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Breaking it down
On Jan. 8, 2024, the GASB released GASB Statement 102, “Certain Risk Disclosures,” to enhance the required disclosures of risks for state and local governments.
Basics of the GASB statement
The purpose of Statement 102 is to identify potential risks in governmental environments and develop disclosure requirements associated with those risks. These requirements are designed to provide users of the financial statements with information about risks related to a government’s vulnerabilities due to certain concentrations or constraints. As a result of this statement, users will have better information with which to understand and anticipate certain risks to a government’s financial condition.
GASB Statement 102 states that the assessment of the disclosure criteria should be made at the level of the primary government, which includes its blended component units, as defined in Statement 14, “The Financial Reporting Entity.” An additional assessment of the disclosure criteria should be made for all other reporting units that report a liability for revenue debt.
What is the scope of GASB Statement 102?
The statement applies to the financial statements of all state and local governments. Although existing GASB guidance requires governments to disclose information about certain risks that might affect their operations or ability to meet financial obligations, Statement 102 establishes requirements for when governments are exposed to risks resulting from vulnerabilities due to certain concentrations or constraints. The GASB initially considered a broad approach to the scope but ultimately decided that a narrow approach was more suitable as it is less subjective and better promotes consistency, comparability, and reliability in the information that governments disclose. The scope focuses more narrowly on certain risks by identifying specific conditions that would be subject to the disclosure criteria.
Risks resulting from the government’s general use of estimates and nature of operations are excluded from the scope; however, the environment in which a government operates is included as it can expose governments to certain risks that might limit the ability to acquire resources and control spending. Thus, the GASB deemed information about vulnerabilities from these constraints essential to users of government financial statements and included those risks within the scope of the final statement.
While outside the scope of Statement 102, cyber risks and environmental, social, and governance risks are topics the board might consider in future standard-setting activities.
What are concentrations and constraints?
The statement defines a concentration as a lack of diversity related to an aspect of a significant inflow or outflow of resources. The statement specifically includes the following examples, noting that concentrations can include, but are not limited to, these items:
- Employers
- Industries
- Composition of principal Inflows of resources
- Workforce covered by collective bargaining agreements
- Providers of financial resources
- Suppliers of material, labor, or services
A constraint is a limitation that is imposed by an external party or by formal action of a government’s highest level of decision-making authority. The statement includes the following specific examples (again noting that constraints are not limited to these items):
- Limitations on raising revenue
- Limitations on spending
- Limitations on the incurrence of debt
- Mandated spending
As previously noted, both concentrations and constraints might limit a government’s ability to acquire resources or control spending.
Crowe observation: While many governments routinely consider concentrations and constraints as part of their daily operations as well as their annual budgeting and appropriation processes, the disclosure requirements of Statement 102 give transparency to financial statement users by providing risk information that is now subject to auditing procedures.
What are the disclosure criteria?
The statement requires disclosure of specific information in the notes to the financial statements if the following criteria are met:
- Either a concentration or a constraint is known to the government prior to the issuance of the financial statements.
- The concentration or constraint makes the reporting unit vulnerable to the risk of a substantial impact.
- An event or events associated with the concentration or constraint that could cause the substantial impact have occurred, have begun to occur, or are more likely than not to begin to occur within 12 months of the date the financial statements are issued.
Crowe observation: During deliberations about the exposure draft, the board modified the originally proposed criterion that it is at least reasonably possible that within three years of the financial statement date, the event associated with the concentration or constraint will cause there to be a substantial effect on the government’s ability to 1) continue to provide services at the level provided in the current reporting period or 2) meet its obligations as they come due. The board removed the aspects of service levels and obligations due to the potential difficulty governments and their auditors could have formulating and auditing these assessments. The GASB also concluded that the emphasis of the criterion for substantial impact should be on a government’s vulnerability to the risk of a substantial impact due to a heightened possibility of loss or harm because of an event or events associated with existing concentrations or constraints, rather than on an assessment that a substantial impact could occur within a specified time frame in the future.
The modified criteria now focus simply on the vulnerability to the risk of a substantial impact as the required threshold for disclosure as noted in the second criterion in the previous paragraph.
What should be included in the financial statement footnote?
Disclosures should be provided in sufficient detail to enable users to understand the nature of the circumstances disclosed as well as the government’s vulnerability to the risk of a substantial impact associated with the concentration or constraint. These include:
- Description of the concentration or constraint
- Description of each event associated with the concentration or constraint that could cause a substantial impact if the event has occurred or has begun to occur prior to the issuance of the financial statements
- Description of actions taken by the government prior to the issuance of the financial statements to mitigate the risk
What do entities need to consider?
Concentrations and constraints often are considered in many of a government’s daily operations. These could now be subject to disclosure in the financial statement notes. Thus, governments should consider how other publicly available information (such as budget documents) that discusses concentrations and constraints is aligned to the financial statements in order to ensure consistent information is provided to the financial statement users.
In addition to considering the current concentrations or constraints that meet the criteria for disclosure per Statement 102, governments should be aware that required note disclosures might supplement or overlap other note disclosure requirements. When this occurs, governments should avoid unnecessary duplication by combining the information with that required by other note disclosure guidance.
When does Statement 102 take effect?
The guidance is effective for fiscal years beginning after June 15, 2024, and all reporting periods thereafter, with early adoption encouraged. This disclosure is to be applied on a prospective basis; that is, if comparative financial statements are presented, the reporting requirements of this statement are required for only the current period.
