Project Pages

Investment Fees

Research Description: The initial objectives of this pre-agenda research activity are (1) to review the ways in which governments report the fees charged to them, if any, in relation to investments, including fees associated with private equity funds, hedge funds, and real estate; (2) to identify the information needs of users pertaining to those fees; and (3) to evaluate the sufficiency of existing guidance to result in appropriate reporting that meets user needs. The research will collect the information necessary for the Board to determine whether existing guidance is sufficient or, if not, whether improvements to the relevant standards should be considered further.

Added to Research Agenda: August 2019

Investment Fees—Project Plan

Background: Stakeholders have raised concerns regarding what they believe to be a lack of transparency with regard to the management fees associated with some state and local government investments. Of particular note are investments in private equity funds, hedge funds, real estate, and similar ventures—sometimes referred to as alternative investments. A key concern is a perceived inability to fully identify the costs that are associated with those investments and to separate those costs from investment income in the financial statements of state and local governments. Some observers believe the accounting and financial reporting standards are not sufficient to result in investment-related fees being specifically identified in the financial statements or notes to the financial statements.

GASB standards do not specify how fees related to investments should be reported in general. However, the issue is specifically addressed in the standards for pensions and other postemployment benefits (OPEB). Paragraph 22d of Statement No. 67, Financial Reporting for Pension Plans, requires recognition in a pension plan’s statement of changes in fiduciary net position of “Net investment income, including separate display of (1) investment income (see paragraphs 23−25) and (2) investment expense, including investment management and custodial fees and all other significant investment-related costs (see paragraph 26).” Regarding investment expense, paragraph 26 requires that, “Investment-related costs should be reported as investment expense if they are separable from (a) investment income and (b) the administrative expense of the pension plan.” The same requirements are applied to OPEB by Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans.

Paragraph 23 of Statement No. 84, Fiduciary Activities, addresses investment fee reporting in fiduciary funds other than pension (or other employee benefit) trust funds:
…[T]he statement of changes in fiduciary net position should disaggregate additions by source including, if applicable, separate display of:
  1. Investment earnings
  2. Investment costs (including investment management fees, custodial fees, and all other significant investment-related costs)
  3. Net investment earnings (investment earnings minus investment costs).
Investment-related costs should be reported as investment costs if they are separable from (a) investment earnings and (b) administrative costs. The statement of changes in fiduciary net position should disaggregate deductions by type and, if separable, should separately display administrative costs.

Statement 84 (paragraph 24) provides an exception to those general display requirements for “custodial funds in which resources, upon receipt, are normally expected to be held for three months or less.” Those funds “may report a single aggregated total for additions and a single aggregated total for deductions” though, “The descriptions of the aggregated totals of additions and deductions should indicate the nature of the resource flows.”

There are at least two reasons for conducting pre-agenda research on fees related to investments: (1) the presence of alternative investments in pension plan portfolios, and (2) the potential for variability in reporting of investment income and investment expense by governments. The existing standards regarding whether fees are separable from investment income and administrative expense rely upon professional judgment. That inherent subjectivity may result in variation in reporting by governments and, therefore, a diminution of the usefulness of the reported information.

Major Research Issues: The following issues will be considered:
  • What information do governments report regarding fees associated with investments? What fees are netted against investment income rather than recognized as investment expense?
  • What information about investment fees is made available to governments by the general partners or funds managing alternative investments? Can additional information be obtained by governments, if necessary?
  • What information do financial statement users need regarding investment fees? Do users need additional information about fees related to alternative investments? What characteristics of alternative investments, if any, would justify additional reporting beyond what is required for investments in general?
  • What audit issues, if any, are associated with investment fees?
  • Pre-agenda research approved: August 2019
  • Consultative group appointed? No
Current Developments: The project staff concluded the survey of preparers and began the analysis of the results. The project staff also launched the survey of auditors. The results of all three surveys (users, preparers, auditors) will inform the focus of the interviews with relevant professional organizations.

Research Work Plan: The plan for the pre-agenda research includes the following activities:


Board Meetings

Research Activities

April 2021: Discuss research results with GASAC members.

Investment Fees—RECENT MINUTES

Minutes of Meeting, March 15, 2021

The Board received and discussed the results of staff pre-agenda research on investment fees reporting by state and local governments, including public pension and other postemployment benefit plans, as presented in a research memorandum. No formal deliberations took place and no tentative Board decisions were reached.