GASB 84 Fiduciary Activities and Custodial Funds: An Audit Guide

Governments hold money that is not theirs. They collect taxes for other governments, hold funds for individuals and keep accounts for student clubs. GASB Statement 84 sets the test for deciding which of these holdings are fiduciary activities, and it sets how the government reports them. For the auditor, the first question on a county or school district is not about balances. It is whether the client has identified every fiduciary activity and put each in the right fund. This guide follows the Statement as summarized by Maher Duessel and the North Carolina Office of the State Controller, and checks the effective date, the liability trigger and the three-month exception against GASB's own Statement 95 and Implementation Guide 2019-2.

The effective date

Statement 84 was issued with an effective date of reporting periods beginning after December 15, 2018. GASB Statement 95 postponed it by one year, to reporting periods beginning after December 15, 2019 (Statement 95, paragraph 4b). That date has passed, so the audit question is completeness and classification, not first-year adoption.

The two questions the Statement asks

The Statement focuses on whether the government controls the assets of the fiduciary activity and on the beneficiaries with whom a fiduciary relationship exists. The tests work as follows.

Pension and OPEB arrangements. Plans that are component units are fiduciary if they are administered through a trust meeting the GASB 67 or GASB 74 criteria, or accumulate assets for pension or OPEB plans under the GASB 73 or 74 criteria. A plan that is not a component unit is fiduciary if the government controls the assets and the same trust or accumulation criteria are met.

All other activities. All of the following must apply:

1. The government controls the assets.
2. The assets are not derived solely from the government's own-source revenue or from government-mandated or voluntary nonexchange transactions.
3. At least one of the trust or beneficiary traits applies: the assets are held in a trust in which the government is not a beneficiary, dedicated to providing benefits and legally protected from the government's creditors; or they benefit individuals and the government has no administrative or direct financial involvement; or they benefit an organization or another government outside the reporting entity.

The North Carolina summary describes four identification paths and says most fiduciary activities fall under two of them: the postemployment benefit arrangements that are fiduciary component units, and the other fiduciary activities. It names typical other fiduciary activities: the external portion of an external investment pool, taxes collected for other governments, and funds held for patients, minors, inmates, seized cash and other financial assets, and student club accounts.

The four fund types

Both sources list the four fiduciary fund types: pension and other employee benefit trust funds, investment trust funds, private-purpose trust funds and custodial funds. NC describes the line between them: assets held under a trust agreement or equivalent arrangement go to one of the three trust funds, and custodial funds hold fiduciary activities that are not held that way.

The statements

A fiduciary activity is reported in a fiduciary fund in the basic financial statements. The fiduciary statements are a statement of fiduciary net position and a statement of changes in fiduciary net position. Custodial funds therefore report net position and a flow statement, not only assets and liabilities.

For custodial funds and other fiduciary activities outside pension and OPEB plans, a liability to beneficiaries is recognized only when an event compels the government to disburse fiduciary resources. NC gives examples: a demand for the resources, or the point at which no further action or condition is needed from the beneficiary. Implementation Guide 2019-2 (Question 4.47) applies the rule to a city that collects contributions for a youth soccer uniform fund: no liability exists at registration, and the liability arises when coaches acquire the uniforms and the city is compelled to disburse. Other liabilities, such as administrative costs, follow existing accrual standards.

The three-month exceptions. Statement 84 paragraph 19 lets a business-type activity, such as an enterprise fund, report assets that would otherwise sit in a custodial fund, with a matching liability, in its own statement of net position when the assets, upon receipt, are normally expected to be held for three months or less (Implementation Guide 2019-2, Questions 4.45, 4.46 and 4.52). For paragraph 19, the holding period is assessed on receipt and can rest on past practice for a recurring receipt, and an occasional late remittance does not defeat it (Question 4.45). Paragraph 24 lets a government report a single aggregated total of additions and a single aggregated total of deductions in the statement of changes in fiduciary net position, with descriptions that show the nature of the flows, for custodial fund resources expected to be held three months or less (Questions 4.48 and 4.49). If inflows are normally held longer than three months, occasional faster outflows do not qualify (Question 4.50). NC gives taxes passed to local governments as the most common example.

