BAR CPA Exam: How to Prepare the Statement of Net Position for the Fiduciary Funds of a State or Local Government

Introduction

Purpose of the Article

In this article, we’ll cover how to prepare the statement of net position for the fiduciary funds of a state or local government. This article focuses on preparing the statement of net position for fiduciary funds in state and local governments. This topic is particularly important for candidates preparing for the BAR CPA exam, as it involves key governmental accounting principles required to report financial data accurately. The statement of net position is crucial in presenting the financial condition of fiduciary funds, which are resources that the government holds in trust or as an agent on behalf of others. The exam often tests candidates’ abilities to prepare and analyze these statements based on trial balances and supporting documentation. By understanding how to construct this statement correctly, exam candidates can better navigate related exam questions and real-world financial reporting scenarios.

Overview of Fiduciary Funds

Fiduciary funds are a distinct classification within governmental accounting, designed to account for resources that the government manages in a fiduciary capacity, meaning the government acts as a trustee or agent. These funds do not belong to the government but are held on behalf of external parties, such as individuals, private organizations, or other governments.

There are four main types of fiduciary funds:

1. Pension and Other Employee Benefit Trust Funds: These funds are used to manage resources for pensions, healthcare, and other post-employment benefits (OPEB). Governments hold these resources in trust for their employees, ensuring proper management and disbursement of retirement and healthcare benefits.
2. Investment Trust Funds: These funds account for the external portion of investment pools managed by a government entity. The funds belong to external entities but are managed by the government to maximize returns or manage resources efficiently.
3. Private-Purpose Trust Funds: These funds are created for purposes that benefit specific individuals, private organizations, or other governments. An example would be a scholarship fund held by a local government for the benefit of students from a particular school district.
4. Custodial Funds: Custodial funds are resources collected and held by the government on behalf of another entity. Unlike trust funds, custodial funds do not require formal trust agreements. Examples include tax collections on behalf of other governmental entities, such as a state collecting taxes for its counties.

Fiduciary funds are not used to support the government’s own programs; instead, they represent resources the government holds and manages on behalf of others. Therefore, they are reported separately from governmental and proprietary funds. These funds are critical in ensuring accountability and transparency in how governments manage resources they hold in trust. Understanding the nature of these funds is essential for properly preparing their respective financial statements, especially the statement of net position.

Understanding Fiduciary Funds

Definition and Characteristics

Fiduciary funds represent resources that a government holds in a trustee or agent capacity for the benefit of individuals, private organizations, or other governments. These funds are not available for the government’s own programs and operations but are instead managed for the benefit of external parties. The government’s role is to manage and safeguard these resources responsibly, ensuring they are used according to their intended purpose.

Fiduciary funds can be broadly categorized into the following types:

1. Pension and Other Employee Benefit Trust Funds: These funds are designed to manage resources set aside for employee pension benefits, healthcare, and other post-employment benefits (OPEB). The government holds these funds in trust for its employees, ensuring the funds are managed and disbursed appropriately.
2. Investment Trust Funds: These funds account for external investment pools managed by the government. The resources belong to external entities, but the government acts as an agent, managing the investments to optimize returns or achieve specific financial objectives.
3. Private-Purpose Trust Funds: Private-purpose trust funds are used for specific purposes that benefit private individuals, organizations, or other governments. These funds are held in trust for designated private beneficiaries, such as a scholarship fund administered by a local government for students.
4. Custodial Funds: Custodial funds (formerly known as agency funds) account for resources that the government temporarily holds on behalf of another party without having a fiduciary obligation to manage or invest the resources. Examples include taxes collected by a state government on behalf of local governments or fees collected and distributed to third parties.

GASB 84: Governmental Accounting Standards Board Statement No. 84

The Governmental Accounting Standards Board (GASB) Statement No. 84, issued in 2017, significantly impacted how fiduciary funds are classified and reported. GASB 84 clarifies which activities of a government should be reported as fiduciary in nature and establishes consistent guidelines for identifying fiduciary activities across governments. The key objectives of GASB 84 are:

1. Defining Fiduciary Activities: GASB 84 provides a framework to determine whether a government activity qualifies as fiduciary. This determination is based on factors such as control over assets and whether the resources are held for the benefit of individuals, organizations, or other governments.
2. Classification of Fiduciary Funds: GASB 84 ensures that fiduciary activities are appropriately classified into the correct type of fiduciary fund. The statement distinguishes between trust and custodial funds, ensuring that governments report fiduciary activities in the appropriate fund type.
3. Reporting Requirements: Under GASB 84, governments are required to present fiduciary activities in the financial statements using a statement of fiduciary net position and a statement of changes in fiduciary net position. These statements provide transparency and accountability in how fiduciary resources are managed and disbursed.

