorize it in the correct fiduciary activity.
  • Presentation of financial statements that disclose fiduciary funds in an appropriate manner.

Governmental accounting requires all incoming and outgoing funds to be accounted for. In this regard, it is important to consider the fact that for fiduciary statements too, financial statements need to be drawn. The following financial statements are subsequently used when it comes to treating fiduciary funds. They are as follows:

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