ACC 460 chap 10 sm - Chapter 10 Fiduciary Funds and...

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Chapter 10 Fiduciary Funds and Permanent Funds Questions for Review and Discussion 1. Fiduciary funds are maintained to account for assets that governments hold as trustees or agents for individuals, private organizations, or other governmental units. Permanent funds are used to account for nonexpendable resources that the government holds to benefit its own programs and activities. 2. The full accrual basis helps to assure that administrators of endowments funds do not dissipate fund assets by inappropriately basing distributions on cash flows rather than economic earnings. By charging depreciation, they reduce reported earnings to reflect the economic decline of the related asset. Consequently, if they distribute all reported earnings, when the asset is fully depreciated they will have resources on hand equal to the original cost of the asset. These resources could then be used to replace the asset. 3. Inasmuch as the resources of permanent funds are usually intended to account for government-type activities and programs, the funds are classified as governmental. Therefore, to be consistent with government-fund accounting, they are accounted for on a modified accrual basis. In fact, with respect to permanent fund accounting, the differences between the modified and full accrual bases of accounting are generally minor, since permanent funds typically do not include significant amounts of depreciable assets. 4. The primary factors in determining whether investment gains are expendable or nonexpendable should be the wishes of the donor as set forth in the agreement establishing the endowment. If the agreement is silent on the issue, then the organization should look to applicable legal provisions. In the absence of any donor or legal restrictions, then, per the FASB in Statement No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations , gains (both realized and unrealized) should be reported as expendable. Per the GASB, all investments must be marked to market so presumably investment gains should be accounted for just as would ordinary income (interest and dividends). 5. Permanent funds are governmental funds; they should be reported in government- wide funds just as would other governmental funds. Income from permanent funds should be assigned to specific functions if the income is restricted to those programs. Otherwise it should be reported as investment income in the “general revenue” classification. Fiduciary funds should be excluded from the government- wide statements; they benefit outside parties, not the government itself. 6. By making the investment gains nonexpendable (adding them to principal), you will help protect the endowment from inflation. Assuming that at least a portion of net 10-1
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investment gains can be attributable to changes in the value of the monetary unit, the policy will help assure that the endowment principal retains its initial earning (and hence) purchasing power. The disadvantage of this policy, however, is that it
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This note was uploaded on 12/13/2010 for the course ACCT 460 taught by Professor Smith during the Spring '08 term at University of Phoenix.

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ACC 460 chap 10 sm - Chapter 10 Fiduciary Funds and...

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