GASB Seeks to Answer Stakeholder Questions about Fiduciary Activities

GASB Seeks to Answer Stakeholder Questions about Fiduciary Activities

One reason the Governmental Accounting Standards Board (GASB) establishes accounting standards is to provide information that will assist the public in making decisions, such as whether to buy a particular government’s municipal bonds or where to locate a business. The financial information required by the GASB’s standards also is intended to help people assess whether their governments have been accountable. In December 2015, the GASB proposed standards that should be valuable for evaluating if governments have been accountable for money for which they act in a fiduciary capacity.

The proposed standards—contained in the Exposure Draft, Fiduciary Activities—would help governments to determine if they should report qualifying fiduciary activities in their financial statements. The GASB’s proposal was prompted in part by concerns expressed by government officials and other stakeholders that the existing standards are not clear enough for governments to accurately identify what fiduciary activities qualify to be reported in their financial statements.

Comments on the proposal are requested by March 31, 2016.

What Is a Fiduciary Activity?

On its face, the question of what constitutes a fiduciary activity seems straightforward—when a government is taking care of money that belongs to individuals or entities other than the government itself. But that definition could conceivably be applied to some grants and tax revenues that governments receive and use to finance the provision of services.

The GASB’s proposal essentially lays out a series of questions that a government would ask when evaluating whether they are engaged in a fiduciary activity:
  1. Does the government control the assets of the activity?
  2. Where do the assets come from?
  3. What purpose are the assets to be used for?


The Exposure Draft proposes that a government would be considered to control assets that may be associated with a fiduciary activity if the government holds the assets. However, not actually holding the assets does not mean a government does not control them. If the government is able to administer or direct how the assets’ service capacity is used, exchanged, or employed, it would be considered to have control of the assets. Service capacity is an essential characteristic of items that can be reported as assets—it can be used to provide services directly (like a prepaid college tuition plan), or to purchase goods and services (such as when one government collects taxes on behalf of other governments), or to generate cash or be sold for cash (such as the portion of an investment pool that belongs to other governments).

The Source of the Assets

If a government controls the assets, the next question would be where the assets come from. To be the assets of a fiduciary activity, the GASB is proposing that they cannot come solely from a government’s own-source revenue. In other words, the assets would not result only from revenues that a government generates itself, such as taxes or customer charges.

The Purpose of the Assets

If a government controls assets that do not derive solely from its own-source revenues, the government lastly would ask what the assets are for. The government would be engaged in a fiduciary activity if those assets meet at least one of these four criteria:
  • The assets are administered through a trust in which the government is not a beneficiary. (Assets also could be held in a non-trust arrangement that is equivalent to a trust, but for simplicity we will call them all trusts.) The assets in the trust would need to be dedicated to providing benefits to the recipients under the trust’s benefit terms and legally protected from the government’s creditors. In other words, the assets can go only to the intended beneficiaries.
  • The assets are for people who qualify as beneficiaries for reasons other than being the government’s residents or service recipients (though some, but not all, could be).
  • The assets are for entities (possibly including governments) that are neither a part of the government’s financial reporting entity nor recipients of its services.
  • The assets come from a pass-through grant for a program in which the government does not have administrative or direct financial involvement. This is consistent with existing standards in Statement No. 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance. In brief, a pass-through grant is received by a government and subsequently distributed to another government or other entity for their use.
If a government controls the assets as part of a pension arrangement or other postemployment benefit (OPEB) arrangement (such as retiree health insurance), as the term control is described above, it should report them as directed by the pension and OPEB standards. (Specifically, Statements No. 67, Financial Reporting for Pension Plans; No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68; and No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans.)

Finally, if a government has a component unit that meets the proposed fiduciary activity definitions and criteria, the government would report the component unit as one of the government’s fiduciary activities.

Reporting Fiduciary Activities

Governments are required to report their fiduciary activities in fiduciary fund financial statements. Under existing standards, these statements report four types of fiduciary funds: pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and agency funds.

Proposed Types of Fiduciary Funds

In practice, the governments sometimes use those first three types of fiduciary funds to report resources that actually are not in trusts. The GASB is proposing to clarify that those three fund types would be used only to report assets held in trusts.

Pension (and other employee benefit) trust funds would report assets that meet all three of these criteria:
  • The assets are only to be used for pension or OPEB plans
  • They are held in a trust meeting the two criteria in bullet A above
  • Contributions to the trust from employers (and from other entities that are legally responsible for benefits), and earnings on those contributions, are irrevocable.
Investment trust funds would report the external portion of an investment pool, if the assets are held in a trust meeting the two criteria in bullet A above. A government’s own portion of the investment pool is reported in its government-wide, governmental fund, and propriety fund financial statements. The remaining assets—those belonging to other governments, entities, or individuals—represent the external portion that would be reported in the fiduciary funds.