The impact of GASB 84 is particularly significant in terms of reclassifying certain activities that were previously accounted for differently. For instance, certain agency funds are now classified as custodial funds, requiring more detailed reporting. GASB 84 also emphasizes the need to report fiduciary activities separately from governmental and proprietary activities.

Differences from Other Governmental Funds

Fiduciary funds are distinct from other governmental fund types, such as proprietary and governmental funds, in several key ways:

1. Purpose: Unlike governmental funds, which are used to finance government programs and services, and proprietary funds, which operate like business enterprises, fiduciary funds hold resources for the benefit of external parties. The government has no claim on these resources and cannot use them for its own programs.
2. Accounting Basis: Fiduciary funds use the accrual basis of accounting, similar to proprietary funds, meaning revenues and expenses are recognized when they are earned or incurred, not when cash is received or disbursed. In contrast, governmental funds typically use the modified accrual basis of accounting, where revenues are recognized when they are both measurable and available.
3. Financial Reporting: Fiduciary funds are reported separately from governmental and proprietary funds in the financial statements. The key financial statement for fiduciary funds is the statement of fiduciary net position, which is distinct from the balance sheet used for governmental funds or the statement of net position for proprietary funds. Fiduciary funds do not report results of operations because their purpose is solely to manage assets on behalf of others.
4. Responsibility: The government’s role in fiduciary funds is to act as a custodian or trustee, ensuring proper management and disbursement of resources. In contrast, the government is directly responsible for the management and use of governmental and proprietary funds for public services or business-like activities.

Understanding these differences is essential for correctly preparing and reporting fiduciary funds, as they require a distinct approach compared to other fund types in state and local government accounting.

Components of the Statement of Net Position

What is the Statement of Net Position?

The statement of net position is a financial statement that reports the assets, liabilities, and net position of a fiduciary fund at a specific point in time. It provides a snapshot of the financial status of the fund, showing what resources are available (assets), what obligations exist (liabilities), and the difference between the two (net position). This statement is crucial in fiduciary funds because it demonstrates how the government is fulfilling its role as a trustee or agent for resources held on behalf of external parties.

In the context of fiduciary funds, the purpose of the statement of net position is to provide transparency regarding how well a government is managing assets in trust or as an agent. This statement is not concerned with the government’s own operational activities but focuses on the resources held for others, ensuring accountability in how these assets are used or preserved.

Major Sections

Assets

Assets represent the resources held by the fiduciary fund, which are expected to provide economic benefits in the future. The types of assets typically reported in fiduciary funds include:

1. Cash and Cash Equivalents: This includes currency on hand and short-term, highly liquid investments that are readily convertible to known amounts of cash, such as money market funds. Since fiduciary funds are responsible for holding others’ resources, maintaining adequate cash flow is essential.
2. Receivables: These represent amounts owed to the fiduciary fund by others. Examples include receivables from contributions (e.g., pension contributions due but not yet received) or receivables related to investment income (e.g., interest or dividends owed to the fund).
3. Investments: Fiduciary funds often hold investments on behalf of beneficiaries. These can include stocks, bonds, real estate, or other investment vehicles. Investments are typically reported at fair value, meaning the price that would be received to sell the asset in an orderly transaction at the reporting date.
4. Other Assets: In certain cases, fiduciary funds may hold other types of assets such as capital assets (e.g., land, buildings) held in trust for private individuals or entities, though this is less common than financial assets.

Liabilities

Liabilities represent obligations or debts owed by the fiduciary fund to external parties. These liabilities must be settled using the resources held in the fiduciary fund. Common examples include:

1. Payables: These are amounts due to third parties, such as vendors, service providers, or individuals entitled to distributions. For example, a pension trust fund might owe benefits payable to retirees.
2. Amounts Held for Others: Fiduciary funds often hold resources for other parties, such as custodial funds holding tax collections on behalf of local governments. These amounts are recorded as liabilities until they are disbursed to the appropriate recipients.
3. Obligations Related to Investments: If the fiduciary fund engages in complex investment strategies, it may have liabilities related to investment activities, such as amounts owed to brokers for securities purchased but not yet paid for.

In fiduciary funds, liabilities represent obligations to external beneficiaries, and therefore, they do not impact the government’s own financial position. Instead, they show the responsibility the government holds for managing these resources.

Net Position

The net position of a fiduciary fund is the difference between its assets and liabilities. It represents the resources remaining after liabilities have been settled, which are held for the benefit of external parties. In fiduciary funds, the net position can be classified into different categories based on restrictions and how the resources can be used. For fiduciary funds, net position is often categorized as restricted or unrestricted, depending on the legal and contractual obligations tied to the resources.

