Account For Fiduciary Funds - CPA Far

SECTION 1

Historical Context & Motivation

Governments frequently hold resources that do not belong to them — pension contributions for employees, taxes collected on behalf of other jurisdictions, and investment pools administered for external participants. Historically, accounting for these fiduciary activities varied widely among jurisdictions, creating opacity that undermined public trust and complicated external auditing. The need to segregate assets held in a fiduciary capacity from a government's own resources became a central concern as state and local governments grew in fiscal complexity during the twentieth century.

As public pension systems expanded after the Second World War, the sheer volume of assets held in trust — often exceeding a government's own net position — demanded a formal reporting framework. Without such a framework, the risk of commingling fiduciary assets with governmental resources was significant, and stakeholders lacked the information necessary to evaluate a government's stewardship of entrusted resources. The evolution of standards governing fiduciary funds reflects a broader movement toward transparency and accountability in governmental financial reporting.

1934 • Municipal Finance Officers Association

The precursor to GFOA publishes early guidelines suggesting that trust and agency monies should be tracked separately from general revenues, laying the conceptual groundwork for fiduciary fund accounting.

1984 • GASB Established

The Governmental Accounting Standards Board is created under the Financial Accounting Foundation to set authoritative standards for state and local governments, including fiduciary reporting.

1999 • GASB Statement No. 34

The landmark standard introduces the dual-perspective model of government-wide and fund financial statements. Fiduciary funds are required to appear only in fund-level statements, reinforcing that these resources are not the government's own.

2017 • GASB Statement No. 84

GASB 84 redefines the criteria for identifying fiduciary activities and consolidates fiduciary fund types into four categories: pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and custodial funds.

2020 • GASB 84 Effective Date

GASB 84 becomes effective for reporting periods beginning after December 15, 2018 (with pandemic-related delays for some governments), replacing the legacy agency fund concept with the broader custodial fund classification.

The central question that fiduciary fund accounting resolves is this: How should a government report resources it controls but does not own, ensuring that users of financial statements can distinguish between a government's own net position and assets it merely holds as a trustee or custodian? Understanding the answer to this question is essential for CPA candidates preparing for the FAR section, as fiduciary funds appear prominently in state and local government reporting problems.

SECTION 2

Core Principles & Definitions

At their core, fiduciary funds capture the accounting for assets that a government holds in a trust or custodial capacity for individuals, private organizations, or other governments. Because these resources do not belong to the reporting government, they are excluded from the government-wide financial statements and appear only in the fiduciary fund financial statements. This exclusion is a fundamental principle: fiduciary net position is not available to finance the government's own programs.

Pension (and OPEB) Trust Funds

Account for resources held in trust for pension plans, other post-employment benefit (OPEB) plans, and other employee benefit plans administered through qualifying trusts. These are typically the largest fiduciary funds in terms of assets.

Investment Trust Funds

Report the external portion of investment pools operated by the sponsoring government. The internal portion is reported in the participating fund of the sponsoring government, not in the fiduciary statements.

Private-Purpose Trust Funds

Account for trust arrangements under which both principal and income benefit individuals, private organizations, or other governments — for example, escheat property held for rightful owners.

Custodial Funds

Report fiduciary activities that are not held in a trust (i.e., do not meet trust criteria). Under GASB 84, these replaced the former agency fund category and now recognize additions and deductions rather than merely assets and liabilities.

A critical distinction for CPA candidates involves the identification criteria under GASB 84. A government's activity is fiduciary if the assets are (a) administered through a trust in which the government is not a beneficiary, (b) the government controls the assets and the assets are derived from sources other than the government's own revenues, or (c) the government controls the assets and the assets are for the benefit of individuals, organizations, or other governments not part of the reporting entity. GASB 84's criteria replaced the older, less precise guidance and eliminated much of the judgment previously required.

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KEY TAKEAWAY

Think of a government acting as a fiduciary like a bank acting as a trustee for a deceased person's estate. The bank manages and reports on the estate's assets, but those assets never appear on the bank's own balance sheet because they belong to the beneficiaries. Similarly, fiduciary fund assets are reported in a separate set of financial statements and never flow into the government-wide statements, because the government is merely the steward — not the owner — of those resources.

