Are You Ready for the Accounting and Reporting Changes Coming to Fiduciary Funds?

Governmental Accounting Standards Board Statement No. 84 (GASBS No. 84), Fiduciary Activities, provides updated guidance on reporting activities in which the government has a fiduciary role. The Statement retains three of the previously used fiduciary fund types (pension and other employee benefit trust, investment trust and private-purpose trust funds) and replaces agency funds with custodial funds. Many of the general concepts from previous guidance were carried over, but there is new guidance to address specific situations that hadn’t been addressed before or were deemed ambiguous. This Statement is effective for reporting years ending December 31, 2019 and later.

Defining Fiduciary Activities

GASBS No. 84 provides criteria to define fiduciary activities, broken into three categories: 1) fiduciary component units; 2) pension and other postemployment benefit (OPEB) arrangements that are not component units; and 3) other fiduciary activities.

The first category of fiduciary activities, fiduciary component units, include component units that meet component unit criteria under GASBS No. 14, as amended, and are either: trusted pension plans (as defined by GASBS No. 67); trusted OPEB plans (as defined by GASBS No.74); or entities not part of the reporting government that either accumulate assets for pensions (as defined by GASBS No. 73) or for OPEB (as defined by GASBS No. 74). GASBS No. 84 introduces the concept that a government’s obligation to contribute to a trusted pension or OPEB plan will trigger the financial burden criteria under GASBS No. 14 that, combined with either fiscal dependency or board appointment/imposition of will, would classify the plan as a component unit.

A component unit not involved in a pension or OPEB arrangement may still be considered a fiduciary component unit if its assets meet at least one of the following characteristics:

  • The assets are (a) administered through a trust or equivalent in which the government itself is not a beneficiary; (b) dedicated to providing benefits to recipients in accordance with benefit terms; and (c) are legally protected from creditors of the government;
  • The assets are for the benefit of individuals and the government does not have administrative or direct financial involvement with the assets. Additionally, the assets are not derived from the government’s provision of goods or services to those individuals; or
  • The assets are for the benefit of organizations or other governments that are not part of the financial reporting entity. In addition, the assets are not derived from the government’s provision of goods or services to those organizations or other governments.

A government has administrative or direct financial involvement if it monitors for compliance, determines eligible recipients or expenditures, has discretion of how funds are allocated, or is responsible for matching requirements or any liability associated with disallowed costs.

The second category of fiduciary activities includes the pension and OPEB arrangements that were described above under the first category, but do not meet component unit criteria. If the reporting government has control of the assets, these arrangements are deemed to be fiduciary activities. Control of the assets is defined as the government either having custody of the assets or having the ability to direct the use, exchange, or employment of the assets that provides benefits to others outside the government itself. Existence of restrictions on the use of the assets does not negate a government’s control of the assets.

The third category of fiduciary activities includes situations that do not involve component units, pension arrangements, or OPEB arrangements, but meet all the following criteria:

a. The government controls the assets, as defined previously;

b. The assets are not derived:

    • Solely from the government’s own-source revenues, such as water and sewer charges, investment earnings, and sales, income or property taxes;
    • From government-mandated or voluntary nonexchange transactions, such as federal or state programs local governments are mandated to perform, certain grants, entitlements or private donations, where the government does not have administrative or direct financial involvement, as defined previously;

c. The assets associated with the activity have one or more of the same three characteristics previously discussed that are used to identify fiduciary components not involved in pension or OPEB arrangements.

Reporting Fiduciary Activities

Fiduciary activities identified will be reported under one of the following four fiduciary fund types:

  1. Pension (and other employee benefit) trust funds for fiduciary activities from trusted pension and OPEB plans and other trusted employee benefit plans with irrevocable contributions and earnings;
  2. Investment trust funds for fiduciary activities from the external portion of trusted investment pools and individual investment accounts;
  3. Private-purpose trust funds for all other trusted fiduciary activities not required to be reported as pension (and other employee benefit) or investment trust funds;
  4. Custodial funds (formerly agency funds) are the residual category are for all other fiduciary activities not required to be reported in the other three fiduciary fund types. This also includes the external portion of nontrusted investment pools, but they are required to be reported separately from other custodial fund activity as a separate column under the custodial fund type umbrella. However, GASBS No. 84 provides the option for business-type activities that have fiduciary activities, that otherwise would be reported as custodial fund activity, to be reported with business-type activities if those resources are expected to be held for three months or less. The addition and deduction activity will need to be identified separately in the operating section of the statement of cash flows.