For example:

• Pension and Other Employee Benefit Trust Funds: The net position would typically be restricted for pension benefits and other post-employment benefits. These funds are legally bound to be used solely for the benefit of employees and retirees.
• Private-Purpose Trust Funds: The net position in these funds is restricted for the specific private purpose, such as scholarships or charitable activities. The use of these resources is governed by trust agreements or legal mandates.

Unlike governmental or proprietary funds, fiduciary funds generally do not report an unrestricted net position, as their resources are dedicated to specific external parties.

Restricted Net Position

Restricted net position refers to the portion of the net position that is subject to external restrictions on how it can be used. These restrictions can be imposed by law, regulations, or contracts and are typically associated with trust agreements or legal mandates.

Examples of restricted net position in fiduciary funds include:

1. Pension and Other Employee Benefits: In a pension trust fund, the net position is restricted for the payment of pension and other post-employment benefits. These restrictions are legally required to ensure that the funds are available for current and future retirees.
2. Scholarship Funds: In a private-purpose trust fund, the restricted net position may be earmarked for scholarships to be awarded to students based on certain criteria. These restrictions are typically imposed by donors or trust agreements.
3. Tax Collections: In a custodial fund, the net position is restricted for disbursement to other governmental entities or individuals. For example, a state government collecting taxes on behalf of municipalities would hold those amounts in a custodial fund, and the net position would be restricted for distribution to the appropriate local governments.

The restricted nature of fiduciary funds emphasizes the government’s responsibility to manage these resources according to their legal or contractual purposes, providing transparency and ensuring accountability in their use.

Trial Balances and Supporting Documentation

Purpose of the Trial Balance

In governmental accounting, a trial balance serves as a preliminary financial statement that lists all the account balances of an entity, including fiduciary funds, at a specific point in time. It is an essential tool used to ensure that debits and credits are equal and to verify that all transactions have been accurately recorded. For fiduciary funds, the trial balance is particularly important because it helps government entities track the resources they manage on behalf of others, ensuring accuracy and transparency in the financial reporting process.

The purpose of a trial balance for fiduciary funds is to:

1. Summarize the Financial Position: The trial balance provides a snapshot of the fund’s financial position, listing all assets, liabilities, and net position accounts. It acts as a starting point for preparing more formal financial statements, such as the statement of net position.
2. Identify Errors: By comparing total debits and credits, the trial balance helps to identify any discrepancies or errors in the accounting records. Any imbalance between debits and credits could indicate an issue that needs to be corrected before finalizing the financial statements.
3. Facilitate Adjustments: Trial balances allow accountants to make necessary adjustments for accruals, deferrals, and reclassifications to ensure accurate financial reporting. For fiduciary funds, adjustments might be necessary to properly classify assets and liabilities or to account for changes in the net position.
4. Prepare Financial Statements: Once the trial balance is confirmed to be accurate and balanced, it serves as the foundation for preparing formal financial statements, including the statement of net position for fiduciary funds. This statement relies on the accuracy of the trial balance to report the government’s fiduciary responsibilities.

Key Supporting Documentation

The preparation of the statement of net position for fiduciary funds requires more than just the trial balance. Accurate financial reporting depends on having supporting documentation that provides evidence for the balances reported in the trial balance and confirms the validity of assets, liabilities, and net position. Below are the types of documentation typically required to support the preparation of the statement of net position for fiduciary funds:

1. Investment Reports
   • Investment reports are essential for fiduciary funds that hold investments, such as pension and other employee benefit trust funds or investment trust funds. These reports provide details on the types of investments held, their fair value, and any income earned from them (e.g., interest or dividends).
   • Investment reports often come from custodians, asset managers, or financial institutions, and they must be reconciled with the balances in the trial balance to ensure that investments are accurately reported at their fair value.
2. Payables and Liabilities Reports
   • For fiduciary funds with liabilities, such as amounts held for others or benefits payable, it is necessary to maintain documentation supporting these obligations. This could include accounts payable reports detailing amounts owed to vendors or beneficiaries.
   • Benefits payable reports for pension or OPEB trust funds should clearly outline the amounts due to retirees or employees, as these will be reflected in the liabilities section of the statement of net position.
3. Trust Agreements and Contracts
   • Fiduciary funds are often governed by trust agreements or other legal contracts that dictate how resources should be managed and disbursed. These agreements are crucial in determining the restricted net position of the fund and ensuring that the government is fulfilling its fiduciary obligations.
   • The terms of trust agreements or contracts must be reviewed to confirm that the net position is being reported appropriately, especially in terms of restrictions on the use of funds.
4. Contribution and Distribution Records
   • In pension trust funds or private-purpose trust funds, contributions from participants or donors and distributions to beneficiaries are common transactions. Records supporting these contributions and distributions provide a trail that can be reconciled with the amounts reported in the trial balance.
   • These records could include payroll reports (for contributions), distribution schedules (for pensions or scholarships), and bank statements showing actual cash inflows and outflows.
5. Tax Collection and Custodial Fund Documentation
   • Custodial funds often handle tax collections, fees, or other resources temporarily held by the government. Supporting documentation for custodial funds may include tax collection records, remittance reports, or distribution schedules showing the amounts collected and their subsequent disbursement to other governments or entities.
   • Proper documentation is necessary to ensure that amounts collected on behalf of others are accurately classified as liabilities until they are transferred.
6. Reconciliation Statements
   • To confirm that the amounts reported in the trial balance are accurate, governments often prepare reconciliation statements. These reconciliations compare the amounts recorded in the accounting system with external documentation (e.g., bank statements, investment reports, or payable schedules) to ensure that all resources are accounted for properly.
   • Reconciliation is especially important for fiduciary funds due to the fiduciary responsibility of managing others’ resources, ensuring that there is no misstatement or misclassification of assets or liabilities.

