In April 2024, GASB issued Statement Number 103 – Financial Reporting Model Improvements. The Standard’s objective seeks to improve key components of the financial reporting model and enhance its effectiveness in providing information that is essential for decision making and assessing a government’s accountability. While some of the initial considerations have been excluded, this is the first significant change to the financial reporting model since GASB 34 Basic Financial Statements—and Management’s Discussion and Analysis—For state and local governments was issued in 1999 nearly 25 years ago.
The requirements of this Statement apply to the financial statements of all state and local governments.
When is the new financial reporting model effective?
The requirements of this Statement are effective for fiscal years beginning after June 15, 2025, and all reporting periods thereafter. Earlier application is encouraged. Governments with a fiscal year end of June 30th will be the first required to implement in fiscal year end June 30, 2026.
So, what changed in the New Financial Reporting Model?
Management’s discussion and analysis (MD&A)
This Statement continues the requirement that the basic financial statements be preceded by management’s discussion and analysis (MD&A), which is presented as required supplementary information (RSI). The Statement requires that the information presented in MD&A be limited to the related topics discussed in five sections: (1) Overview of the Financial Statements, (2) Financial Summary, (3) Detailed Analyses, (4) Significant Capital Asset and Long-Term Financing Activity, and (5) Currently Known Facts, Decisions, or Conditions. The Statement stresses that the detailed analyses should explain why balances and results of operations changed rather than simply presenting the amounts or percentages by which they changed. Additionally, unnecessary duplication should be avoided by not repeating explanations that may be relevant to multiple sections should be avoided and “boilerplate” discussions should be avoided by presenting only the most relevant information, focused on the primary government.
Unusual or Infrequent Items
Unusual or infrequent items are defined as transactions and other events that are either unusual in nature or infrequent in occurrence. The Statement requires that governments display the inflows and outflows related to each unusual or infrequent item separately as the last presented flow(s) of resources prior to the net change in resource flows in the government-wide, governmental fund, and proprietary fund statements of resource flows.
Source: GASB 103 Appendix C
Presentation of the Proprietary Fund Statement of Revenues, Expenses, and Changes in Fund Net Position
This Statement requires that the proprietary fund statement of revenues, expenses, and changes in fund net position continue to distinguish between operating and nonoperating revenues and expenses. The standard defines Operating revenues and expenses as revenues and expenses other than nonoperating revenues and expenses. Nonoperating revenues and expenses are defined as (1) subsidies received and provided, (2) contributions to permanent and term endowments, (3) revenues and expenses related to financing, (4) resources from the disposal of capital assets and inventory, and (5) investment income and expenses.
In addition to the subtotals currently required in a proprietary fund statement of revenues, expenses, and changes in fund net position, this Statement requires that a subtotal for operating income (loss) and noncapital subsidies be presented before reporting other nonoperating revenues and expenses. Subsidies are defined as (1) resources received from another party or fund (a) for which the proprietary fund does not provide goods and services to the other party or fund and (b) that directly or indirectly keep the proprietary fund’s current or future fees and charges lower than they would be otherwise, (2) resources provided to another party or fund (a) for which the other party or fund does not provide goods and services to the proprietary fund and (b) that are recoverable through the proprietary fund’s current or future pricing policies, and (3) all other transfers.
Source: GASB 103 Appendix C
Major Component Unit Information: This Statement requires governments to present each major component unit separately in the reporting entity’s statement of net position and statement of activities if it does not reduce the readability of the statements. The standard does allow combining statements of major component units to be presented after the fund financial statements, If the readability if those statements would be reduced.”
Source: GASB 103 Appendix C
Budgetary Comparison Information
Governments are required to present budgetary comparison information using a single method of communication—RSI. GASB Statement No. 34 previously allowed governments to choose to present mandated budgetary comparisons either as part of the basic audited financial statements or as “required supplementary information” (RSI). By definition, RSI does not fall within the scope of the independent audit of the financial statements, although auditors are required to perform certain limited procedures in connection with RSI. By limiting the presentation to a single method of communication, GASB Statement No. 103 provides greater consistency to the reader of the financial statements.