SECTION 3

Visual Explanation — Fiduciary Fund Reporting Structure

The diagram below illustrates the relationship between fiduciary fund financial statements and the broader governmental reporting model. Note that the government-wide statements exclude fiduciary activities entirely. Fiduciary funds produce two required statements: a Statement of Fiduciary Net Position and a Statement of Changes in Fiduciary Net Position. These are presented using the economic resources measurement focus and accrual basis of accounting.

The diagram shows how fiduciary funds sit within the broader governmental reporting model. The government-wide statements (left) explicitly exclude fiduciary assets, while the fund financial statements (right) present fiduciary funds alongside governmental and proprietary funds. The four fund types are shown at the bottom with their trust classification.

SECTION 4

Accounting Mechanics — Measurement Focus & Basis of Accounting

All fiduciary funds use the economic resources measurement focus and the accrual basis of accounting. This means that all assets and liabilities — both current and long-term — are reported on the Statement of Fiduciary Net Position. Revenues (called 'additions' in fiduciary terminology) are recognized when earned, and expenses (called 'deductions') are recognized when the related liability is incurred, regardless of the timing of cash flows. This treatment parallels proprietary fund accounting and stands in contrast to the modified accrual basis used for governmental funds.

Key Accounting Equation

FIDUCIARY NET POSITION

Fiduciary Net Position = Assets − Liabilities

Assets include cash, investments at fair value, receivables, and capital assets held in trust. Liabilities include benefits payable, refunds payable, and amounts due to other entities. Net position is restricted to the fiduciary purpose — it is not classified as restricted, unrestricted, or invested in capital assets like in government-wide statements.

CHANGE IN FIDUCIARY NET POSITION

ΔNet Position = Additions − Deductions

Additions include contributions from employers, plan members, and other entities, plus investment income (including unrealized gains and losses). Deductions include benefit payments, refunds, and administrative expenses. This equation drives the Statement of Changes in Fiduciary Net Position.

Journal Entry Mechanics

Journal entries for fiduciary funds follow standard double-entry conventions but use account titles tailored to the fiduciary context. When a pension trust fund receives employer contributions, the entry debits Cash and credits Additions — Employer Contributions. When benefits are paid, the entry debits Deductions — Benefit Payments and credits Cash. Investments are reported at fair value, so unrealized gains and losses are recognized through the additions account — this is a key distinction from the historical-cost model used in many private-sector contexts.

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CPA Exam Tip

Fiduciary funds use the terminology 'additions' and 'deductions' rather than 'revenues' and 'expenses' or 'expenditures.' On the FAR exam, incorrect answer choices often use governmental fund terminology (e.g., expenditures, modified accrual) in a fiduciary fund context. Recognizing the correct terminology can help you eliminate distractors quickly.

SECTION 5

Detailed Breakdown — The Four Fiduciary Fund Types

While all four fiduciary fund types share the same measurement focus and basis of accounting, they differ significantly in the nature of the activities they report, the source of their assets, and the identity of their beneficiaries. GASB Statement No. 84 provides a structured decision framework to determine (a) whether an activity is fiduciary and (b) which fund type is appropriate. The table below summarizes the key characteristics, and the diagram that follows illustrates the decision logic prescribed by GASB 84.

Fund Type	Trust Agreement?	Beneficiaries	Examples
Pension (& OPEB) Trust	Yes — qualifying trust per GASB 67/68/74/75	Plan members and their beneficiaries	Defined benefit pension plan, OPEB trust, defined contribution plan
Investment Trust	Yes — trust or equivalent arrangement	External participants in government-sponsored investment pools	County investment pool (external portion), state-administered local government investment fund
Private-Purpose Trust	Yes — trust agreement	Individuals, private organizations, other governments	Escheat property, scholarship trust for non-government beneficiaries, unclaimed property
Custodial	No — no trust arrangement	Individuals, private organizations, other governments	Tax collections on behalf of other governments, special assessments collected for property owners, pass-through grants

Summary of fiduciary fund types under GASB 84

This decision tree follows the GASB 84 classification logic. Start at the top: determine whether the government controls the assets, then proceed through the series of questions to identify the appropriate fiduciary fund type. If the activity does not meet fiduciary criteria, it is reported in governmental or proprietary funds.