By ensuring that all trial balances are supported with thorough and accurate documentation, governmental entities can demonstrate compliance with accounting standards and fiduciary responsibilities. This documentation forms the backbone of the statement of net position and helps prevent errors or omissions in financial reporting.

Steps to Prepare the Statement of Net Position

Step 1: Review the Trial Balance

The first step in preparing the statement of net position for fiduciary funds is to review and reconcile the trial balance. This is crucial because the trial balance serves as the foundation for the financial statement, and any errors or misclassifications at this stage will carry through to the final statement of net position.

Importance of Reconciling the Trial Balance to Ensure Accuracy

Reconciling the trial balance is essential to ensure that all debits and credits are accurately recorded, and that the balances in fiduciary accounts reflect the true financial position of the fund. This process involves checking each account’s balance against supporting documentation (such as bank statements, investment reports, and payables) to confirm that there are no discrepancies. If errors are found, adjustments should be made to correct the accounts before proceeding with the preparation of the statement of net position.

Reconciling the trial balance also ensures that all necessary fiduciary-related accounts are included and correctly categorized. For instance, investment gains or losses must be accurately recorded, and liabilities such as amounts held for others should be reconciled with corresponding records.

How to Identify Fiduciary-Related Accounts

Identifying fiduciary-related accounts is a key part of reviewing the trial balance. Fiduciary funds have specific accounts that differ from governmental or proprietary funds. Some common fiduciary-related accounts include:

• Assets: Cash and cash equivalents, investments (stocks, bonds, etc.), and receivables such as contributions or taxes held for others.
• Liabilities: Payables, amounts held for others, or obligations to external parties, such as benefits payable to retirees in a pension fund.
• Net Position: This represents the difference between assets and liabilities and is often classified as restricted for a specific purpose, such as pensions or scholarships.

As part of this process, fiduciary fund accounts should be reviewed separately from other government-wide accounts to ensure proper classification. Identifying fiduciary-related accounts allows the accountant to focus on resources held on behalf of others and ensures that these accounts are appropriately reflected in the statement of net position.

Step 2: Classify Assets and Liabilities

Once the trial balance has been reviewed and reconciled, the next step is to classify the assets and liabilities of the fiduciary fund. This involves organizing the resources and obligations based on their nature and purpose, which is essential for presenting them correctly in the statement of net position.

Segregating Assets and Liabilities Based on Their Classification in Fiduciary Funds

Assets and liabilities in fiduciary funds must be segregated and classified according to their type and how they relate to the fiduciary responsibilities of the government. The two main categories of assets and liabilities to consider include:

• Current vs. Non-Current Assets: Current assets include resources that are expected to be liquidated or used within a year, such as cash, receivables, and short-term investments. Non-current assets, like long-term investments (e.g., bonds or real estate), are expected to provide benefits over a longer period.
• Current vs. Non-Current Liabilities: Current liabilities include obligations that are due within a year, such as amounts payable to beneficiaries or third parties. Non-current liabilities, such as long-term payables or deferred benefits, represent obligations that will be settled over a longer timeframe.

Properly segregating and classifying assets and liabilities ensures that the fiduciary fund’s statement of net position accurately reflects its short-term and long-term financial obligations. It also helps external users, such as auditors or beneficiaries, understand the liquidity and solvency of the fund.