Governments also are required to present (1) variances between original and final budget amounts (new) and (2) variances between final budget and actual amounts. An explanation of significant variances is required to be presented in notes to RSI.
Source: GASB 103 Appendix C
Potential Improvements Considered but Not Required
- Debt Service Fund Information: The Board considered requiring debt service funds to be major funds and requiring additional debt related information. The Board recognizes that different types of users have unique needs that require specific financial information to meet those needs but ultimately recognized that the general purpose external financial reporting cannot meet the needs of every type of user. The Board also noted that governments have the discretion to report debt service funds as major funds and can do so if they believe that it is particularly important to financial statement users. Similarly, it was recognized that much of the additional debt information important to readers of the financial statements can be found throughout the financial statements in other disclosures.
- Schedule of Government-Wide Expenses by Natural Classification: A schedule of natural classification of government-wide expenses by function or program for governmental activities and by different identifiable activity for business-type activities be presented as supplementary information by governments that prepare an annual comprehensive financial report.
Concerns that the expected benefits would not justify the perceived costs to prepare such information, led the Board to conclude that a schedule of government-wide expenses by natural classification would not be required.
- Statement of Cash Flows: The Board also considered whether a statement of cash flows, as part of either the government-wide financial statements or the governmental fund financial statements, should be required to be presented as part of the financial reporting model. Ultimately, the Board did not require a statement of cash flows because the expected incremental benefits did not exceed the perceived costs of preparing and auditing that information. Additionally, the Board determined that the budget preparation and reporting under modified accrual for government funds was similar to cash basis.
The Board also noted that the effort required for complex governments with a large number of governmental funds and small governments with limited resources could be significant and could affect the timeliness of financial reports.
- Governmental Funds: Early on in the process the Board considered issues related to recognition of elements in and presentation of governmental fund financial statements. Based upon those considerations, the Board proposed a new measurement focus and basis of accounting: the short-term financial resources measurement focus and accrual basis of accounting (the short- term method), which reflected the features of recognition (a) based upon contractual terms, (b) when payments are due, and (c) applying a one-year time recognition period, as well as presentation using the current and noncurrent format for the governmental fund resource flows statement.
Many inconsistencies and exceptions were identified during the process and the Board ultimately determined that a change in the recognition elements would not improve the consistency and reporting for the financial statement reader.
- Small Government Considerations: Each of the changes noted under this new standard were considered as to their affect and cost on small governments and ultimately it was determined that consistent application regardless of the government’s size was the best approach. Some of the significant considerations include:
- The Board considered elimination of budget vs actual schedule altogether. However, comments from stakeholders indicted that this was an important schedule.
- The Exposure Draft proposed a two-tiered effective date with governments with total annual revenues of less than $75 million implementing the requirements one year later than governments with total annual revenues of $75 million or more.
The Board shifted their approach to identifying specific potential improvements to the existing financial reporting model, rather than taking a “clean slate” approach that would have resulted in a complete overhaul of the existing financial reporting model. Accordingly, the Board concluded that the incremental changes would not warrant a staggered implementation for smaller governments.
Looking Ahead
While implementation of these standards may be a year or so in the future, its important to start considering the implications. Most local governments are currently in the process of developing and passing the first budget that will be reported under this new Statement. Governments should consider the implications of their budget decisions that will need to be disclosed in the upcoming financial statements. Consider whether your budgeting process allows you to identify and explain variances in a timely fashion, preferably throughout the year. As their titles indicate, Unusual or Infrequent items are not regularly occurring and as such, you should consider each year, whether there are any transactions that may be required to be reclassified as Unusual or Infrequent and what impact that reclassification may have on your financial statements. Additionally, financial statements changes, and the gathering of information needed for those changes should be considered now.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation!
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
