Commercial and Fiduciary Accountings Part 1: General Overview
Commercial or Business Accountings are used primarily to determine the profitability and solvency of a business. These types of accountings are better known as “financial statements” comprised of a “balance sheet” which shows the company’s assets, liabilities and ownership equity as of that report; an “income statement” or “profit & loss statement” which explains the company’s income, expenses and profits over time; and a “statement of cash flows” which is concerned with the flow of cash in and out of the business. These types of accountings benefit investors, shareholders and creditors. As part of preparing these types of accounting reports, a common set of accounting principles, standards and procedures are used to compile these reports. This common set of standards is referred to as “Generally Accepted Accounting Principles” or GAAP. GAAP provides comprehensive guidance on ways to record and report the financial information in a uniform manner for businesses.
A Fiduciary Accounting differs totally from a Commercial Accounting. A Fiduciary Accounting is an accounting that must be rendered by a fiduciary; usually a personal representative of an estate; a trustee of a trust; an agent under a power of attorney; or a guardian. Any situation where someone is holding or dealing with property of others usually creates a fiduciary relationship requiring a Fiduciary Accounting. The fiduciary is usually entrusted with the safekeeping, management, and disposition of assets on behalf of others.
A Fiduciary Accounting, rather than focusing on the profitability of the entity, focuses on the underlying assets and how the fiduciary has discharged his responsibilities to the beneficiaries in dealing with those assets.
The Fiduciary Accounting is the main, and perhaps only, way a beneficiary can determine whether the fiduciary has managed, protected and invested the underlying assets appropriately. If the fiduciary has failed to appropriately manage, protect and invest the underlying assets, then the beneficiary can hold the fiduciary accountable for breach of the multiple fiduciary duties owed to the beneficiaries. A fiduciary, knowing he is under a duty of full disclosure regarding the assets, may be less inclined to commit a breach of duty resulting in a loss to the beneficiary. A Fiduciary Accounting also allows a fiduciary to be discharged from liability for all disclosed actions in the accounting limiting a trustee’s liability. These two main objectives of fiduciary accounting are usually described as “Performance” accounting and “Discharge” accounting.
Unlike Commercial Accountings, there are no GAAP guidelines that govern the preparation of Fiduciary Accountings. That is not to say, however, that there are no guidelines which pertain to Fiduciary Accountings. The first place to look to see what guidance is provided to prepare a Fiduciary Accounting is the governing instrument. If that document does not provide guidance, then state laws should be consulted.
Over time, most of the states have adopted rules and statutes that provide guidance. Florida has adopted its variation of the Uniform Principal and Income Act, as embodied in Chapter 738 of the Florida Statutes. This statute gives guidance on what is classified as receipts and disbursements of income and principal, among other things. Rule 5.346 of the Florida Rules of Probate Procedure sets forth certain standards required for Fiduciary Accountings, at least for probate matters, but can and should be standards for all Fiduciary Accountings in Florida, as this rule was adopted the Uniform Fiduciary Accounting Principles and Model Formats as adopted by the Committee on National Fiduciary Standards of the American Bar Association.
The purpose of a Fiduciary Accounting must be to fully disclose and when necessary, explain the transactions in a clear and concise way so that a beneficiary can readily determine what assets are being administered, how each asset performed, either by income being generated by that asset, costs attributable to the carrying of that asset, and capital gain or loss on the disposition of that asset. The beneficiary should be able to readily determine how the income or principal of the trust, or probate estate, was used during the accounting period, and what the assets are still on hand at the end of the accounting period.
©2015 BaskinFleece – Part 2 – The Fiduciary Accounting in more detail to follow at a later date.
To watch a video on the topic of the Fiduciary Duty of a Trustee, click here.
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