Common Adjustments to Be Made During the Classification Process

During the classification process, several adjustments may need to be made to the trial balance to ensure the accuracy and completeness of the statement of net position. Some common adjustments include:

1. Accruals and Deferrals: Fiduciary funds often deal with accrual-based transactions, such as interest earned on investments or benefits payable. These accruals must be recorded even if the cash has not yet been received or disbursed. Similarly, deferrals may be needed for income or expenses that are not yet recognized but will be realized in future periods.
2. Reclassification of Accounts: Certain accounts may need to be reclassified based on their specific fiduciary nature. For example, amounts that were initially recorded as general governmental assets may need to be reclassified as fiduciary assets if they pertain to a trust or custodial activity. Similarly, liabilities related to third parties must be properly categorized to ensure they are recognized as fiduciary obligations rather than government liabilities.
3. Fair Value Adjustments: Investments held by fiduciary funds are often reported at fair value, meaning that adjustments may be necessary to account for changes in market value since the time the investment was acquired. This is particularly relevant for pension trust funds or investment trust funds, where investments may fluctuate in value over time.
4. Elimination of Interfund Transactions: If the fiduciary fund has any transactions with other funds within the government, these interfund transactions must be eliminated to prevent double-counting. For example, a loan between a fiduciary fund and the general fund should be adjusted so that it does not appear in both funds’ financial statements.

By making these adjustments, the government ensures that the statement of net position reflects the true financial condition of the fiduciary fund, providing a clear and accurate representation of the assets available and the liabilities owed.

Step 3: Determine Net Position

Once the assets and liabilities have been classified and adjustments have been made, the next step is to calculate the net position for the fiduciary fund. The net position represents the resources available after liabilities have been deducted from assets and provides an overall picture of the fund’s financial health.

Calculating Net Position by Subtracting Liabilities from Assets

The net position is determined by subtracting the total liabilities from the total assets:

Net Position = Total Assets – Total Liabilities

This calculation results in the net resources available to beneficiaries or external parties for whom the government is acting as a trustee or agent. The net position essentially shows the excess of assets over liabilities and can either be positive (indicating a surplus) or negative (indicating a deficit).

For example, if a pension trust fund has $10 million in assets and $7 million in liabilities, the net position would be:

Net Position = $10,000,000 – $7,000,000 = $3,000,000

This $3 million represents the funds available to fulfill the pension obligations of the government.

How to Determine the Appropriate Categories for Net Position (e.g., Restricted vs. Unrestricted)

In fiduciary funds, the net position is typically categorized as either restricted or unrestricted, depending on the nature of the restrictions placed on the use of the assets. Most fiduciary funds, due to their purpose, will have a large portion of their net position classified as restricted.

• Restricted Net Position: These are resources that are subject to external restrictions (e.g., legal, regulatory, or contractual). For example, in a pension trust fund, the net position is restricted for use in paying employee pension benefits, and in a private-purpose trust fund, it may be restricted for scholarships or charitable activities.
  • Pension Trust Fund Example: A pension trust fund might have a net position restricted for retirement benefits, where the government is legally bound to use these resources solely for retirees.
  • Private-Purpose Trust Fund Example: A private-purpose trust fund’s net position may be restricted by a trust agreement that designates funds for a specific scholarship program.
• Unrestricted Net Position: In fiduciary funds, unrestricted net position is rare because these funds generally exist to manage assets for a specific purpose. However, in some custodial funds, an unrestricted balance might exist temporarily until the funds are distributed to external parties.

It’s important to analyze the nature of the fund and the agreements governing its use to correctly categorize the net position. Any misclassification can lead to a misleading financial picture and mismanagement of resources.

Step 4: Prepare Notes to the Financial Statements

After determining the net position, the final step in preparing the statement of net position is to draft the notes to the financial statements. These notes provide additional context and disclosures that explain the figures presented in the statement, offering a more comprehensive understanding of the fiduciary fund’s financial position.

The Role of Disclosures and Notes in Explaining the Financial Position

Disclosures and notes play a crucial role in financial reporting by giving stakeholders insight into the assumptions, methods, and details behind the financial data. For fiduciary funds, these notes are particularly important because they:

1. Explain the Nature of the Fiduciary Activities: Notes often describe the purpose of the fiduciary fund, its legal and contractual obligations, and how the government is managing the resources on behalf of external parties. For example, a pension fund might include a note explaining the types of benefits it provides and its funding status.
2. Detail the Classification of Assets and Liabilities: Notes can clarify how assets and liabilities have been classified, particularly when dealing with complex investment portfolios or long-term obligations. This helps users of the financial statements understand how the government is managing its fiduciary responsibilities.
3. Describe the Basis of Accounting: Fiduciary funds use the accrual basis of accounting, and the notes should explain this to ensure transparency. Disclosures regarding the accounting policies for recognizing revenue, expenses, and investments help clarify how the financial figures were derived.
4. Provide Information on Restricted Net Position: When a fiduciary fund has a restricted net position, notes should specify the nature of these restrictions. For example, if part of the net position is restricted for pension benefits, the note should detail the legal or contractual obligations associated with that restriction.
5. Highlight Contingencies and Risks: Fiduciary funds, especially those with investments, may be exposed to risks such as market volatility or credit risks. Disclosures should highlight any contingencies or uncertainties that may affect the value of the fund’s assets or liabilities in the future.