Where the audit risk sits

• Completeness. The client has to find the activities. Accounts sit in school buildings, sheriff's offices, courts, clerks, health departments and utilities, and they are not always in the general ledger as funds. NC's implementation steps are to identify potential fiduciary assets, meet staff who manage them, and review purpose, beneficiaries, sources, agreements, governing law, resource flows and holding periods.
• The criteria judgment. The control test and the own-source revenue test decide whether a holding is fiduciary or a government activity. The same account can answer differently depending on who administers it.
• Liability recognition. The compelled-disbursement trigger changes when a liability appears.
• Presentation. Flow statements need additions and deductions disaggregated unless the three-month exception applies.

Audit procedures

1. Obtain management's inventory of potential fiduciary activities with its criteria analysis for each, and the governing agreements and statutes.
2. Test completeness. Search the bank account list, deposits held for others, "funds held for others" and agency-type balances, and ask department heads and the treasurer's office about accounts they hold for third parties.
3. Evaluate the criteria. For each activity, confirm control, the source of the assets and the trust or beneficiary trait relied on.
4. Test fund classification. Confirm whether the activity is held in a trust or equivalent arrangement and the fund type chosen.
5. Test liability recognition. For each custodial fund, identify the event that compels disbursement and confirm that the liability matches.
6. Test the flow statement. Trace additions to receipts by source, deductions to disbursements by type, and check that net position rolls forward.
7. Evaluate the three-month presentation. Where used, inspect holding periods of receipts, not only of disbursements, to confirm the assets are normally held three months or less.

Worked example

Lakeland County collects property taxes for the county, two school districts and a fire district. Each month it remits the collected amounts to the other governments within three weeks.

1. Criteria. The county controls the cash it collects. The assets are not derived solely from the county's own-source revenue, since the portion collected for others belongs to the other governments. The assets benefit other governments outside the county's reporting entity. All three conditions are met for the portion due to others.
2. Fund type. No trust agreement exists, so the activity is a custodial fund.
3. Statements. The custodial fund appears in the statement of fiduciary net position and the statement of changes in fiduciary net position. Because the resources are normally held and disbursed within three months, the county may report one aggregate addition and one aggregate deduction, with a description of the flows.
4. Auditor's tests. The auditor agrees collections to the tax roll and bank deposits, tests remittance dates for three months, recomputes the allocation among the districts and agrees the year-end balance due to others to the subsequent remittance.
5. Finding. The auditor's completeness work finds a sheriff's inmate account holding $212,000 that the county reports as a general fund liability. The funds belong to inmates and benefit individuals, so the auditor asks management to evaluate it against the criteria and, if met, move it to a custodial fund.

Common misses

• Leaving school student activity accounts and inmate funds in the general fund.
• Treating a custodial fund as only assets and liabilities.
• Recognizing a liability before an event compels disbursement.
• Using the three-month presentation without evidence of holding periods.

Related reading

For other governmental standards, see GASB 87 lease audit procedures and GASB 101 compensated absences.

Where CORAA fits

CORAA prepares ready-to-review audit files for US CPA firms, including fiduciary activity inventories and flow statement tie-outs. The firm keeps the client, the review and the signature. See /us.

Sources

• Maher Duessel, GASB No. 84 Fiduciary Activities: https://www.md-cpas.com/gasb-no-84-fiduciary-activities
• North Carolina Office of the State Controller, Focus Area: Fiduciary Activities: https://www.ncosc.gov/node/1397
• GASB, Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance (May 2020): https://storage.gasb.org/GASBS%2095.pdf
• GASB, Implementation Guide No. 2019-2, Fiduciary Activities (June 2019): https://storage.gasb.org/GASB%20IG%202019-2.pdf

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