GASB recently updated its guidance on the reporting of assets held by governments in a fiduciary capacity. While the clarification on how to differentiate fiduciary and nonfiduciary component units and activities is welcome, the actual details of implementation remain complicated. The authors explain how to identify which component units and activities must be reported, how to determine which type of fund to report each of those activities in, and how to report them on the financial statements.
State and local governments throughout the United States hold trillions of dollars of assets in a fiduciary capacity. The combined fiduciary fund assets of New York State and New York City alone exceeded half a trillion dollars in fiscal year 2018. Texas reported over a quarter of a trillion dollars of assets held in a fiduciary capacity in the same fiscal year, including more than $46 billion not reported in fiduciary funds.
Assets held in a fiduciary capacity that are intended to benefit a government’s own programs or component units (i.e., separate legal entities included in a government’s financial statements) are reported in governmental fund and proprietary fund financial statements and government-wide financial statements. Indeed, permanent funds—such as the Texas “Permanent School Fund,” which had $46.5 billion of assets in 2018—exist strictly to report fiduciary relationships that not only benefit the reporting government but also have a non-expendable principal. Other resources for the benefit of the government’s own programs or component units may be reported in special revenue funds, in other governmental funds or proprietary funds, or in the government-wide financial statements.
Most assets held in a fiduciary capacity, however, are not for a government’s own benefit; instead, they are intended to benefit outside entities and individuals. GASB refers to activities or organizations related to assets held for the benefit of external organizations and individuals as “fiduciary activities;” these activities must be reported in fiduciary funds.
In January 2017, GASB adopted Statement 84, Fiduciary Activities, to address important financial reporting objectives, including—
- properly identifying all of a government’s fiduciary activities,
- determining the type of fiduciary fund to use to report each fiduciary activity (including fiduciary component units), and
- presenting the financial statements of fiduciary funds appropriately.
Statement 84 must be implemented for fiscal years ending December 15, 2019, or later.
The purpose of this article is to present the guidance provided by GASB Statement 84 in a comprehensive, comprehensible manner to facilitate its successful implementation by state and local governments and their auditors. It first provides an abbreviated walk-through of fiduciary activity reporting guidance, then discusses how to determine whether a component unit or other activity of a government is a fiduciary activity that should be reported in a fiduciary fund. Next, it identifies the four fiduciary fund types and discusses and diagrams the process for determining which fund type to use to report each fiduciary component unit or other fiduciary activity. Finally, it discusses certain specific fiduciary fund financial statement guidance.
The Evolution of Fiduciary Activity Reporting Guidance
Statement 84 culminates the transformation of the reporting requirements for governments’ fiduciary relationships and responsibilities that began with GASB Statement 34, Basic Financial Statements— and Management’s Discussion and Analysis—for State and Local Governments. GASB’s predecessor body, the National Council on Governmental Accounting (NCGA), in its Statement 1, Governmental Accounting and Financial Reporting Principles, indicated that fiduciary funds were to be used to account for assets that a government held “in a trustee capacity or as an agent for individuals, private organizations, other governmental units, and/or other funds.” Note that assets held for other funds were intended to benefit a government’s own programs and activities.
Implementation of the GASB’s initial major reporting guidance for pension plans (GASB Statement 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans) generated numerous queries regarding whether a particular pension plan should be reported as a pension trust fund. During the due process procedure for another standard, GASB recognized that the then-current guidance for reporting fiduciary relationships was likely inadequate to ensure consistent application. No clear guidance was provided to determine whether the government had any fiduciary responsibility that would require a legally separate entity to be included in its reporting entity, nor to determine when other activities should be considered fiduciary activities.
Statement 34 established the current framework of state and local government financial reporting and began to address issues related to identifying and reporting fiduciary activities. It—
- excluded assets held in a fiduciary capacity for the benefit of a government’s own programs or activities (including its component units) from inclusion in fiduciary funds,
- established permanent funds as a governmental fund type to account for assets held in a fiduciary capacity for the benefit of the government that have a nonexpendable corpus, and
- established a new fiduciary fund structure to report fiduciary activities that are not for the benefit of the government’s programs.
It did not, however, provide guidance for differentiating fiduciary activities, including fiduciary component units, from other activities. Later standards dealing with pension plans (GASB Statement 67, Financial Reporting for Pension Plans—an amendment of GASB Statement 25, as amended) and other postemployment benefits (GASB Statement 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended) provided detailed guidance on financial reporting for pension and other postemployment benefit (OPEB) arrangements. The guidance included specific criteria that a pension or OPEB arrangement must meet for the arrangement to be reported in a pension or other employee benefit trust fund.
