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Breaking it down
On May 28, 2024, the GASB released GASB Statement 103, “Financial Reporting Model Improvements,” to address stakeholder concerns obtained in its post-implementation review process for GASB Statement No. 34, “Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments,” as well as other reporting model-related pronouncements.
Basics of the GASB statement
The objective of Statement 103 is to make improvements to key components of the financial reporting model established with Statement 34, which has been effective since 2001. Statement 103 is the culmination of the reexamination of the financial reporting model. Several areas identified during the reexamination project, which began in 2013, were deemed to require improvements.
Changes to the financial reporting model
Statement 103 includes changes in several areas of the financial reporting model categorized as follows:
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Change category
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Expected impacts
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MD&A
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While MD&A will continue to be a required element of the financial reporting model, Statement 103 includes clarifying guidance on format issues (including removal of repeated explanations and “boilerplate” discussions that do not provide users with value), focusing the analysis on the primary government.
Current year balances and results in comparison with the prior year are still required. Rather than simply presenting the changes, however, the analysis requires specific discussions on why certain balances changed, including references to activities or events that had significant impacts on operations.
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Proprietary fund statement of revenues, expenses, and changes in fund net position
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Statement 103 modifies the format of operating and nonoperating activity in the proprietary fund statement of revenues, expenses, and changes in net position to require separate reporting of noncapital subsidies (a type of nonoperating revenue and expense).
Subsidies are defined in the statement as resources received from another party or fund for which the proprietary fund does not provide goods or services to the other party or fund and that directly or indirectly keep current fees and charges lower than they should be otherwise. Subsidies also include the opposite where resources are provided to another party or fund without goods or services being returned and are recoverable through the proprietary fund’s current or future pricing policies. All other transfers are also considered subsidies.
Nonoperating revenues and expenses are specifically defined in the statement as:
- Subsidies received and provided
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Endowment contributions
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Financing-related revenues and expenses
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Resources from the disposal of capital assets and inventory
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Investment income and expenses
Items that are not nonoperating revenues and expenses are deemed to be operating revenues and expenses.
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Budgetary comparisons
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The budgetary comparison information for the general fund and each major special revenue fund that has a legally adopted annual budget is permitted only as a required supplementary information (RSI) schedule, as opposed to the optional basic financial statement presentation governments can elect currently. Separate columns for the variances between original and final budget amounts and final budget amounts and budget results are required to be presented. Additionally, an explanation of significant variances presented within these two columns is required in the notes to the RSI as opposed to in the MD&A.
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Unusual or infrequent items
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Although GASB Statement No. 62, “Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements,” included definitions of unusual or infrequent items, Statement 103 requires presentation of these items separately, as opposed to netted, on the respective financial statements of the reporting units in which they occurred. Disclosure in the notes to the financial statements is required, including disclosing the program, function, or identifying activity to which the item is related as well as whether the item was within management’s control.
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Major component units
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Each major component unit should be presented in the reporting entity’s statements of net position and activities assuming the presentation does not reduce the readability of the statements. If readability is impaired, then combining statements of the major component units are required to be presented within the basic financial statements after the fund financial statements. The option of presenting condensed major component unit financial statements in the notes to the financial statements is eliminated.
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Statistical section
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For entities that present only business-type activities or business-type activities and fiduciary activities, there should be a presentation of revenues by major source for the business-type activities, breaking out operating, noncapital subsidy, and other nonoperating revenues and expenses.
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Crowe observation: The GASB’s original exposure draft included several significant items that either do not appear in the final statement or were explored but not adopted. These include:
- A new model for the measurement focus and basis of accounting of governmental funds, which would have been a significant change in the preparation and presentation of the governmental funds financial statements. While the GASB removed this component from the final statement, the board indicated that it likely will be revisited in a future project.
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A requirement that debt service funds be reported as major funds even if they do not meet the definition of a major fund per Statement 34.
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A requirement that a schedule of government-wide expenses by natural classification be presented as supplementary information by governments that prepare an annual comprehensive financial report.
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A requirement that a statement of cash flows be included for either the government-wide financial statements or the governmental funds financial statements.
Effective date
The statement is effective for fiscal years beginning after June 15, 2025, and all reporting periods thereafter, with early adoption permitted. If a primary government elects to early adopt the statement, all component units included in the reporting entity also would be required to adopt the statement in the same year. The changes would be considered a change of accounting principle, requiring restatement of prior periods presented if practicable as well as including disclosures describing the change.
Risk considerations and next steps
Entities need to consider risks and impacts that the new statement might have on their future financial statement presentations. Examples include:
- Current systems are not aligned with upcoming requirements. New methods of reporting mean potential new line items and accounts will need to be incorporated into legacy reporting systems. Controls and processes might have to be updated so that the required information is available and the entity’s system of internal control can verify accuracy and completeness.
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The current financial statement reporting model in use will require updates. New account analysis for certain items in the MD&A and notes to the financial statements, as well as new statement formats and reconciliations, might be required. Entities need to consider their current approach to financial statement preparation, which might no longer be adequate.
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Existing resources to execute a reporting model change are not sufficient. Workforce and budget resources to make a change in the financial reporting process might not be adequate. Entities should evaluate their current reporting process and consider a plan to expand resources.
Some steps for entities to consider include:
- Assess the changes that will affect the various report structure components. Although the governmental funds component was removed from this project, the GASB indicated a willingness to continue its deliberations on this topic in a future project, meaning entities should continue to monitor changes that might be forthcoming.
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Discuss the changes with key stakeholders, and consider the anticipated deadlines for implementation. This discussion should include how current systems might be modified to deliver compliant information outputs, such as account structure, names for existing accounts, and new accounts. In addition, the discussion should review how certain automated functions that feed into the general ledger might need alteration.
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Discuss with auditors and regulators how changes could affect current requirements, such as bond covenants and non-GAAP supplemental reporting.
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Thoughtfully explore outside assistance. While external auditors might assist in a nonaudit service setting, the extent of assistance requested as a result of a reporting model change might bring about independence concerns.