Examples of Relevant Disclosures for Fiduciary Funds

1. Pension Trust Fund Disclosure:
   • A disclosure might describe the investment strategy used by the pension trust fund, including the types of investments held (stocks, bonds, real estate) and the policies in place for managing these investments.
   • The note may also include information about actuarial assumptions used to calculate pension liabilities, such as the discount rate, expected return on assets, and projected benefit payments.
2. Custodial Fund Disclosure:
   • For a custodial fund that holds tax collections, the note could detail the amounts held on behalf of local governments and how these funds will be distributed. It may also explain the legal basis for collecting and remitting these funds.
3. Private-Purpose Trust Fund Disclosure:
   • A private-purpose trust fund might include a disclosure about the specific terms of the trust agreement governing the fund. This could include information about how scholarships are awarded, any restrictions on the use of the funds, and the process for determining the recipients.

By providing thorough and clear notes to the financial statements, the government can ensure that stakeholders understand not only the financial position of the fiduciary funds but also the risks, restrictions, and management practices that affect those resources.

Common Challenges in Preparing the Statement

Complexity of Investments

One of the major challenges in preparing the statement of net position for fiduciary funds is dealing with the complexity of investments. Fiduciary funds, especially pension and investment trust funds, often hold diverse and complex investment portfolios that include various asset classes such as stocks, bonds, real estate, and alternative investments like private equity or hedge funds. Each of these asset types may require different accounting treatments, adding layers of complexity to financial reporting.

Accounting for Fair Value Adjustments

The Governmental Accounting Standards Board (GASB) requires fiduciary funds to report investments at fair value, which represents the price that would be received to sell the asset in an orderly transaction at the measurement date. Calculating fair value can be particularly challenging for complex investments, such as:

• Securities Traded in Thin Markets: Some bonds or stocks may not be actively traded, making it difficult to determine their fair value. This is often the case with municipal bonds or other securities held in trust by a government entity.
• Alternative Investments: Private equity, real estate, or hedge funds may not have readily observable market values, requiring governments to rely on valuation models, external appraisals, or fund manager reports.
• Level 3 Assets: These are investments that rely heavily on unobservable inputs, such as management estimates or forecasts, and can be the most difficult to value accurately.

To address these challenges, governments must ensure they have accurate data sources and valuation methodologies. Regular reconciliation of investment reports with external custodians or fund managers is also critical to ensuring fair value is accurately reflected in the financial statements. In cases where fair value cannot be easily determined, disclosures explaining the assumptions used in valuation are necessary to provide clarity to users of the financial statements.

Ensuring Proper Classification of Liabilities

Properly classifying fiduciary fund liabilities is another challenge in preparing the statement of net position. Fiduciary funds are responsible for holding resources on behalf of others, which means liabilities can range from straightforward payables to more complex obligations, such as benefits payable or amounts held for future distribution.

Identifying Fiduciary Fund Liabilities

A key difficulty in classifying fiduciary liabilities lies in distinguishing them from general governmental liabilities. Common fiduciary liabilities include:

• Payables to Beneficiaries: These are amounts owed to individuals or organizations that the fiduciary fund serves, such as pensioners, scholarship recipients, or other government entities. Accurately tracking these payables and ensuring they are reported correctly can be difficult, particularly for long-term obligations like future pension benefits.
• Amounts Held for Others: Custodial funds often hold resources, such as taxes collected on behalf of other governments or individuals, until they are ready for distribution. Correctly identifying and reporting these amounts as liabilities is essential to avoid misrepresenting the fund’s net position.

Challenges in Estimating Long-Term Liabilities

In some cases, fiduciary funds may have long-term liabilities, such as future pension or post-employment benefit obligations. Estimating these liabilities requires actuarial assumptions and calculations that depend on factors like expected lifespan, inflation, and employee turnover. These assumptions can fluctuate, making it challenging to present an accurate liability figure in the financial statements.

To overcome this challenge, governments should work closely with actuaries and use reliable estimation models. Regular reviews of these models are also necessary to ensure assumptions remain valid over time, especially in volatile economic conditions.

Compliance with GASB Standards

Ensuring compliance with GASB standards is another significant challenge for governments when preparing the statement of net position for fiduciary funds. GASB issues standards that govern how fiduciary activities must be reported, and these rules can be complex and subject to change.

