Author: Jennifer CruverKibi, CPA, CGFM, Partner

The Governmental Accounting Standards Board (GASB) has approved Statement No. 103, Financial Reporting Model Improvements, which will become effective for governments with fiscal years beginning after June 15, 2025, and for all reporting periods thereafter. The financial statement improvements resulting from GASB 103 include:

• Changes to Management’s Discussion and Analysis
• Presentation of major discretely presented component units
• Reporting extraordinary and special items as unusual or infrequent items
• Changes to the proprietary statement of revenues, expenses, and changes in fund net position
• Definitions of operating and non-operating revenues and expenses
• And the presentation of budgetary comparison information

Changes to Management’s Discussion and Analysis

The key change to the Management’s Discussion and Analysis (MD&A) is an enhanced focus on understandability and analysis and to avoid “boilerplate” discussions. Specifically, the MD&A should be written in a way that is understandable to users who may not be knowledgeable in governmental accounting and financial statement reporting, including providing additional details to help users understand the information provided. Charts, graphs, and tables will continue to be useful tools in providing clear information to readers. The MD&A should also help users understand why balances and results reported in the current year’s financial statements changed from the prior year rather than simply presenting the amounts or percentages by which they changed. Another key change to the MD&A is to eliminate the duplication of information by referencing the original discussion of an item rather than repeating the same information and analysis previously presented.
The required elements of the MD&A have also been reduced from eight to five sections with the names of some of the sections changing as well. The five sections are:

• Overview of the Financial Statements
• Financial Summary
• Detailed Analyses
• Significant Capital Asset and Long-Term Financing Activity
• Currently Known Facts, Decisions or Conditions

Other key changes include:

-Governments that use the modified approach to report infrastructure should no longer include information about that approach in the MD&A. Instead, that information should be included in the notes to the Required Supplementary Information (RSI).
-The analysis of budgetary variations for the general fund has been removed from the MD&A and should now be included in the notes to the RSI.
-In the Detailed Analyses section of the MD&A, analyses of the financial position for governmental and business-type activities should be included, as well as any significant policy changes (such as tax rates or fees) and important economic factors that significantly affected operation results. Also, here should be an analysis of each major fund’s results of operations and fund balance/net position. The major fund analysis should include why amounts changed from the prior year, and any facts, decisions, or conditions useful to financial statement users.
-As part of the analysis for both capital asset and long‐term financing activity, governments should include intangible assets and the related liabilities associated with leases, subscription‐based IT arrangements, and public‐private and public‐public partnerships.
-The Currently Known Facts, Decisions or Conditions section should include significant expected changes to the budgetary fund balance or net position as a result of a newly adopted budget. To comply with this requirement, governments should be mindful to not include projections but to report events as they have happened through the reporting date. Also, governments using a budgetary basis such as the cash basis or modified cash basis will now be required to track the differences between the budgetary basis and the GAAP (Generally Accepted Accounting Principles) basis fund balance or net position.

Presentation of Major Component Units

For presentation of major component units, governments are no longer allowed to report condensed financial statements in the notes to the financial statements. Each major Discretely Presented Component Unit (DCU) is to be presented in the government-wide financial statements, as long as the readability of the government-wide financial statements is not reduced (combining statements after the fund financial statements is allowed).

Unusual and Infrequent Items

Governments will no longer report extraordinary or special items but instead, will report on items that are unusual or infrequent (definitions unchanged). Specifically, in the ‘flows statements’, any unusual or infrequent items should be reported as the last items before the net change in net position, fund balance, or fund net position, as appropriate. Also, unusual or infrequent items should not be netted together but be presented separately on the face of the flow statements. In the notes to the financial statements, the program, function, or identifiable activity associated with each unusual or infrequent item displayed on the financial statements should be disclosed along with whether the item was within the control of management.

Proprietary Funds Statement of Revenues, Expenses and Changes in Net Position and Statistical Section

In the Proprietary Funds Statement of Revenues, Expenses, and Changes in Net Position, GASB has defined what constitutes a nonoperating revenue or expense. The following transactions are classified as a nonoperating revenue or expense:

• Contributions to permanent and term endowments
• Financing related revenues and expenses (for example, interest expense and lease revenue)
• Proceeds from the disposal of capital assets and items reported as inventory
• Investment income and expenses, and
• Subsidies received and provided

Subsidies are defined as follows:

a. Resources received from another party (such as a grantor) or fund that are not related to the goods or services the proprietary fund provides and keeps the fund’s current and future fees or charges lower than they would be without the resources
b. Resources provided to another party or fund that are not related to the goods or services provided by the other fund or party and which the fund’s current and future fees or charges are designed to recapture
c. All interfund transfer in and out

All noncapital subsidies, which are nonoperating revenues, are to be reported separately, in detail, after operating income (loss) but before all other non operating revenues and expenses.

Governments will be required to display the new line items in the statement of revenues, expenses, and changes in net position. Below is the example taken from the standard:

For financial statements issued by governments that conduct only business‐type activities or only business‐type and fiduciary activities and that prepare a statistical section, the financial trends information should be updated to reflect the changes made to the statement of revenues, expenses, and changes in net position. The revenues should be presented by major source distinguishing between operating revenues, noncapital subsidies, and other nonoperating revenues.

Budgetary Comparison Schedules

Under GASB 103, the mandatory budget comparisons for the government’s general fund and major special revenue funds are only reported as RSI. It is also now required to have a variance column between the original and final budget amounts. The notes to the RSI should provide an explanation of any significant differences between both the final budget and the actual results and original and final budgets.

If you have any questions regarding how GASB 103 affects your MD&A and financial reporting, please contact a member of your audit team.