Private-purpose trust funds would report assets related to fiduciary activities other than those in the first two types of trust funds, as long as they are held in a trust meeting the two criteria in bullet A above.

What happens to fiduciary funds that a government has been reporting but that do not meet these proposed definitions and criteria? If the assets in those funds are used for an activity that qualifies as a fiduciary activity, the GASB is proposing that the funds would be reported as a new type of fiduciary fund—custodial funds.

Custodial funds also would include what governments are now reporting as agency funds. Agency funds report resources held temporarily before being passed along to their intended recipients—for instance, property taxes collected by a county on behalf of local governments and school districts.

If assets meet the proposed definitions and criteria, a government would be required to report them in fiduciary fund financial statements. However, based on cost-benefit considerations, the GASB has proposed an exception related to custodial funds for business-type activities (BTAs) such as public colleges and universities and utilities. If a BTA has assets and corresponding liabilities that it would be required to report in a custodial fund, but those assets are expected to be held for three months or less, the BTA may report the assets and liabilities in its own statement of net position instead of in fiduciary fund financial statements. If a BTA chooses to do this, it would be required to report significant additions to and deductions from those assets as operating cash inflows and outflows in the statement of cash flows.

Fiduciary Fund Financial Statements

Governments would continue to present two statements for their fiduciary funds—a statement of fiduciary net position and a statement of changes in fiduciary net position. However, the Exposure Draft proposes some notable changes to the statements.

Fiduciary Fund Liabilities

The GASB has proposed to clarify when a government should recognize a liability to the beneficiaries of a fiduciary fund. Such a liability should be reported in the statement of fiduciary net position when an event has occurred that requires the government to distribute resources to a beneficiary. Such an event could be when the resources have been demanded, or when nothing else needs to happen for a beneficiary to be entitled to receive the resources.

Changes in Fiduciary Net Position

Under existing standards, agency funds are not reported in the statement of changes in fiduciary net position because they have no net position—assets equal liabilities. All trust funds and custodial funds would be reported in that financial statement under the proposed standards. Additions would be reported by source, with the following shown separately if a government has them:
  1. Investment income
  2. Investment costs, including management fees, custodial fees, and other significant investment-related costs
  3. Net investment income (1 minus 2).
Deductions would be reported by type. Administrative costs, if there are any, would be shown separately from other deductions.

Exception for Custodial Funds

To mitigate the costs of the proposed standards, the GASB has proposed an exception related to custodial funds that are expected to hold resources for three months or less. For such funds, a government would be allowed to report a single total for all additions and a single total for all deductions, as long as the labels of those totals sufficiently indicate the nature of the inflows and outflows.

Component Units

Occasionally, a government reports a component unit that is a fiduciary activity, and that component unit has component units of its own that are fiduciary activities (for example, a retirement system with multiple pension plans). In such circumstances, the government would report in its fiduciary funds the combination of the component unit and its fiduciary component units.

Effective Date and Transition

The GASB has proposed that the standards would be effective for periods beginning after December 15, 2017—for instance, fiscal years ending December 31, 2018, or June 30, 2019. Governments would be encouraged to implement earlier.

As is typical for most GASB guidance, these proposed standards would be implemented retroactively. This is done by restating the financial statements for all prior years included and presenting a note to the financial statements about the nature of the restatement and its effect. However, if this is not practicable—in other words, if it cannot reasonably be accomplished—a government would instead restate the beginning net position of the earliest year presented in the financial statements and explain in the notes to the financial statements why the financial statements were not restated.

It should be noted that practicable is a new term that replaces the use of practical in prior standards. However, practicable should be understood to mean the same thing as practical. The change was made because practicable is a more precise definition of what always has been intended by the use of practical—able to be done.

Share Your Views with the GASB

You are encouraged to read the Exposure Draft and let the GASB know what you like and do not like about it. Comments are due by March 31, 2016, and instructions for submitting them can be found at the front of the Exposure Draft. Comments can be submitted by email or traditional mail.

A public hearing with the GASB members and staff is planned for April 21 in Rosemont, Illinois (near Chicago O’Hare Airport). You can participate in person or by telephone. Information about signing up to testify or observe can be found in the Exposure Draft as well.

Substantial and diverse input from stakeholders is vitally important to establishing effective standards. The independent setting of accounting and financial reporting standards is unique in that it considers all comments objectively and with equal seriousness and diligence, no matter who the comments come from—taxpayer or governor, municipal bond analyst or government CFO, government auditor or partner from a Big-4 accounting firm. All stakeholders can play an integral role in the formation of the GASB’s standards.

The GASB members base their decisions on the substance of the comments received from stakeholders. So, when you write to the GASB to share your views, be sure to explain the reasoning behind your opinions.

Download the Exposure Draft, Fiduciary Activities

Send the GASB your comments on the Exposure Draft