Statement 84 fills the gaps, modifying and improving prior guidance based on insights gained from experience, research, constituent input, and board deliberation. It addresses how to determine which component units and other activities are fiduciary activities as well as the fund type for reporting each fiduciary activity. Statement 84 also refines the fund structure, recognizing that not every fiduciary activity is either a strict trust relationship or agency relationship, and it refines the financial statement guidance, particularly with respect to the recognition of liabilities to beneficiaries and to fiduciary activities that are not reported in trust funds.
Identifying Fiduciary Component Units and Other Fiduciary Activities
The specific guidance to determine whether an activity is a fiduciary activity reported in a government’s fiduciary funds varies somewhat based on 1) whether the activity is a legally separate entity that qualifies as a component unit of the government and 2) whether the activity is a pension or OPEB arrangement. Determining whether an organization is a component unit is based on the existing reporting entity guidance. Statement 84 (paragraph 7) only specifies that a government that is legally required (or otherwise assumes the obligation) to contribute to a pension plan, or an OPEB plan administered by a legally separate entity, has a financial benefit or burden relationship with the entity in applying the reporting entity guidance. Statement 84 provides similar, but not identical, guidance to identify component units as fiduciary component units (and therefore fiduciary activities) than that used to identify other activities as fiduciary activities. The requirements for classifying component units as fiduciary component units (and therefore as fiduciary activities) are discussed below and diagrammed in Exhibit 1.
Identifying Fiduciary Component Units That Are Pension or OPEB Arrangements
Whether a component unit is a fiduciary activity, and therefore a fiduciary component unit, depends upon the structure of the plan arrangement. An organization that administers a pension plan or an OPEB plan through a trust or equivalent arrangement that meets the requirements of paragraph 3 of GASB Statement 67 (for pension plans) or of paragraph 3 of GASB Statement 74 (for OPEB plans) is a fiduciary component unit that must be reported as a fiduciary activity. These paragraphs require that the plan have 1) irrevocable employer (and any nonemployer contributing entity) contributions and related earnings, 2) plan assets dedicated to providing plan benefits, and 3) legal protection of the plan assets from creditors of employers, nonemployer contributing entities, and the plan administrator. (Defined benefit plan assets also must be legally protected from plan members’ creditors.)
Component units that accumulate assets for pensions or OPEB from entities that are not part of a government’s reporting entity are also fiduciary component units. Financial statements for component units for pension or OPEB arrangements that are notadministered through a Statement 67 or a Statement 74 qualified trust must exclude any assets that pertain to the reporting entity—that is, the primary government or its component units.
Identifying Other Fiduciary Component Units
For component units that are not pension or OPEB arrangements, different requirements apply to determine which ones are fiduciary activities and therefore fiduciary component units. These other component units are fiduciary activities if the assets are either—
- administered through a trust or equivalent arrangement that meets the criteria of paragraph 8a of Statement 84—that is, the government is not a beneficiary, the assets are dedicated to providing benefits per the terms, and the assets are legally protected from the government’s creditors;
- held for the benefit of individuals, but not derived from the government providing goods and services to the benefit recipients, and over which the government has no administrative or direct financial involvement; or
- held for the benefit of organizations or governments that are 1) not part of the reporting entity and 2) not derived from the government providing goods and services to the benefit recipients.
Identifying Fiduciary Activities That Are Not Separate Component Units
A government’s activities that are not activities of a component unit also must be distinguished between pension and OPEB arrangements and other activities. The criteria for identifying whether non–component unit pension and OPEB arrangements are fiduciary activities are the same as for component units that are pension or OPEB arrangements only if the government controls the assets. If the government does not control the assets, the government should not include the arrangement in its financial statements at all. “Control of assets,” according to Statement 84, means that the government either holds the assets or otherwise meets a set of control criteria, described below. These criteria also apply to determining whether non–component unit activities other than pension or OPEB arrangements are fiduciary activities.
The government must control the assets associated with the activity. The control criterion is met if either 1) the government holds the assets or 2) the government or its designee can direct their use, exchange, or employment to provide benefits to the intended recipients. The GASB Statement 84 basis for conclusions describes use of an asset as expending or consuming an asset to benefit the activity’s intended benefit recipients, outside of the government providing goods and services to them. Providing high-level investment guidance, such as a policy on permitted investments, is considered a restriction on how recipients can use assets rather than as the government having the ability to direct the use of assets. Note that in this case, no assets are expended or consumed to benefit the intended beneficiaries.
