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Is Your Government a Fiduciary? – Just Scratching the Surface…

By   Eric Berman

October 05, 2017

In January 2017, the Governmental Accounting Standards Board (GASB) released Statement No. 84, Fiduciary Activities (GASB-84). In many situations, a state or local government may become a fiduciary as the result of implementation of GASB-84.  In other situations, no change may be necessary. 

The updated standards are effective for reporting periods beginning after December 15, 2018.  A restatement will be required of all prior periods presented in the basic financial statements, if practicable, or a restatement of beginning net position for the earliest period restated.

This article is an overview of the provisions of GASB-84.  Future articles will discuss topics including GASB-84’s effect on Internal Revenue Code Section 457(b) and 403(b) reporting, custodial funds and student activity funds in detail.

What are the Criteria for Recognizing a Fiduciary Activity?

GASB-84 establishes two major criteria for identifying a fiduciary activity:

  • Is the government controlling the assets of the fiduciary activity?
  • Are there specific types of beneficiaries with whom a fiduciary relationship exists?

A government controls the assets of an activity if the government:

  • Holds the assets, or
  • Has the ability to direct the use, exchange, or employment of assets in a manner that provides benefits to the specified or intended recipients. 

A government ‘uses’ an asset when it expends or consumes the asset for the benefit of individuals, organizations, or other governments, beyond simply providing services to those entities. ‘Employment of assets’ is a little more difficult to understand. For example, if a government signs a contract with a custodial bank to manage a fiduciary fund, by virtue of the contractual relationship, a fiduciary activity may exist if the government has the ability to direct the use, exchange, or employment of those assets. 

There are many types of possible fiduciary relationships, which may be identified based on the following aspects of control:

  • A fiduciary component unit may exist providing postemployment benefits such as pensions or OPEB.
  • A fiduciary component unit may exist providing investment management or trustee activities.
  • Non-component unit activities may exist that provide postemployment benefits and presented in a pension or postemployment benefit trust fund.
  • Other fiduciary activities may exist that are currently primarily reported in agency funds.

What GASB-84 May Change or May Not Change

If a fiduciary component unit exists, no change may be required by implementation of GASB-84, especially for pensions or OPEB. However, if assets are accumulated to provide pensions or OPEB without a trust or equivalent arrangement, a fiduciary fund may have to be created. 

Fiduciary activities may be present if:

  • The assets of the activity are controlled by the government, or
  • The assets are not derived either:
    • Solely from the government’s own source revenues such as taxes, fees, charges and similar, or
    • From most grants.

To emphasize, most grant transactions will not be fiduciary transactions. In most pass-through grant situations, administrative or direct financial involvement still exists due to a sub-recipient relationship or some other matching requirement. Therefore, a fiduciary activity would not exist.

A large change with the implementation of GASB-84 will involve the conversion of agency funds to custodial funds. Financial reporting of custodial funds will be the same as all other fiduciary funds with a statement of fiduciary net position and a statement of changes in fiduciary net position. This may necessitate systems, policies and procedural changes. The most pervasive change may be in some custodial fund situations. If resources in a former agency fund are normally held for more than three months, additions and deductions will have to be disaggregated similarly to other fiduciary funds in the statement of changes in fiduciary net position. Otherwise, an aggregated total for all additions and deductions may be presented similarly to the current presentation, except in a vertical format instead of horizontal.

The recognition of liabilities within fiduciary funds may also change. A liability will be recognized in a fiduciary fund when an event has occurred which compels a government to disburse resources. An example provided in GASB-84 is when a County collects taxes for other governments to be disbursed in the future in accordance with a statute. GASB-84 will require the County to declare a liability for that disbursement in the future. Another example may be with Internal Revenue Code Section 529 Plans (Qualified Tuition Programs). Upon a beneficiary of the Plan needing a cash distribution for higher education or meeting the other distribution requirements in the tax code, a liability will be declared.

Should you have any questions regarding GASB-84, please see your Eide Bailly partner.