Understanding Governmental Accounting For Investment Trust Funds

Investment trust funds are a type of fiduciary fund used by governments to report the external portion of investment pools held in a qualifying trust. Fiduciary activities are those carried out by state and local governments for the benefit of individuals and agencies outside the government, such as employee groups, members of the public, and other governments. In January 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 84, which defines four types of fiduciary funds, including investment trust funds. These funds are used to report the external portion of investment pools, which are held in a trust that meets specific criteria, such as the government not being a beneficiary and the funds being legally protected from the government's creditors. This article will provide an overview of investment trust funds, their purpose, and how they fit within the framework of governmental accounting.

Investment trust funds vs. pension trust funds

Investment trust funds and pension trust funds are both types of fiduciary funds, which are activities that governments carry out for the benefit of individuals and agencies outside the government. However, there are several differences between the two.

An investment trust fund is a collective investment, which means it is a range of individual investments chosen and managed by an investment manager. They are the oldest type of collective investment, first appearing in the 1860s. Despite the name, they are not trusts but companies listed on the stock exchange. To invest in them, one must buy shares, the price of which is dictated not just by the value of the underlying assets, but also by supply and demand. Investment trust funds can be attractive to investors because they can potentially outperform other fund types. However, they can also be more volatile as they can trade at a premium or discount to their net asset value and can use gearing.

On the other hand, pension trust funds are a type of employee trust fund, which is a long-term investment plan that an employer establishes as a job benefit. Pension plans are designed to help employees build retirement income over time and then withdraw it in the form of annuity payments for life. Both the employer and the employee may contribute to a pension trust fund, and the proceeds are taxable as regular income when they are withdrawn. While pension plans used to be common in America, they are now less prevalent, with only 14% of Fortune 500 companies offering them in 2019. However, they are still available to most public employees, including federal, state, and local government employees.

In summary, investment trust funds are a type of collective investment that is publicly traded on the stock exchange, while pension trust funds are a type of employee benefit plan that helps employees save for retirement.

Fiduciary activities and reporting

Investment trust funds are a type of fiduciary activity that governmental entities may engage in. A fiduciary activity refers to an arrangement where one party (the fiduciary) holds and manages assets on behalf of another party (the beneficiary). In the context of governmental accounting, fiduciary activities involve the government acting as a trustee or agent for individuals, other governments, or private-purpose trusts.

Investment trust funds are typically established by governments to invest and manage financial assets for specific purposes. These funds are separate from a government's own investment portfolio and are governed by fiduciary principles, which dictate that the assets must be managed solely for the benefit of the beneficiaries and in accordance with the purposes of the trust.

The governmental entity acting as a fiduciary has a responsibility to maintain accurate records and provide transparent reporting for the investment trust funds it manages. This includes maintaining proper accounting records that distinguish between the assets and transactions of the fiduciary fund and those of the government's own funds. The Governmental Accounting Standards Board (GASB) sets standards for financial accounting and reporting, including guidelines specific to fiduciary activities.

Reporting requirements for investment trust funds typically include providing statements that present the financial position, results of operations, and cash flows of the fund. These statements should disclose information about the types of investments held, investment risks, and any restrictions on the use of assets. Additionally, the government should also report on its fiduciary responsibilities, including the nature and purpose of the funds it manages, as well as any significant changes or events that may impact the trust.

The frequency and level of detail required in the reporting may vary depending on the size and complexity of the investment trust fund, as well as the specific requirements of the governing body or regulatory framework. It is important for the governmental entity to ensure that the reporting provides a clear and transparent view of the financial health and activities of the investment trust fund, enabling beneficiaries and other interested parties to understand how the assets are being managed and ensuring compliance with fiduciary standards.

In summary, fiduciary activities, such as investment trust funds, involve a governmental entity acting as a trustee or agent, holding and managing assets on behalf of beneficiaries. Accurate record-keeping and transparent reporting are crucial in ensuring compliance with fiduciary principles and providing accountability to the beneficiaries and relevant stakeholders. The GASB sets standards for financial reporting, ensuring consistency and transparency in the disclosure of information related to investment trust funds and other fiduciary activities.

Governmental fund types

GASB 84 defines four generic types of fiduciary funds:

Pension (and other employee benefit) trust funds:

These are used to accumulate resources to fund pension and other post-employment benefits for government employees. The government itself is not a beneficiary of these funds, and contributions are irrevocable.

Investment trust funds:

These are used to report the external portion of investment pools held in a qualifying trust. A qualifying trust is one where contributions and earnings are irrevocable and dedicated to providing benefits to recipients.

Private-purpose trust funds:

These funds are held in a qualifying trust and are used for specific purposes such as endowments or scholarship funds, which are defined by the person or organization donating the funds.

Custodial funds:

These are used to report fiduciary activities that are not required to be reported in the other three fund types. Custodial funds are a new category that replaces the former Agency funds to avoid confusion with the term "agency" when referring to various departments within larger governments.

The basic financial statements for these fiduciary funds include the Statement of Fiduciary Net Position and the Statement of Changes in Fiduciary Net Position. These statements show the assets, liabilities, and changes in net position over time for each fund.

Custodial funds

• Billing property owners for assessments.
• Collecting instalments of assessments and interest on assessments.
• Paying interest and principal on the special assessment debt.

The basic financial statements for fiduciary funds include:

• Statement of Fiduciary Net Position: A full accrual basis financial statement that shows all the assets and liabilities of the fiduciary activities.
• Statement of Changes in Fiduciary Net Position: This statement shows how net position changes during the year, including all additions and deductions to or from the net position of the funds.

Qualifying trusts

• The government is not a beneficiary of the trust.
• The trust is dedicated to providing benefits to recipients in accordance with the benefit terms.
• The trust is legally protected from the creditors of the government.
• Contributions to the trust and earnings on those contributions are irrevocable.

These criteria are defined by the Governmental Accounting Standards Board (GASB) in its Statement No. 84, which provides guidance on the reporting of assets held by governments in a fiduciary capacity. GASB 84 defines four generic types of fiduciary funds, including pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and custodial funds.

Pension (and other employee benefit) trust funds are used to accumulate resources to fund pension and other post-employment benefits. Investment trust funds are used to report the external portion of investment pools held in a qualifying trust. Private-purpose trust funds are held in a qualifying trust and are used for specific purposes, such as endowments or scholarship funds. Custodial funds are used to report fiduciary activities that are not required to be reported in the other three fiduciary fund types.

It is important to note that the definition of a "qualifying trust" differs slightly between pension and investment trusts. For pension trusts, contributions and earnings must be irrevocable, whereas this criterion does not apply to investment trusts.

Frequently asked questions