In January 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 84, “Fiduciary Activities.” The requirements of this Statement are effective for reporting periods beginning after December 15, 2018. For June 30 governments, implementation will begin for the period beginning on July 1, 2019. And for December 31 governments, implementation will begin for the period beginning on December 1, 2019. Of course, earlier application is always encouraged.
Why did the GASB address fiduciary activities?
The GASB addressed fiduciary activities because there is wide diversity in practice for reporting fiduciary activities. Moreover, similar activities of governments are not reported on a comparable basis. For example, a single activity could be reported in a governmental fund, a fiduciary fund, or not reported at all. Prior to Statement No. 84, none of the existing standards defined fiduciary responsibilities.
What are the effects of this statement?
This statement defines and clarifies fiduciary activities and introduces a new generic fund type, “custodial funds.” The existing “agency” fund type will be eliminated. In essence, the statement:
- establishes criteria for identifying fiduciary activities with a focus on whether a government is controlling the assets, and the beneficiaries with whom the relationship exists;
- sets forth separate criteria for fiduciary component units and postemployment benefit arrangements that are fiduciary activities;
- describes four fiduciary generic fund types that should be reported: postemployment trust funds, investment trust funds, private-purpose trust funds, and custodial funds; and
- modifies the financial statements of fiduciary funds
Identifying Fiduciary Activities
There are four paths to identifying fiduciary activities. Two of these paths involve fiduciary component units: Pension/OPEB plans that are component units and other fiduciary component units. The remaining two paths involve pension/OPEB plans that are not component units and other fiduciary activities. Each of these paths is depicted in the diagram that follows:
It is important to emphasize that governments will still look to the criteria of GASB Statement No. 14, as amended, for component unit determination. And, Statement No. 84 does convey that “control of component unit assets by the primary government is not a consideration in determining whether a component unit is a fiduciary component unit (Paragraph 9).”
Fiduciary Component Units
Pension & OPEB Plans
If your government has a pension plan or an OPEB plan that is administered through a trust that meets the criteria of paragraph 3 of GASBS 67 and 74, respectively, then you have a fiduciary activity. Paragraph 3 of 67 defines a trust or equivalent arrangement as: contributions from employer and nonemployer contributing entities, as well as earnings on those contributions, being irrevocable. Also, plan assets are dedicated to providing benefits/pensions to plan members in accordance with benefit terms; and lastly, the plan assets are legally protected from creditors of employers, nonemployer contributing entities, and the pension plan administrator.
Generally, Statement No. 67 and Statement No. 74 plans administered through trusts are separate legal entities and considered component units if the primary government has a financial burden because it is legally obligated or has otherwise assumed the obligation to make contributions to the pension or OPEB plan and either the government appoints the majority of the plan’s board or the plan financially depends on the government.
Generally Accepted Accounting Principles (GAAP) requires fiduciary component units to be reported as fiduciary funds of the primary government rather than as discretely presented component units. Two examples of fiduciary component unit pension plans in Georgia are the Employees’ Retirement System of Georgia (ERS) and the Teachers Retirement System of Georgia (TRS).
Other Fiduciary Component Units
Other component units are fiduciary activities if they have one or more of the following characteristics:
- The assets are administered through a trust or equivalent arrangement in which the government itself is not a beneficiary.
- 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.
- The assets are for the benefit of organizations or other governments that are not part of the financial reporting entity. Additionally, the assets are not derived from the government’s provision of goods or services to those organizations or other governments.
Non Fiduciary Component Units
Pension and OPEB Plans
For Pension and OPEB plans that fall within the scope of paragraph 3 of Statement No. 67 and Statement No. 74, respectively, that are not component units, the only additional criterion needed to determine if the activity is a fiduciary activity is whether or not the government controls the assets. Control is defined in paragraph 12 of Statement No. 84 as the government holds the assets or has the ability to direct the use, exchange, or employment of the assets. If control is met, the activities should be reported in a fiduciary pension (and other employee benefit) trust fund. Relevant examples in Georgia of these plans would be single-employer, locally-governed plans. For example, Gwinnett County Government would report their Defined Benefit Pension Plan and their Other Post-Employment Benefit (OPEB) Plan as trust funds within the fiduciary category.
Other Fiduciary Activities
All other activities are considered fiduciary activities if all of the following criteria are met:
- the government controls the assets; and,
- assets are not derived solely from the government’s own-source revenues, government-mandated or voluntary nonexchange transactions; and,
- assets are either administered through a trust agreement or held for the benefit of individuals without any administrative involvement or direct financial involvement.
Terminology is important when interpreting Statement No. 84. Let’s discuss a few terms referenced in the standard. Own-source revenues are generated by the government itself and include exchange and exchange-like revenues. For example, water and sewer charges, investment earnings, derived tax revenues (e.g., sales and income taxes), and imposed nonexchange revenues such as the property tax. Administrative involvement might include monitoring recipients for compliance, determining eligibility, and exercising discretion over how assets are allocated. And lastly, direct financial involvement might include a grantor-imposed matching requirement or being liable for disallowed costs.