GASBS No. 84 carries forward many of the financial reporting requirements from previous guidance, including reporting of investment earning and investment expenses separately when arriving at net investment income.  However, custodial funds will be required to report revenue and expense activity in the statement of changes in fiduciary net position, whereas the former agency funds did not.

Activity in the statement of fiduciary net position (balance sheet) should be recognized under existing accounting standards using the economic resources measurement focus, except for liabilities to beneficiaries. These liabilities should be recognized when an event has occurred that compels the government to disburse fiduciary resources. GASBS No. 84 defines an occurring event as a demand for resources being made or when no further action, approval, or condition is required to release the assets. For example, governments that collect taxes for other governments should recognize a liability when the taxes are collected, even though collections may be distributed at a later date.

In the statement of changes in fiduciary net position (income statement), reporting of additions by source and deductions by type (including administrative costs, if applicable) should be disaggregated. A government may report a single aggregated total for additions and a single aggregated total for deductions of custodial funds of resources normally expected to be held for three months or less, upon receipt, such as property taxes collected for other governments or property taxes distributed to other governments.

Fiduciary component units should be aggregated with the primary government’s other fiduciary funds in accordance with the four fiduciary fund types (pension and other employee benefits trust, investment trust, private-purpose trust or custodial funds).

Additional Guidance

There is a lot to keep straight when implementing GASBS No. 84. The key is to start early. Each government entity will need to review their existing fiduciary, governmental, and business-type activities to determine if they meet fiduciary criteria under GASBS No. 84. This will include examining bank account arrangements, employee benefit arrangements, related organizations, and component units. It may also require tweaks to accounting and reporting systems to reclassify funds and to capture needed revenue and expense activity of custodial funds to present in the statement of changes in fiduciary net position.

Appendix C in GASBS No. 84 contains flowcharts to help assess potential activities as fiduciary activities and could easily be used to create questionnaires or checklists. At the time of writing this article, the GASB released an exposure draft of an implementation guide to be used as a companion to GASBS No. 84 to provide clarified guidance. The final version is expected to be released in mid-2019. Some examples of proposed guidance addressed in the exposure draft include:

  • Governments that perform the duties of a governing board for a trusted pension or OPEB plan that does not have a governing board is equivalent to appointing a voting majority in making fiduciary component unit determinations;
  • Cash deposits and performance bonds held by a government as assurance for satisfactory completion of a project or service are not fiduciary activities because the assets are the result of an exchange transaction and are being held for the government’s own benefit;
  • Use of clearing accounts, such as accumulating employee payroll deduction withholdings to pay when due, are not fiduciary activities; the withholding and accrual is a liability of the government;
  • In examining student activities that are not legally separate from a school district, the school district needs to lack administrative involvement in the activity in order to be reported as a fiduciary fund. A couple of instances where a school district is deemed to have administrative involvement include:
    • Involvement of the school board, a school administrator, or a school representative (such as a faculty advisor or a teacher) in deciding how funds are raised or spent in a particular student activity;
    • Establishment of policies, whether by a school board or the state, addressing receipt, disbursement and holding of funds for various student activities.

However, if the students, or their parents, were in charge of raising and spending the funds, or policies established by the school board only address issues, such as authorized account signers and prohibition on use of funds for illegal activities, these do not constitute administrative involvement and may be considered fiduciary activities.

CSH is here to help. We are available to talk through your scenarios, review your determination processes, or provide any staffing assistance you may need.

 

 

Author

Get In Touch With An Advisor
STAY INFORMED ON IMPORTANT TOPICS

Subscribe To Get CSH Guidance
Delivered To Your Inbox