GASB 84 and Its Impact on Fiduciary Funds

One of the key standards impacting fiduciary funds is GASB Statement No. 84, which provides guidance on identifying and reporting fiduciary activities. GASB 84 established more stringent requirements for reporting fiduciary funds and emphasized the need for transparency and accountability in fiduciary activities.

Compliance challenges include:

• Classifying Fiduciary Activities: Under GASB 84, governments must carefully assess whether an activity qualifies as fiduciary. If the government controls the assets and holds them for the benefit of external parties, the activity is likely fiduciary in nature. Correctly identifying fiduciary activities is critical, as misclassification can result in inaccurate financial reporting.
• Changes in Reporting Requirements for Custodial Funds: GASB 84 redefined agency funds as custodial funds and added new reporting requirements. Governments now must report a statement of changes in fiduciary net position for custodial funds, which may be new for some entities. Adapting to these changes requires careful planning and updated accounting systems.

Tips for Ensuring Compliance

To ensure compliance with GASB standards, governments can adopt the following best practices:

1. Stay Informed: Keep up to date with the latest GASB pronouncements and guidelines. This includes understanding how new standards, like GASB 84, impact fiduciary fund reporting and applying these changes in a timely manner.
2. Conduct Regular Training: Provide ongoing training to accounting staff on GASB standards, particularly those affecting fiduciary fund reporting. This helps ensure that everyone involved in preparing financial statements understands the relevant requirements.
3. Review Internal Controls: Ensure that internal controls are in place to capture fiduciary transactions accurately and that those controls are aligned with GASB standards. For example, governments should have a system for regularly reviewing investments and ensuring that liabilities are properly classified.
4. Consult External Auditors: External auditors can provide an additional layer of assurance that the government is complying with GASB standards. Engaging auditors early in the financial reporting process can help identify any potential compliance issues before the final statement of net position is prepared.

By following these tips and maintaining strong internal controls, governments can ensure they meet GASB standards and provide accurate and transparent reporting for fiduciary funds.

Example of a Statement of Net Position for Fiduciary Funds

Step-by-Step Example of Preparing a Statement of Net Position for Fiduciary Funds

In this section, we will walk through the process of preparing a statement of net position for fiduciary funds, using a simplified example. We will start with a sample trial balance and supporting documents, and then follow the necessary steps to create an accurate and compliant statement of net position.

Step 1: Review the Sample Trial Balance

Below is a sample trial balance for a pension trust fund as of December 31, 2023:

Account Description	Debit (Dr)	Credit (Cr)
Cash and Cash Equivalents	$1,000,000
Receivables (Pension Contributions)	$500,000
Investments (Stocks, Bonds)	$3,500,000
Payables (Vendor Services)		$150,000
Pension Benefits Payable		$1,200,000
Net Position (Restricted for Pensions)		$3,650,000
Totals	$5,000,000	$5,000,000

This trial balance includes key fiduciary accounts, such as cash, receivables, investments, payables, and pension benefits payable. The trial balance is balanced, meaning the debits and credits are equal, which indicates no immediate errors.

Step 2: Classify Assets and Liabilities

Next, we classify the assets and liabilities based on the nature of the fiduciary fund. In this case, we are working with a pension trust fund, so the assets will primarily consist of cash, receivables, and investments. Liabilities will include payables to vendors and pension benefits payable to retirees.

• Assets:
  • Cash and Cash Equivalents: $1,000,000
  • Receivables (Pension Contributions): $500,000
  • Investments (Stocks, Bonds): $3,500,000
• Liabilities:
  • Payables (Vendor Services): $150,000
  • Pension Benefits Payable: $1,200,000

Step 3: Determine Net Position

The net position is calculated by subtracting total liabilities from total assets. In this case:

Net Position = Total Assets – Total Liabilities
Net Position = ($1,000,000 + $500,000 + $3,500,000) – ($150,000 + $1,200,000)
Net Position = $5,000,000 – $1,350,000 = $3,650,000

The net position is $3,650,000, which is restricted for pension benefits in this example because the resources in the pension trust fund can only be used to provide benefits to retirees. This classification is crucial for understanding the fund’s financial health.

Step 4: Prepare the Statement of Net Position

Now, we can prepare the formal Statement of Net Position for the pension trust fund based on the classified assets, liabilities, and net position:

Pension Trust Fund Statement of Net Position
As of December 31, 2023

Assets
Cash and Cash Equivalents	$1,000,000
Receivables (Pension Contributions)	$500,000
Investments (Stocks, Bonds)	$3,500,000
Total Assets	$5,000,000

Liabilities
Payables (Vendor Services)	$150,000
Pension Benefits Payable	$1,200,000
Total Liabilities	$1,350,000

Net Position
Restricted for Pensions	$3,650,000

In this statement, we can see the total assets, liabilities, and net position restricted for pensions. The restricted net position ensures that the resources are properly allocated and will only be used for pension benefits.