A critical change introduced by GASB 84 was the elimination of the agency fund category. Under prior guidance, agency funds reported only assets and liabilities (Assets = Liabilities, with no net position and no statement of changes). The new custodial fund is broader in scope: it reports fiduciary net position and recognizes additions and deductions over the life of the activity. This represents a significant improvement in transparency, as stakeholders can now see the flow of resources through custodial arrangements over time, not merely a snapshot of balances.

SECTION 6

Worked Example — Recording Fiduciary Fund Transactions

The City of Greenfield administers a defined benefit pension trust fund and a custodial fund for property tax collections on behalf of the county government. During fiscal year 2024, the following transactions occur. We will record the journal entries and prepare condensed financial statements for each fund.

Pension Trust Fund — City of Greenfield

1
Step 1 — Record Employer Contributions Received

The city contributes $5,000,000 to the pension trust fund based on the actuarially determined contribution (ADC). The entry is: Dr. Cash $5,000,000 Cr. Additions — Employer Contributions $5,000,000 This increases both the fund's cash balance and its net position through the additions account.

Cash ↑ $5,000,000 | Additions ↑ $5,000,000
2
Step 2 — Record Employee Contributions Received

Employees contribute $2,000,000 through payroll withholdings transferred to the trust. The entry is: Dr. Cash $2,000,000 Cr. Additions — Employee Contributions $2,000,000

Cash ↑ $2,000,000 | Additions ↑ $2,000,000
3
Step 3 — Record Net Investment Income and Unrealized Gains

The trust portfolio earns $800,000 in dividends and interest, plus $1,200,000 in unrealized appreciation (fair value increase). Under the accrual basis, both are recognized: Dr. Cash $800,000 Dr. Investments $1,200,000 Cr. Additions — Net Investment Income $2,000,000 Note that unrealized gains are reported through the additions line, not deferred.

Cash ↑ $800,000 | Investments ↑ $1,200,000 | Additions ↑ $2,000,000
4
Step 4 — Record Benefit Payments to Retirees

The fund pays $4,500,000 in monthly retirement benefits to plan participants: Dr. Deductions — Benefit Payments $4,500,000 Cr. Cash $4,500,000 Deductions reduce fiduciary net position.

Cash ↓ $4,500,000 | Deductions ↑ $4,500,000
5
Step 5 — Record Administrative Expenses

The fund incurs $150,000 in administrative costs (investment management fees, actuarial services): Dr. Deductions — Administrative Expenses $150,000 Cr. Cash $150,000

Cash ↓ $150,000 | Deductions ↑ $150,000
6
Step 6 — Calculate Change in Fiduciary Net Position

Total Additions = $5,000,000 + $2,000,000 + $2,000,000 = $9,000,000 Total Deductions = $4,500,000 + $150,000 = $4,650,000 Change in Net Position = $9,000,000 − $4,650,000 = $4,350,000 If beginning fiduciary net position was $50,000,000, ending net position is $54,350,000.

Ending Fiduciary Net Position = $54,350,000

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Custodial Fund Illustration

If the City of Greenfield collects $12,000,000 in property taxes on behalf of the county, it would record: Dr. Cash $12,000,000 / Cr. Additions — Property Tax Collections for Other Governments $12,000,000. When remitted: Dr. Deductions — Payments to County $12,000,000 / Cr. Cash $12,000,000. Unlike the old agency fund model, these flows are recognized as additions and deductions, providing a full activity statement.

SECTION 7

Fiduciary Funds vs. Other Fund Categories

A frequent source of confusion on the CPA FAR exam is distinguishing fiduciary funds from governmental and proprietary funds, particularly because all three categories may hold resources for similar-sounding purposes. The table below draws out the critical differences across measurement focus, basis of accounting, financial statement presentation, and the nature of resources reported.