“Exchange” and “employ” in the fiduciary activity context are also described in the Statement 84 basis for conclusions. Exchange means to replace one asset with a different asset that will be used for the benefit of intended beneficiaries without “expending or consuming” the asset. Employ means to put an asset into service for the benefit of intended beneficiaries “without expending or consuming” the asset. Investment is given as an example of employing an asset.
Legal or external restrictions on assets to expenditure for a specific purpose do not affect the determination of whether the government controls the assets.
To meet the source criterion, the assets cannot be raised from—
- a government’s own source revenues, such as solely from its own taxes and charges for services, or
- government-mandated or voluntary nonexchange transactions. (Pass-through grants for which a government does not have any administrative or direct financial involvement are an acceptable source for fiduciary activity resources.)
This criterion can be met in any one of three ways. First, the assets may be administered through a trust or similar arrangement that qualifies under paragraph 11c(1) of Statement 84. (The requirements are the same as those in Statement 84, paragraph 8a.) The government cannot be a beneficiary of the trust, and the trust assets must be—
- dedicated to providing benefits per the trust terms, and
- legally protected from the government’s creditors.
The second situation requires that—
- the assets are for the benefit of individuals,
- the government has no administrative or direct financial involvement with the assets, and
- the assets were not raised from the government providing goods or services to the individuals whom the assets are intended to benefit.
The third situation requires that the assets of the activity—
- are for the benefit of organizations or other governments not included in the reporting entity (rather than for the benefit of individuals), and
- were not raised from the government providing goods or services to the organizations or governments that the assets are intended to benefit.
A primary government activity, other than pension or OPEB arrangements, must meet all three criteria—control, source, and administration/beneficiaries—to be a fiduciary activity reported in a fiduciary fund. The guidance for determining whether an activity that is not a component unit is a fiduciary activity is illustrated in Exhibit 2.
Statement 84 specifies four types of fiduciary funds—three types of trust funds and the custodial fund type—to be used to report various fiduciary activities, including fiduciary component units. (Agency funds have been eliminated.) The type of fund to be used to report each fiduciary activity included in the fiduciary fund financial statements is summarized below and illustrated in Exhibit 3.
Determining the Fund Type to Report a Fiduciary Component Unit (CU) or Other Fiduciary Activity
Trust funds are used only to report fiduciary activities (including fiduciary component units) that are administered through a trust or equivalent arrangement that qualifies under the guidance of either Statement 67, paragraph 3 on pensions; Statement 74, paragraph 3 on OPEBs; or Statement 84, paragraph 11c(1). Custodial funds are used to account for all other fiduciary activities.
The type of trust fund to use when required depends on the nature of the activity. Two of the trust fund types have very specific uses; the third is used to report all of the other qualifying trusts of a government.
Pension and other employee benefit trust funds are used for—
- pension plans administered through Statement 67, paragraph 3 qualified trusts;
- OPEB plans administered through Statement 74, paragraph 3 qualified trusts; and
- other employee benefit plans if administered through a Statement 84, paragraph 11c(1) qualified trust for which the contributions to the trust and related earnings are irrevocable. Note that all Statement 84, paragraph 8a qualified trusts and similar arrangements also meet the paragraph 11c(1) criteria.
Investment trust funds are used for the external portion of investment pools and individual investment accounts (defined in paragraph 22 of GASB Statement 31) that are administered through a GASB 84, paragraph 11c(1) qualified trust.
Private purpose trust funds are used to account for all other fiduciary activities required to be reported in trust funds. Note that this includes other employee benefit plans administered through a Statement 84, paragraph 11c(1) trust for which the contributions and related earnings are not irrevocable.
Statement 84 provides one exception to this guidance for reporting fiduciary activities in a fiduciary fund. Governments can choose to report fiduciary activities and fiduciary component units of business-type activities and enterprise funds that are agency relationships (i.e., the assets have a corresponding liability) that would otherwise be reported in custodial funds within the business-type activities and enterprise funds, but only if the assets are to be held not more than three months after receipt.
Financial Statement Guidance
All of a government’s fiduciary activities and fiduciary component units (including any fiduciary component units of its fiduciary component units) are reported in the appropriate fiduciary fund type column of the reporting government’s fiduciary fund financial statements. They are not included in the government-wide financial statements. Fiduciary fund financial statements continue to include a statement of fiduciary net position and a statement of changes in fiduciary net position, with few changes from prior reporting guidance. Custodial funds are reported in both statements, as they can have net position balances, whereas in the past agency funds always had equal assets and liabilities and were only reported in the statement of fiduciary net position.