Step 5: Supporting Documentation

To complete the preparation of the statement of net position, it’s essential to review and reconcile the supporting documentation that backs up the figures reported:

1. Cash and Cash Equivalents: Verify the balance with bank statements and cash reconciliations as of December 31, 2023.
2. Receivables (Pension Contributions): Review the pension contribution records from employers and participants to confirm the $500,000 receivable balance. This might include invoices, payroll records, or contribution reports.
3. Investments: Obtain investment reports from custodians or financial managers detailing the stocks and bonds held by the pension fund. Ensure that these are reported at fair value as of the reporting date. Reconcile these reports with the $3,500,000 reported in the statement.
4. Payables: Confirm vendor payables by reviewing outstanding invoices or contracts for services provided to the pension fund but not yet paid. Ensure the $150,000 liability is accurate based on the supporting documents.
5. Pension Benefits Payable: Review the pension benefit payment schedules and actuarial reports to confirm the $1,200,000 payable to retirees. This may include records of upcoming pension disbursements or any unpaid amounts for the current period.

This step-by-step process illustrates how to prepare a statement of net position for fiduciary funds, from reviewing the trial balance to calculating net position and verifying supporting documentation. In a real-world scenario, governments must follow a similar process to ensure accurate financial reporting and compliance with GASB standards. Proper classification of assets and liabilities and reconciling figures with supporting documents are key to creating a transparent and reliable statement of net position for fiduciary funds.

Conclusion

Summary

In this article, we have explored the process of preparing a statement of net position for fiduciary funds, focusing on key aspects such as reviewing trial balances, classifying assets and liabilities, calculating net position, and preparing the necessary notes to the financial statements. Fiduciary funds, including pension trust funds, investment trust funds, private-purpose trust funds, and custodial funds, hold assets on behalf of external parties, making accuracy and transparency in reporting essential.

The statement of net position provides a snapshot of the financial health of fiduciary funds by detailing their assets, liabilities, and net position. Accurately classifying these elements ensures that governments fulfill their fiduciary obligations and comply with GASB standards, such as GASB 84, which govern the reporting of fiduciary activities.

Throughout the article, we’ve emphasized the importance of using reliable supporting documentation, such as investment reports, payables, and trust agreements, to ensure the accuracy of the financial statements. The complexity of accounting for investments, the proper classification of liabilities, and compliance with GASB standards are key challenges that require careful attention.

In preparing the statement of net position, governments must act as stewards of the assets they manage on behalf of others, ensuring that the resources are reported correctly and used in accordance with legal and contractual obligations.

Final Tips for Exam Preparation

As you prepare for the BAR CPA exam, it’s important to focus on understanding the fundamental principles of fiduciary funds and how they are reported in the statement of net position. Here are some final tips to help you approach exam questions related to fiduciary funds:

1. Understand the Types of Fiduciary Funds: Be clear on the differences between pension trust funds, investment trust funds, private-purpose trust funds, and custodial funds. Each type has unique characteristics and reporting requirements. Know how each fund is used and how it impacts the government’s financial statements.
2. Know the Structure of the Statement of Net Position: The statement of net position for fiduciary funds consists of assets, liabilities, and net position. Make sure you understand the types of assets and liabilities commonly reported and how to classify them appropriately, especially in terms of restricted vs. unrestricted net position.
3. Focus on Compliance with GASB Standards: Pay special attention to GASB 84 and how it affects the reporting of fiduciary activities. Exam questions may ask about the impact of GASB standards on fiduciary fund classification, measurement, and presentation, so ensure that you’re familiar with the key requirements.
4. Practice with Trial Balances and Supporting Documents: Be prepared to work through sample trial balances and supporting documentation, identifying fiduciary-related accounts and making the necessary adjustments to prepare the statement of net position. Understanding how to reconcile trial balances with actual financial statements is a key exam skill.
5. Master the Calculation of Net Position: Know how to calculate the net position by subtracting liabilities from assets and ensure that you can distinguish between restricted and unrestricted net position. Be prepared to classify the net position accurately based on the specific type of fiduciary fund.
6. Focus on Real-World Application: Fiduciary fund accounting is deeply rooted in real-world applications, especially for government entities. Think about how the exam questions might present real-life scenarios where governments manage resources for external parties, and practice applying the concepts to those scenarios.

By mastering these concepts and focusing on accuracy and compliance, you’ll be well-prepared to tackle questions on fiduciary funds and their statement of net position on the BAR CPA exam.