Characteristic	Governmental Funds	Proprietary Funds	Fiduciary Funds
Measurement Focus	Current financial resources	Economic resources	Economic resources
Basis of Accounting	Modified accrual	Accrual	Accrual
Gov't-Wide Statements?	Yes (converted to accrual)	Yes	No — excluded
Revenue / Expense Terms	Revenues & Expenditures	Revenues & Expenses	Additions & Deductions
Resource Ownership	Government's own resources	Government's own resources	Held for external parties
Net Position Classification	Fund balance (5 categories)	Net invested in capital assets; restricted; unrestricted	Restricted (held in trust) or reported as fiduciary net position

Comparison of fund categories in state and local government accounting

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KEY TAKEAWAY

The easiest way to remember why fiduciary funds are excluded from government-wide statements is to think of the distinction between a portfolio manager and a portfolio owner. A mutual fund company (the manager) reports the fund's assets in a separate prospectus — not on its own corporate balance sheet — because the assets belong to the investors. Similarly, a government that administers a pension trust reports those assets in fiduciary fund statements, not in the government-wide Statement of Net Position, because the pension assets belong to the plan participants, not the taxpayers.

SECTION 8

Connection to Advanced Reporting — GASB 67, 68, 74, & 75

Fiduciary fund accounting does not exist in isolation; it interconnects deeply with the employer-side pension and OPEB reporting requirements established by GASB Statements No. 67 and 68 (for pensions) and GASB Statements No. 74 and 75 (for OPEB). The pension trust fund's fiduciary net position directly feeds into the calculation of the employer's net pension liability (or asset) on the government-wide statements. This relationship means that the accuracy of fiduciary fund reporting has a direct impact on the employer's government-wide financial position.

Concept	Fiduciary Fund Level (GASB 67/74)	Employer Level (GASB 68/75)
Plan Net Position	Reported on Statement of Fiduciary Net Position	Used as a component in calculating net pension liability
Total Pension Liability	Disclosed in plan's notes and RSI	Net Pension Liability = TPL − Plan Net Position
Discount Rate	Based on expected return on plan investments	Blended rate if plan net position is projected to be insufficient
Investment Income	Recognized in full as addition in fiduciary statements	Difference between actual and expected return creates deferred inflows/outflows
Financial Statements	Fiduciary fund statements only	Government-wide statements (net pension liability on Statement of Net Position)

Interplay between fiduciary-level and employer-level pension/OPEB reporting

Understanding this linkage is particularly important for the CPA exam. Questions may require candidates to trace a pension plan's fiduciary net position from the fiduciary fund statements into the net pension liability calculation on the employer's government-wide statements. Additionally, GASB 84's identification criteria interact with component unit reporting: if a pension plan qualifies as a fiduciary component unit of the sponsoring government, it is blended into the government's fiduciary fund statements. Advanced study should also consider GASB Statement No. 97 (2020), which refined the treatment of certain Section 457 deferred compensation plans and clarified that certain IRC Section 457 plans meeting specific criteria should be reported as pension trust funds rather than custodial funds.

SECTION 9

Practice Problems

Question 1: CONCEPTUAL

Explain why fiduciary fund resources are excluded from a government's government-wide financial statements, and identify the two financial statements required for fiduciary funds.

Show answer

Fiduciary fund resources are excluded from government-wide statements because these assets do not belong to the government — they are held in a trust or custodial capacity for the benefit of external parties such as pension plan participants, other governments, or private individuals. Including them in the government-wide statements would overstate the government's own net position and misrepresent the resources available to finance governmental programs. The two required statements are the Statement of Fiduciary Net Position (a balance-sheet equivalent) and the Statement of Changes in Fiduciary Net Position (an activity statement showing additions and deductions).

Question 2: BASIC CALCULATION

A pension trust fund reports the following for fiscal year 2024: employer contributions $8,000,000; employee contributions $3,200,000; net investment income $4,100,000; benefit payments $6,800,000; administrative expenses $200,000. Beginning fiduciary net position was $120,000,000. Calculate the ending fiduciary net position.

Show answer

Total Additions = $8,000,000 + $3,200,000 + $4,100,000 = $15,300,000. Total Deductions = $6,800,000 + $200,000 = $7,000,000. Change in Fiduciary Net Position = $15,300,000 − $7,000,000 = $8,300,000. Ending Fiduciary Net Position = $120,000,000 + $8,300,000 = $128,300,000. This amount would appear on the Statement of Fiduciary Net Position and would also be used in the employer's net pension liability calculation under GASB 68.

Question 3: INTERMEDIATE

A county government operates an investment pool. During the year, internal county funds invested $15,000,000 in the pool and three external school districts invested $25,000,000. The pool earned $2,800,000 in investment income. How should the county classify the pool in its financial statements? How much investment income appears in the investment trust fund's Statement of Changes in Fiduciary Net Position?

