More Changes To Governmental Financial Statements
Whether you prepare your financial statements using the cash basis or GAAP (generally accepted accounting principles) basis, the Government Accounting Standards Board (GASB) Statement No. 84 Fiduciary Activities will likely impact you. GASB 84 is geared to improve guidance for state and local governments regarding the identification and reporting of fiduciary activities for accounting and financial reporting purposes as well as when liabilities to beneficiaries must be disclosed.
GASB 84 covers three types of activities: fiduciary component units, pension and other post-employment benefit (OPEB) arrangements that are not component units and other fiduciary activities such as pension trust funds, investment trust funds, private-purpose funds and custodial funds. The new requirements are in effect for reporting periods beginning after Dec. 31, 2018. Because the new requirements are now being implemented to classify fiduciary activities, it’s important to understand the changes. Read on for greater understanding of GASB 84.
Knowledge Is Power
There are several different facets of GASB 84, some of which will impact Ohio governmental entities more than others. Areas such as fiduciary component units, investment trust funds, or pension and OPEBs in which the reporting government maintains control of the assets will likely not pertain to many Ohio government entities. However, it is still a good idea to familiarize yourself with all of the reporting requirements.
Also Read: Six Policies And Procedures All Government Entities Should Implement Or Update
Activities that do not fall into the categories of component units, investment trust funds or pension and OPEBs are considered fiduciary if all of the following criteria are met for the assets associated with the activity:
- The assets are controlled by the government. To be in control, the government must hold the assets or have the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended recipients.
- The assets associated with the activity are not derived from the government’s sole own-source revenue, from government-mandated, non-exchange transactions or voluntary, non-exchange transactions with the exception of pass-through grants. Additionally, the government cannot have administrative involvement or direct financial involvement. Own-source revenues include exchange and exchange-like revenues (for example, water and sewer charges) and investment earnings. Own-source revenues can also include derived tax revenues (such as sales and income taxes) and imposed non-exchange revenues (such as property taxes).
- In addition to the items above, assets:
- Must be administered through a trust in which the government itself is not a beneficiary, dedicated to providing benefits to recipients in accordance with the terms of the trust and the assets must be legally protected from the creditors of the government.
- Must be for the benefit of individuals and/or organizations, and the government does not have administrative or direct financial involvement with the assets.
For most governments, these assets/recourses fall into two buckets of other fiduciary activities:
- Private Purpose Trust Funds
These may be used to report any trust arrangement not properly reported in a pension trust fund or an investment trust fund under which principal and income benefit individuals, private organizations or other governments. These should be used when a trust agreement is in place where specific benefits accrue to specific individuals, organizations or governments.
- Custodial Funds (formerly Agency Funds)
These typically do not involve a formal trust arrangement and don’t qualify as any of the aforementioned fiduciary trust arrangements. These situations cover activities where the government serves as custodian of the funds. Many governments currently use funds to account for activities that combine custodial funds with governmental funds (e.g., payroll withholdings). Governments must be disaggregated these activities to exclude the government’s portion of any assets held by the government. Accounting for Custodial Funds will likely impact Ohio entities the most.
Changes To The Statement Of Fiduciary Net Position
GASB 84 will not have a significant impact for the reporting of Private Purpose Trust Funds within this financial statement. The previous “Agency Funds” reported all assets being held with an offset by current liabilities with the balance reported as a liability to the party on whose behalf they are held. However, the “Custodial Funds” will now only report liabilities when an event has occurred that compels the government to disburse fiduciary resources. Events that compel a government to disburse fiduciary resources occur when a demand for the resources has been made or when no further action, approval, or condition is required to be taken or met by the beneficiary to release the assets. The net difference of the assets and liabilities will be reported as Net Position, a first for fiduciary funds of this type.
Changes To The Statement Of Change In Fiduciary Net Position
This statement will continue to report additions and deductions, however will now include this for Custodial Funds. Additional changes include the requirement of governments to display:
- Investment earnings
- Investment costs (separate from administrative costs)
- Net investment earnings
- Disaggregated deductions by type, including any administrative costs
There is an exception for Custodial Funds. A single aggregated total of additions and deductions may be reported if the resources received are normally expected to be held for three months or less.
Prepare For GASB 84
- Identify activities that could potentially fall into the categories of fiduciary arrangements
- Gather any contracts, trust agreements, ordinances, resolutions or other documents that explain the source of the assets
- Consult with other departments that help manage the assets
- Summarize
- Who/what provided the resources
- The purpose of the resources
- Who are the beneficiaries of the resources
- Retain all this documentation for future financial statement preparation and audit
- Start early!
Governments need to report fiduciary activities in the fiduciary fund financial statements section of the basic financial statements that include a statement of fiduciary net position and a statement of changes in fiduciary net position. If you need assistance interpreting and implementing the GASB 84 guidance, contact a member of Rea’s government services team.
By: Chad Welty, CPA (Medina office)