Other specific guidance in Statement 84 regarding reporting of various financial statement elements includes the following:
- Other than in trust funds used to report pension or OPEB plans that must follow the liability recognition guidance in Statement 67 or Statement 74, as applicable, liabilities to beneficiaries of a fiduciary component unit or other fiduciary activity are recognized in fiduciary funds when an event occurs that compels a government to disburse fiduciary resources. Demand for the resources being made is one type of compelling event; situations in which no further action, approval, or condition must be taken or met by the beneficiary also meet this requirement. Collection of taxes for another government to be remitted to the taxing government at a future date is one example provided in Statement 84 of the latter type of compelling event. (The standard does not change recognition guidance for any liabilities other than those to beneficiaries.)
- Custodial funds may have a net position; therefore, additions and deductions to the net position of these funds are included in the statement of changes in fiduciary net position. In the past, this financial statement covered only the three types of trust funds.
- Additions are to be reported by source in the statement of changes in fiduciary net position. This requirement includes, if applicable, separate display of—
- investment earnings;
- investment costs, including investment management fees, custodial fees, and other significant investment-related costs (that are separable from investment earnings and from administrative costs); and
- net investment earnings (the difference between the previous two components).
An exception to the above requirement is that a single aggregated additions total and a single aggregated deductions total may be reported for a custodial fund in which resources, at the time received, are expected to be held not more than three months. The descriptions used to report the aggregated amounts should indicate the nature of the resource flows. Property taxes collected for other governments and property taxes distributed to other governments are given as examples for a custodial fund used to account for tax collections on behalf of other governments. In addition, pension and OPEB trust funds should always report changes in fiduciary net position in accordance with Statement 67 or Statement 74, as applicable.
Governments must present fiduciary activities that meet the criteria in GASB’s Statement 84 with respect to financial statements presented for the 2019 calendar year and for fiscal years ending in 2020 and later. The new guidance is to be applied retroactively.
Implementing the statement appropriately requires ensuring that activities presented in fiduciary funds in the past are 1) fiduciary activities (including fiduciary component units) under Statement 84 and 2) reported in the same type of fiduciary fund. Most, but not all, trust and similar arrangements probably are. Fiduciary activities that had been reported in agency funds in the past typically will now be reported in custodial funds; these activities will be included in the statement of changes in fiduciary net position for the first time.
Governments also must consider whether activities excluded from fiduciary activities in the past should be reported as fiduciary activities under the new guidance. Many governments are apt to find no changes in the activities reported as fiduciary activities, but others will have noteworthy differences. At least one comment letter received by the GASB during the exposure draft period was from a government that believed the guidance in the exposure draft—some of which was changed—could have a major impact on the monetary amount of assets it would have to report as fiduciary activities.
The good news for preparers is that assets held for pension and OPEB arrangements make up most of the assets of most governments’ fiduciary activity assets. For example, approximately 90% of the combined fiduciary fund assets of New York City and the states of New York and Texas are assets of pension and other employee benefit trust funds.
Statement 84 did not change the requirements for component units or other activities that are pension or OPEB arrangements that must be reported in pension and other employee benefit trust funds under Statement 67 or Statement 74. For pension and OPEB arrangements that are fiduciary activities but do not qualify for trust fund reporting, assets held for external entities must be reported in custodial funds instead of agency funds. If the government does not control the assets of a pension or OPEB arrangement that is not a component unit, the government does not report these assets. Therefore, only a limited number of governments will have to make changes with regard to pension and OPEB arrangements.
With regard to component units and other activities that are not pension or OPEB arrangements, governments will have to apply the Statement 84 guidance to determine if they are fiduciary activities. For those that are, the government will have to evaluate both existing and newly identified fiduciary activities to determine the type of fiduciary fund in which to report each fiduciary activity. Some governments may find that activities they previously reported in trust funds do not qualify as trust funds under Statement 84 and will have to be reported in custodial funds. Most agency funds will have to be reported as custodial funds—as noted above for certain pension and OPEB arrangements—and additions and deductions of custodial funds will have to be reported in the statement of changes in fiduciary net position, which was not required for agency funds. In addition, liabilities to beneficiaries—other than for pension plans and OPEB plans reported in trust funds—must be recognized based on whether payment has been compelled. For some activities previously reported as agency funds, this will mean that assets and liabilities are not always equal. Therefore, governments will report a net position for some of these activities where they could not report net position under prior guidance.
Some governments will require little time and effort to apply Statement 84; others will find themselves in complex situations that require considerable time and effort. All must take the time and effort to understand the statement’s requirements and apply them correctly.