Agency fund

What Is Agency Fund?

An Agency Fund is a type of fiduciary fund used in governmental accounting to account for assets held by a government in a purely custodial capacity for individuals, private organizations, or other governments. In essence, the government acts as a collection agent or trustee, temporarily holding resources that do not belong to its own primary operational programs. The defining characteristic of an Agency Fund is that the government entity holding the assets has no administrative involvement with them beyond their collection and subsequent disbursement, and it does not have an ownership interest in the funds themselves. These funds are characterized by the fact that assets typically equal liabilities, meaning there is no "net position" balance for the government within this fund type.

History and Origin

The concept of agency funds has been a long-standing component of governmental financial reporting. Historically, these funds served as clearing accounts for cash received that required analysis and subsequent apportionment or distribution to the rightful owners. For instance, a county government might collect property taxes on behalf of various school districts and other local entities, temporarily holding these revenues in an Agency Fund before remitting them.

A significant development in the treatment of Agency Funds occurred with the issuance of Governmental Accounting Standards Board (GASB) Statement No. 84, Fiduciary Activities, in January 2017. This statement, effective for fiscal years beginning after December 15, 2018, aimed to improve guidance on identifying and reporting fiduciary activities. GASB Statement No. 84 redefined the criteria for fiduciary activities, leading to a reclassification of many previously designated Agency Funds into a new category: Custodial Fund. The objective was to enhance the consistency and comparability of financial reporting and improve the usefulness of information for assessing a government's accountability as a fiduciary.⁴

Prior to this, GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, issued in June 1999, also had a profound impact on governmental financial reporting. While it required government-wide financial statements to be prepared on the full accrual basis of accounting, it specifically excluded fiduciary funds, including Agency Funds, from these government-wide statements due to their custodial nature.

##³ Key Takeaways

• An Agency Fund accounts for assets held by a government in a purely custodial capacity.
• The government acts as an agent, not an owner, for the resources within an Agency Fund.
• Assets within an Agency Fund are always equal to its liabilities, resulting in no equity or net position.
• The Governmental Accounting Standards Board (GASB) redefined fiduciary fund reporting with Statement No. 84, leading to the reclassification of many Agency Funds as Custodial Funds.
• Agency Funds (and Custodial Funds) are excluded from government-wide financial statements because the assets do not belong to the government.

Interpreting the Agency Fund

When analyzing a government's financial reports, the presence and activity within an Agency Fund indicate the extent of its role as a temporary custodian of resources. Unlike other governmental funds, an Agency Fund does not reflect the government's own financial health or its ability to provide services. Instead, it highlights the government's responsibility in managing and disbursing funds on behalf of external parties or other governmental units.

For instance, if a local government's financial statements show a significant balance in an Agency Fund for property tax collections, it means a large amount of tax revenue has been collected but has not yet been distributed to the underlying taxing authorities (e.g., school districts, fire departments). This demonstrates the government's role in facilitating financial transactions rather than accumulating its own resources. It is crucial to understand that these balances are not available for the government's general operations or discretionary spending. Analysts typically focus on the Statement of Fiduciary Net Position and the Statement of Changes in Fiduciary Net Position for insights into these custodial activities, though historically Agency Funds only reported assets and liabilities.

Hypothetical Example

Consider the City of Springfield, which collects local sales tax on behalf of the county and a special transportation district. In a given month, the City collects $500,000 in sales tax. Of this amount, $300,000 is due to the county and $200,000 is due to the transportation district.

Upon collection, the City of Springfield would record the following entry in its Agency Fund:

Once the City remits the funds to the respective entities, the entry would be:

This example illustrates how the Agency Fund acts as a pass-through mechanism. The cash is received and held briefly, and then disbursed, with the liabilities matching the assets at all times. This differentiates it from a general fund or other governmental funds where the government retains the resources for its own use.

Practical Applications

Agency Funds, or their modern equivalent, Custodial Funds, are widely used in governmental and nonprofit sectors for various custodial arrangements. Common applications include:

• Tax Collection: As illustrated, governments often collect taxes (e.g., property, sales, or income taxes) on behalf of other jurisdictions or entities, temporarily holding these funds before distribution.
• ² Employee Withholdings: Governments may manage employee payroll withholdings for taxes, retirement contributions, or insurance premiums, which are then remitted to the appropriate third parties.
• Student Activity Funds: In school districts, funds generated by student clubs and activities (e.g., bake sales, ticket sales for school events) are often held in an Agency Fund, as the school acts as a custodian for the student groups, not the owner of the funds.
• Special Assessments: Sometimes, a government collects special assessments from property owners for specific improvements, acting as an agent to collect and pass these funds to a construction contractor or debt service fund.
• Intergovernmental Pass-Through Grants: While many grants are recorded in special revenue funds, some pure pass-through grants where the government has no administrative involvement may be accounted for as fiduciary activities. The Government Finance Officers Association (GFOA) provides best practices for sound financial management, including guidelines for grant management and internal controls.

