In this video, we walk through 5 BAR practice questions teaching about fiduciary funds and financial statements. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Fiduciary Funds and Financial Statements
Within governmental accounting, fiduciary funds occupy a distinct role. These funds are not used to account for a government’s own programs or operations; rather, they report resources that a government holds for the benefit of others. Proper recognition and reporting of fiduciary funds are essential to ensuring financial accountability and transparency.
The following post summarizes the principal concepts associated with fiduciary funds, including the required financial statements, the different fiduciary fund types, and key reporting principles.
Required Financial Statements for Fiduciary Funds
All fiduciary funds are required to present two financial statements:
- Statement of Fiduciary Net Position – reports assets, deferred outflows of resources, liabilities, and deferred inflows of resources. The residual amount is presented as net position. Its format can be expressed as:
Assets + Deferred Outflows − Liabilities − Deferred Inflows - Statement of Changes in Fiduciary Net Position – reports additions, deductions, and the change in net position during the reporting period.
Fiduciary funds do not prepare a statement of cash flows, and they do not use fund balance terminology, which applies only to governmental funds.
For example, a pension trust fund presents contributions, investment income, and benefit payments in these statements. However, the employer’s net pension liability is reported in the government-wide statements, not within the fiduciary fund itself.
Custodial Funds
Custodial funds are used when a government collects and remits resources on behalf of external parties, without assuming any administrative or financial responsibility for those resources. These funds highlight the government’s role as an agent.
A state government that collects sales taxes from businesses and distributes the proceeds to local governments would record these transactions in a custodial fund. The state does not control the use of the resources and has no liability beyond collection and transfer.
Private-Purpose Trust Funds
Private-Purpose Trust Funds (PPTFs) are used when a government holds resources in trust for individuals, private organizations, or other governments, rather than for its own programs.
A common example is escheat property, such as dormant bank accounts or unclaimed checks. When these resources are held under a qualifying trust arrangement that protects assets from the government’s creditors, they are reported in a Private-Purpose Trust Fund.
When no qualifying trust arrangement exists, the resources are instead reported in a custodial fund, since the government’s role is limited to safeguarding and remitting the property.
Investment Trust Funds
Investment Trust Funds account for the external portion of investment pools managed by a government. When a government administers an investment pool serving both itself and other governments, only the external participants’ shares are reported in the Investment Trust Fund. The government’s own deposits remain in the originating funds, such as the General Fund or a special revenue fund.
For example, if a county manages an investment pool for local school districts, the districts’ shares are reported in an Investment Trust Fund, while the county’s share remains in its own funds. This reporting distinction ensures accountability to external participants.
Pension (and Other Employee Benefit) Trust Funds
Pension and Other Employee Benefit (OPEB) Trust Funds are used to report resources held in trust for pension and OPEB plans, as well as certain deferred compensation plans for employees outside proprietary funds.
A central reporting element is the Net Pension Liability (NPL), defined as:
Total Pension Liability (TPL) − Fiduciary Net Position (FNP)
If a city’s police pension plan reports a TPL of $300 million and an FNP of $240 million, the NPL equals $60 million. This liability is reported in the government-wide financial statements under governmental activities, not in the pension trust fund itself.
Employer contributions to the pension trust fund are recorded as expenditures in the governmental funds, but the full liability appears only at the government-wide level. This separation reinforces the fiduciary nature of the trust fund and the government’s long-term obligation to employees.
Conclusion
Fiduciary funds are designed to ensure transparency and accountability when governments manage resources on behalf of others. The primary fund types—custodial funds, private-purpose trust funds, investment trust funds, and pension/OPEB trust funds—each serve a distinct reporting function.
By recognizing the required statements, understanding the fund classifications, and applying the correct treatment to liabilities and assets, preparers and users of financial statements can accurately assess a government’s fiduciary responsibilities.