Fiduciary Fund Activities – Generic Fund Types
Fiduciary fund classification is determined in part by the presence or absence of a trust agreement or equivalent arrangement. Fiduciary assets administered through a trust agreement are recorded in an investment, private-purpose or pension (and other employee benefit) trust fund. There are four generic fund types in the fiduciary category: pension and OPEB trust, investment trust, private-purpose trust, and custodial.
Pension (and other employee benefit) trust funds are used to report activities of pension and OPEB plans administered through trusts where the contributions and earnings are irrevocable and assets are dedicated to providing benefits to members and legally protected from creditors.
Investment trust funds are used to account for activities from the external portion of investment pools and individual investment accounts where the assets are administered through a trust in which the government is not the beneficiary, dedicated to providing benefits to recipients and legally protected from creditors. Local governments in Georgia will not report this generic fund type as state law prohibits governments from operating investment trust funds. Rather, your government might have assets invested at the Office of the State Treasurer in the local government investment pool (LGIP) or the Georgia extended asset pool (GEAP).
Private-purpose trust funds are used to report fiduciary activities administered through a trust, that are not required to be reported in a pension (and other employee benefit) or investment trust fund, in which the government is not the beneficiary and the assets are dedicated to providing benefits to recipients and legally protected from creditors.
Custodial funds are used to report all other fiduciary activities not required to be reported in one of the aforementioned generic trust fund types. It is worth emphasizing that custodial funds are not pension, OPEB, investment, or private-purpose trust funds. However, they are used for fiduciary activities not held in a trust or equivalent arrangement. Custodial funds are used for the receipt, temporary investment, and remittance of fiduciary resources. Examples of these resources might include: tax collections, student activities, escrowed funds, payroll clearing, and inmate funds.
The State of Georgia and many local governments in Georgia report numerous fiduciary activities in their respective fiduciary fund financial statements. The State of Georgia reports activities such as the child support recovery program, insurance premium tax collections for local governments, and sales tax collections for local governments such as the local option sales tax (LOST) and special purpose local option sales tax (SPLOST) to name a few. Local governments in Georgia report activities such as tax commissioner, clerk of courts, sheriff, and corrections to name a few. Currently, these activities are reported in the agency generic fund type; however, once GASBS 84 has been implemented these activities will be reported in the custodial generic fund type. The agency fund type has been eliminated to avoid any confusion between agency funds and agencies of the government.
Financial Reporting Requirements
Governments should report fiduciary activities in the fiduciary fund financial statements of the basic financial statements with separate columns for each of the four generic fund types as applicable. These statements include the statement of fiduciary net position and the statement of changes in fiduciary net position.
Statement of Fiduciary Net Position
The statement of fiduciary net position would report the following financial statement elements: assets, deferred outflows, liabilities, deferred inflows, and fiduciary net position of fiduciary funds.
Pension (and other employee benefit) trust funds should follow the requirements of GASB Statement No. 67 and 74, respectively. Moreover, Statement No. 84 requires that a government recognize liabilities to beneficiaries when an event occurs that compels the government to disburse the resources. Events that compel a government to disburse fiduciary resources occur when a demand for the resources has been made or when no further action, approval, or condition is required to be taken or met by the beneficiary to release the assets. In Georgia, a county government would recognize a liability for taxes collected on behalf of a school system regardless of when they will be distributed.
Statement of Changes in Fiduciary Net Position
The statement of changes in fiduciary net position should report additions to and deductions from all generic fund types within the fiduciary category (including custodial funds). The presentation of additions and deductions on the statement of changes in fiduciary net position should:
- disaggregate additions and present by source, and if applicable, separately display investment earnings and investment costs; and,
- disaggregate deductions by type.
Governments holding custodial resources normally expected to be held for three months or less have the option of reporting a single aggregated total for additions and deductions – provided the descriptions are sufficient to indicate the nature of the resource flows (e.g., property taxes collected for other governments and property taxes distributed to other governments.) Administrative costs should be reported separately.
Depicted below is a summary of reporting changes as it relates to custodial funds:
Lastly, there are some exceptions for fiduciary funds of business-type activities. If at the time of receipt assets are expected to be held for three months or less, then report assets with a corresponding liability in the statement of net position instead of reporting in a custodial fund. Moreover, additions and deductions should be reported separately in the operating activities section of the statement of cash flows.
Governments should retroactively apply changes to conform to Statement No. 84’s provisions by restating financial statements, if practicable, for all prior periods presented. If restatement for prior periods is not practicable, the cumulative effect, if any, would be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest period restated.
In the first period that this statement is applied, the government should disclose in the notes to the financial statements the nature of the restatement and its effect. The reason for not restating prior periods presented also should be disclosed.
You want to begin the process of identifying potential fiduciary activities for your government. Please read the new standard and review the non-authoritative flowcharts provided by the GASB in the appendix of the statement. Discussion with your independent auditor is encouraged as you begin to implement the standard. A plan for successful implementation:
This article was contributed by:
John G. Hulsey, MPA, CGFM, CPFO
Carl Vinson Institute of Government | Public Service Associate