The precise application of Agency Funds, and more recently Custodial Funds, depends on the specific nature of the fiduciary relationship as defined by the Governmental Accounting Standards Board (GASB). Governments must establish robust internal controls to ensure proper segregation of duties and accurate accounting for these custodial assets.

Limitations and Criticisms

One of the primary limitations of Agency Funds (and Custodial Funds) is that they do not provide a comprehensive picture of a government's overall financial health or operational activities. Since the assets in an Agency Fund are not available to finance the government's programs, they are excluded from the government-wide financial statements prepared under the accrual basis of accounting. This means a user focusing solely on government-wide statements might overlook the scope of these custodial responsibilities.

Historically, a criticism revolved around the potential for governments to improperly retain balances in Agency Funds that actually belonged to the primary government, leading to misclassification of assets and audit findings. This issue was specifically addressed by the Washington State Auditor's Office, which issued guidance to ensure that "only assets belonging to entities other than the State remain in Agency Funds at the end of the reporting period."

Th¹e shift from "Agency Funds" to "Custodial Funds" under GASB Statement No. 84 aimed to clarify and standardize reporting. While Agency Funds historically only presented assets and liabilities, Custodial Funds now require the presentation of a net position, even if it's zero, and a statement of changes in fiduciary net position, bringing them more in line with the other types of trust funds. This change was intended to improve transparency and accountability regarding these fiduciary activities.

Agency Fund vs. Custodial Fund

The terms "Agency Fund" and "Custodial Fund" are closely related and, in many contexts, the latter has replaced the former in governmental accounting. Prior to GASB Statement No. 84, Agency Funds were a specific type of fiduciary fund primarily characterized by assets equaling liabilities, signifying a purely custodial role.

With the implementation of GASB Statement No. 84, the guidance for identifying and reporting fiduciary activities was significantly revised. This led to the introduction of "Custodial Funds" as a new category within fiduciary funds. While Custodial Funds fulfill the role previously performed by Agency Funds—accounting for assets held in a purely custodial capacity—the new standard introduced more stringent criteria for what constitutes a fiduciary activity and requires a full accrual basis of accounting for all fiduciary funds, including the presentation of a net position. This means that while the core function of holding assets temporarily for others remains, the reporting requirements and the distinction of "custodial" versus other "trust" activities have been refined. Therefore, what was once broadly termed an Agency Fund is now typically reported as a Custodial Fund if it meets the criteria outlined in GASB Statement No. 84.

FAQs

What is the primary purpose of an Agency Fund?

The primary purpose of an Agency Fund is to account for assets that a government holds temporarily in a custodial capacity for individuals, private organizations, or other governmental units. It's a pass-through mechanism, not a fund for the government's own operations.

How do Agency Funds differ from other governmental funds?

Unlike other governmental funds (like the General Fund or Special Revenue Funds), Agency Funds do not report on the government's own financial resources or its operational activities. The assets held in an Agency Fund are not available for the government's use and are simply being held before being disbursed to their rightful owners. Other governmental funds typically use a modified accrual basis of accounting, whereas fiduciary funds use the accrual basis.

Are Agency Funds still used in governmental accounting?

While the term "Agency Fund" is still sometimes used colloquially, the Governmental Accounting Standards Board (GASB) Statement No. 84 effectively reclassified many activities previously reported in Agency Funds into "Custodial Funds." Custodial Funds now serve the same custodial purpose but are reported with a net position and changes in net position, aligning with the reporting of other fiduciary fund types.

What kind of transactions are recorded in an Agency Fund?

Transactions recorded in an Agency Fund typically involve the receipt of cash from external parties and the subsequent disbursement of that cash to other entities or individuals. Examples include the collection of taxes on behalf of other governments, employee payroll withholdings, or student activity funds. These transactions are purely custodial, without any direct benefit or administrative involvement by the holding government.

Why are Agency Funds excluded from government-wide financial statements?

Agency Funds (and Custodial Funds) are excluded from government-wide financial statements because the assets held in them do not belong to the primary government. These funds represent a fiduciary responsibility, meaning the government is acting as a trustee or agent, and the resources are not available to finance the government's own programs or operations. Therefore, including them would misrepresent the government's financial position and operational capacity.