Changes are coming for reporting fiduciary activities in government financial statements. In January, the Governmental Accounting Standards Board (GASB) issued new guidance to address how governments report fiduciary activities which is effective for fiscal years ending on or after December 31, 2019. Statement No. 84, Fiduciary Activities, supersedes reporting of agency funds and replaces it with a newly coined custodial fund, and requires several additional reporting requirements for fiduciary funds.
Under current guidance, Statement 34 requires that governments report fiduciary activities in fiduciary funds, but that statement does not provide a clear definition of what constitutes a fiduciary activity. GASB sought to reduce inconsistencies in reporting and provide a clear foundation for future reporting.
The new guidance will impact a significant amount of local governments. Many local governments have activities that may be considered fiduciary, including:
- Student activity funds of a school district
- Tax collection funds
- Circuit court fund of a municipality or county
- Jail inmate accounts
- Nursing home patient accounts
- Cemetery trust funds
- Postemployment benefit plans
What is considered a fiduciary activity under the new standard?
Under the recently issued Statement 84, governments will need to apply specific criteria to determine if a fiduciary activity exists. The criteria focuses on determining if a government is controlling the assets of the potential fiduciary activity and determining who the beneficiaries are. A few of the major changes we have identified that will impact many governments include:
- Pension/OPEB Plans as Fiduciary Component Units: Pension and other postemployment benefit (OPEB) plans will need to be evaluated to determine if they meet the fiduciary component unit criteria. The standard includes a statement that contributions to a pension/OPEB plan are considered a financial burden. Therefore, in many cases, the fiduciary component unit status will depend on the composition of the pension/OPEB board of trustees, as this is a component unit criteria identified in GASB Statement No. 14, The Financial Reporting Entity, as amended. In other words, if the government appoints the voting majority of the pension/OPEB board of trustees, the plan will qualify as a fiduciary fund. However, if the government does not appoint the voting majority of the pension/OPEB board of trustees, the plan would only be reported as a fiduciary fund if the government controls the assets of the plan. “Control” is defined within the standard.
- Other Fiduciary Activities: There are various other types of assets that a government controls which will need to be evaluated under the new standard. Part of this evaluation will include identification of the beneficiary of the funds, consideration of how the assets are derived and the extent of administrative or direct financial involvement with the assets. To highlight a common example, if a school district has student activity funds and it is determined that a student club advisor, employed by the school district, has administrative involvement with the funds, those accounts would be reported as funds of the government itself, not as fiduciary funds. Examples of “administrative involvement” are described in the standard. Student activity funds, and other similar activities, will need to be carefully analyzed according to the specific language of the standard since the circumstances of each government will be different.
Types of fiduciary funds
The four types of fiduciary funds include:
- Pension (and other employee benefit) trust funds
- Investment trust funds
- Private-purpose trust funds
- Custodial funds
Custodial funds will generally be used for activities that are not structured in a trust that meets the prescribed descriptions of the first three fund types.
What are the significant changes in the reporting requirements?
The following is a summary of two significant changes in the reporting requirements:
- The standard requires that governments recognize a liability to the beneficiaries in a fiduciary fund only when an event has occurred that compels the government to disburse fiduciary resources.
- This change may result in net position balances for custodial funds, which frequently did not report a balance of net position under the guidance for agency funds.
- There are specific exceptions to this requirement for some fiduciary funds of business-type activities that normally expect to hold the assets for three months or less.
- Presentation of additions and deductions on the statement of changes in fiduciary net position for all fiduciary funds, including custodial funds will change.
- Additions should be disaggregated by source, and if applicable, separately display investment earnings and investment costs.
- Deductions should be disaggregated by type.
- There is a specific exception for custodial funds with resources that are normally expected to be held for three months or less.
The time to start assessing your government’s fiduciary activities is approaching. Start with reading the new statement and reviewing the non-authoritative flowchart provided by GASB in the appendix of the statement. This will give you an understanding of the new criteria and requirements and help you identify the fiduciary reporting changes that will impact your financial statements.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.