The Governmental Accounting Standards Board (GASB) issued GASB Statement No. 84, Fiduciary Activities the last week in January 2017. Obviously, this is breaking news – stop the presses! The standard is the culmination of a long-term, wide-ranging project to address accounting and financial reporting for the following:
- Pension plan assets that are entrusted (GASB Statement No. 67 and
- Pension plan assets that are not entrusted (GASB Statement No. 73)
- Other postemployment plans (OPEB) assets that are either entrusted or not entrusted (GASB Statement No. 74 and GASB Statement No. 75)
With GASB Statement No. 84, the GASB provides definitive guidance on how all fiduciary activities of a governmental entity should be reported. It is now definitive that assets that are associated with a fiduciary activity and are legally entrusted should be reported in one of three specific fiduciary fund types. Those assets that are not legally entrusted but still meet the definition of a fiduciary activity are to be reported in a separate fiduciary fund type. This does clear some inconsistencies with fiduciary fund reporting currently where entrusted and non-entrusted assets may be reported in the same fund type (although many of us probably never lost much sleep over it).
What is a fiduciary activity?
GASB Statement No. 84 defines a fiduciary activity in a variety of ways. First, there are component units, as defined by GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No. 61, The Financial Reporting Entity: Omnibus – and amendment of GASB Statements No. 14 and No. 34 that are engaged in fiduciary activities. Many pension and OPEB plans are structured as separate legal entities in which assets may or may not be legally entrusted. The plans exist for the benefit of the retirees of a specific governmental entity and are defined as component units of the entity mainly because the government is obligated to make contributions to the plans.
There may defined component units of a governmental entity that are not pension or OPEB activities but nonetheless are:
- Assets that are entrusted and are not for the governmental entity’s benefit; and/or
- Assets that benefit independent individuals and/or organizations; and/or
- Assets that are protected from the government’s creditors.
In these cases, these activities are considered to be fiduciary activities as well.
Second, and more commonly, governmental entities are very often acting in a fiduciary capacity for assets that are not part of a component unit relationship. Thus, fiduciary activities arise in the following types of general circumstances:
- A governmental organization that manages the assets of:
- a pension plan administered through a legal trust, or
- an OPEB plan administered through a legal trust, or
- entities that are not part of the reporting entity and are accumulated for either a pension or OPEB plan that are not in a legal trust.
- Activities that are not part of a pension plan and/or OPEB plan and
- the governmental entity controls the assets, and
- the resources are not generated primarily internally or from nonexchange transactions (e.g., grants), and
- the assets are either administered through a trust with prescribed recipient benefit terms and are protected from the government’s creditors; and/or the assets benefit outside individuals or organizations.
What fund types are used for fiduciary activity reporting?
GASB Statement No. 84 refines the definitions of three of the fiduciary fund types and replaces the fourth one with new terminology and a refined definition. Pension trust funds, investment trust funds and private-purpose trust funds may only be used to account for legally entrusted arrangements. Custodial funds (which replaces agency funds) are used to account for fiduciary activities that are not legally entrusted.
Pension Trust Funds
A pension trust fund is used to account for pension plans and OPEB plans that are legally entrusted. Hundreds of governments in North Carolina participate in the Local Government Retirement System that is managed in a trust by the State of North Carolina. Therefore, those governments that participate in the State-managed plan would not report a pension trust fund for this activity (the State of North Carolina reports the pension trust fund). Local governments that do not participate in the State–managed plan but have their own legally-entrusted assets for pension benefits would report a pension trust fund.
Many governments offer OPEB plans, most commonly for post-retirement health insurance coverage or subsidized coverage. However, it is not a widespread practice to have established legal trusts. The only time an OPEB plan would be reported as a pension trust fund would be if resources were being placed in a legally-binding trust for this purpose.
Likewise, while all governmental entities that employ at least one sworn law enforcement officer are required to provide the North Carolina Law Enforcement Separation Allowance supplemental retirement plan, very few actually have established legal trusts for resources to be set aside. Thus, such plans would only be reported as pension trust funds when a trust has been established. Instead, governmental entities would follow GASB Statement No. 73 (for pension plans not legally entrusted) and GASB Statement No. 75 (for OPEB plans not legally entrusted).
Investment Trust Funds
An investment trust fund would be used when a governmental entity is managing an external investment pool, thus managing other entities’ assets on their behalf. Local governmental entities in North Carolina do not have the legal ability to manage such pools. Therefore, from a practical perspective, such a fund type would not be reported by North Carolina local governments.
Private-purpose Trust Funds
A private-purpose trust fund is used to account for any legally-entrusted assets that are not for pension/OPEB trusts or investment trust funds, as were previously defined. Realistically, these often arise when governments are named as trustees/fiduciaries of a bequest where the benefits are being managed for outside individuals and/or corporations. In other words, the governmental entity itself is not benefiting from the trust arrangement. One of the more common types of private-purpose trust funds in North Carolina are scholarship trusts that school districts manage for the benefit of qualifying students.
Previously known as an agency fund, a custodial fund would be used to report any fiduciary activities where the assets are not legally entrusted and do not meet the definitions of pension trust funds, investment trust funds, or private-purpose trust funds. This would also include contractual arrangements where the government is acting as a true collection agent on behalf of another government. This would not include pass-through grants (which should be accounted for in accordance with GASB Statement No. 24, Accounting for Certain Grants and Other Financial Assistance). The most common example in North Carolina are relationships where a county government bills and collects property taxes not only for itself, but on behalf of municipalities within the county as well. The arrangement is often more cost-efficient for both the counties and municipalities and the taxpayers only have to remit one payment.
It should be noted that under current GAAP, agency funds reported no measurement focus and, as such, assets and liabilities always equaled. Custodial funds could report potential additions and deductions that do not always equal and thus some equity may build in the fund.
What financial statements are reported for the fiduciary funds?
All fiduciary funds – pension trust, investment trust, private-purpose trust and custodial funds – will report a statement of fiduciary net position (e.g., assets, liabilities, deferred inflows and outflows, and equity) and a statement of changes in fiduciary net position (e.g., additions to and deductions from the trust and custodial funds). An aggregated total for additions and another for deductions may be reported in a custodial fund when the collected resources are going to be held for less than three months.
When do governments in North Carolina have to worry about this?
GASB Statement No. 84 is required to be implemented for fiscal years that begin after December 15, 2018. Thus, fiscal year ended June 30, 2020, will be the first year that GAAP requires full implementation. Although a final decision has not yet been made by the staff of the Local Fiscal Management Division of the North Carolina Local Government Commission, it is possible that they may require earlier implementation. Overall, the standard is not that cumbersome and it may be to everyone’s benefit to implement early and consistently.