The Governmental Accounting Standards Board (GASB) has issued Statement No. 102, Certain Risk Disclosures. GASB 102 will be effective for fiscal years beginning after June 15, 2024, and all reporting periods thereafter.

What is the objective of GASB 102?

The objective of GASB 102 is to provide users of government financial statements with essential information about risks related to a state or local government’s vulnerabilities due to the variety of risks they face. These are risks that could negatively affect the level of service they are able to offer or their ability to meet obligations as they come due. Although governments have been required to disclose information about their exposure to some of those risks, key information regarding common risks among state and local governments has not been routinely disclosed because there hasn’t been an explicit requirement to do so.

What are the key aspects of GASB 102?

GASB 102’s end goal is to provide users of financial statements with essential information regarding risks related to a government’s vulnerabilities due to certain concentrations or constraints.

A concentration is defined as a lack of diversity related to an aspect of a significant inflow of resources or outflow of resources. Examples of a concentration included in the guidance (but not limited to) are: employers, industries, inflows of resources, workforce covered by collective bargaining agreements, providers of financial resources, and suppliers of material, labor, or services.

A constraint is defined as a limitation imposed on a government by an external party or by formal action of the government’s highest level of decision-making authority.  Examples of constraints included in the guidance (but not limited to) are: limitations on raising revenue, limitations on spending, limitations on the incurrence of debt, and mandated spending.

Concentrations and constraints may impact a government’s capacity to obtain resources or control spending.

What is now required of local governments?

Governments must assess whether a concentration or constraint meet ALL the following criteria for footnote disclosure:

• The concentration or constraint is known to the government prior to financial statements issuance,
• The concentration or constraint makes the government vulnerable to the risk of a substantial impact, and
• An event or events associated with the concentration or constraint that could cause the substantial impact either has occurred or is more likely than not to begin to occur within twelve months of financial statement issuance.

If all three criteria listed above are met, the government must disclose the following information:

• The concentration or constraint
• Each event associated with the concentration or constraint that could cause a substantial impact if the event had occurred or had begun to occur prior to financial statement issuance.
• Actions taken by the government prior to financial statement issuance to mitigate the risk.

What should your government do to prepare for GASB 102?

Assess whether there are any potential concentrations or constraints within your government. For each concentration or constraint, assess whether it makes your government vulnerable to a risk of a substantial impact. Then evaluate whether a triggering event is taking place that will necessitate footnote disclosure. Concentration examples could be a substantial employer in your municipality is closing and this event will have a substantial negative impact on future revenue; a large source of revenue relied upon for operations will no longer be available in the future; or there will be a substantial decline in a specific revenue source that is a sole source of bond repayment. Examples of constraints could be the state-imposed debt limit or a voter-approved property tax cap.

If you have any questions regarding GASB 102 please contact us.

The Governmental Accounting Standards Board (GASB) issued GASB Statement #101, Compensated Absences in June 2022. We have a summary of this statement, how it will affect your organization’s financial reporting, and how you can prepare for implementation.

What is the objective of GASB 101?

The purpose of GASB 101 is to address and update the recognition and measurement guidance of compensated absences while refining the related disclosure requirements. GASB 101 aligns guidance under a unified model while amending certain previously disclosures.

What are the key parameters of GASB 101?

• GASB 101 requires an organization to recognize a compensated absence liability for 1) leave that has not been used but is more likely than not (i.e. likelihood is greater than 50%) to be used or settled in the future; 2) leave that has been used but not yet paid in cash or settled (including salaries and applicable payroll taxes). Examples of compensated absences include vacation (or annual) leave, sick leave, holidays, etc.
• A liability should be recognized for leave that has not been used if (a) the leave is due to services already rendered, (b) the leave accumulates, and (c) the leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means.
• Liability for certain types of compensated absences—including parental leave, military leave, and jury duty leave—are not to be recognized until the leave commences and is used. For measuring liability for leave that has not been used, use the employee’s pay rate as of the date of the financial statements.
• Leave that is more likely than not to be settled through conversion to defined benefit postemployment benefits should not be included as a liability for compensated absences.
• A liability for leave that has been used but not yet paid or settled should be measured at the amount of the cash payment or noncash settlement to be made. Certain salary related payments that are directly and incrementally associated with payments for leave also should be included in the measurement of the liabilities.
• Expenditures should be recognized for the amount that normally would be liquidated with expendable available financial resources.
• For the notes to financial statements, GASB 101 amends the existing disclosure guidance by now only requiring disclosure of the net change in the liability (instead of showing gross additions and deletions), as well as no longer requiring to disclose which governmental funds are used to liquidate liability.

When is GASB 101 effective?

GASB 101 will be effective for fiscal years beginning after December 15, 2023, and all reporting periods thereafter. Earlier application is encouraged.

What Should Your Organization Do to Prepare for GASB 101?

We recommend you start preparing now. GASB 101 requires an organization to accrue employee leave differently than in the past, especially leave that wasn’t paid out at termination (such as “use it or lose it” leave). Under GASB 101, an organization must now analyze how much of the employee leave balances at year end are more likely than not to be used as time off in future reporting periods. This analysis will take time, and you may need to compile historical data to analyze use trends, by type of employee (for instance, how much uniform and non-uniformed employees use sick leave in the subsequent year regardless of whether they receive payments for such leave at termination).

In estimating the leave that is more likely than not to be used or otherwise paid or settled, you should consider criteria such as policies (which may differ by employee class) related to compensated absences and how your organization has typically handled payment of compensated absences. You may consider amending your PTO policies for improved clarity and streamlining of your financial reporting. Also, be sure to document the factors considered in the estimation process (such as the trends, relevant historical information, and how the information was obtained), as well as flow assumptions.

Be sure to reach out to your audit team with any questions during the process.