Show answer

Under GASB guidance, the external portion of a government-sponsored investment pool is reported in an investment trust fund (a fiduciary fund), while the internal portion is reported in the participating fund of the sponsoring government. The external portion represents $25,000,000 / $40,000,000 = 62.5% of the pool. Investment income allocated to the fiduciary fund = 62.5% × $2,800,000 = $1,750,000. This $1,750,000 would appear as an addition (net investment income) on the investment trust fund's Statement of Changes in Fiduciary Net Position. The remaining $1,050,000 would be reported in the respective internal fund(s) of the county.

Question 4: APPLIED

The City of Riverside collects property taxes on behalf of the county government and two special districts. During FY 2024, the city collected $30,000,000 in property taxes for the county and $10,000,000 for the special districts. By year-end, the city had remitted $28,000,000 to the county and $9,500,000 to the special districts. Under GASB 84, which fiduciary fund type should the city use? Prepare the year-end journal entries and determine the custodial fund's net position at December 31, 2024, assuming a beginning net position of $0.

Show answer

Because these tax collections are not held under a trust arrangement and are for the benefit of other governments, the City of Riverside should use a custodial fund under GASB 84. Journal entries: (1) Dr. Cash $40,000,000 / Cr. Additions — Tax Collections for Other Governments $40,000,000 (to record total collections). (2) Dr. Deductions — Payments to County $28,000,000 / Dr. Deductions — Payments to Special Districts $9,500,000 / Cr. Cash $37,500,000 (to record remittances). Ending Fiduciary Net Position = $0 + ($40,000,000 − $37,500,000) = $2,500,000. This $2,500,000 represents cash held at year-end that has been collected but not yet remitted to the county ($2,000,000) and special districts ($500,000). It will appear on the Statement of Fiduciary Net Position as Cash of $2,500,000 offset by a corresponding fiduciary net position.

Question 5: CRITICAL THINKING

A state government administers a deferred compensation plan (Section 457) for its employees. The plan's assets are held in trust by a third-party custodian and are not accessible to the state's general creditors. Under GASB 84 and GASB 97, should these assets be reported in a fiduciary fund? If so, which type? Discuss how your answer would differ if the assets were not held in a qualifying trust and were accessible to the state's creditors.

Show answer

Under GASB 97, a Section 457 plan that meets the criteria of GASB 84 — specifically, the plan is administered through a trust (or equivalent arrangement) where plan assets are dedicated to providing benefits to participants and are not accessible to the government's own creditors — should be reported as a pension (and other employee benefit) trust fund. The state controls the assets, and they are held for the benefit of plan participants through a qualifying trust, satisfying the GASB 84 fiduciary identification criteria. If the assets were not held in a qualifying trust and were accessible to the state's creditors, the analysis changes fundamentally. In that scenario, the assets are legally the state's own resources, and the arrangement does not meet the fiduciary criteria because the assets are not protected from the government's creditors. The state would report these assets in its governmental or proprietary funds rather than in a fiduciary fund, and any obligation to participants would be a liability of the government. This distinction illustrates the critical importance of the trust arrangement in the GASB 84 classification framework.

SUMMARY

Summary — Accounting for Fiduciary Funds

Summary

Fiduciary funds report resources a government holds in a trust or custodial capacity for external parties — pension plan participants, other governments, individuals, or private organizations. Under GASB Statement No. 84, four fund types exist: pension (and OPEB) trust funds, investment trust funds, private-purpose trust funds, and custodial funds. All four types use the economic resources measurement focus and the accrual basis of accounting, and all are excluded from the government-wide financial statements.

Fiduciary funds produce two required statements: the Statement of Fiduciary Net Position and the Statement of Changes in Fiduciary Net Position. Activity is measured through additions (contributions, investment income) and deductions (benefit payments, administrative expenses). A critical GASB 84 change was replacing the legacy agency fund with the broader custodial fund, which now recognizes a full statement of changes. Fiduciary net position — particularly in pension trust funds — links directly to the employer's net pension liability under GASB 68, making accurate fiduciary fund accounting essential for the integrity of the entire governmental reporting model.