What Are Fiduciary Funds?

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Written By SmarterrMoney.org

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Fiduciary funds represent the assets for which a government serves as a custodian or trustee for another government, organization, fund, or individual.

Fiduciary funds are important to municipalities.

Governments have multiple revenue-generating activities and specific ways to spend them. 

Fiduciary funds are those maintained for assets for which a government or government agency serves as custodian or trustee. They may be either expendable or nonexpendable, depending upon whether they are held for individuals like retirees, private organizations, other funds, or even other government entities. The four classes of fiduciary funds are pension, investment, private purpose, and agency.

Pension funds may be defined benefit or defined contribution plans and include other employee benefit plans even if not labeled as pensions.

Investment trust funds are a type of investment pool in which a sponsoring state or county government holds and invests the cash of cities and town governments within its jurisdiction.

Private purpose funds are trust funds for the benefit of outsiders that aren’t classified as pension or investment funds. For example, endowments may be held to benefit the children of slain police officers.  Also, the state holds inactive bank accounts and the property of deceased persons until they are claimed or reverted to the state.

Agency funds record resources held strictly on behalf of another, such as when a township collects taxes on behalf of the county.

Employee benefit plans for government employees, such as pensions, are accounted for in fiduciary funds because the government serves as the custodian of those funds.

Fiduciary funds use the full accrual basis of accounting. This means lessor governments recognize lease revenues when earned, not received. Lessee governments recognize expenses when incurred, not paid.

Governments must present each fund type separately on their financial statements under the full accrual accounting method. No changes are needed for fiduciary funds since they are already accounted for using this method.

What’s important here?

Fiduciary funds are used when a government acts in a trustee capacity.  Because it uses the full accrual basis of accounting, no accounting changes are needed to present the fiduciary funds in a municipality’s year-end financial statements.