Effective Date – Governmental Accounting Standards Board (GASB) 103 is applicable for fiscal years beginning after June 15, 2025. Therefore, governmental entities with a fiscal year ending on or after June 30, 2026, are required to implement the new financial reporting model improvements standard.
Summary
The new financial reporting model improvements standard improves key components of the financial reporting model to enhance its effectiveness and improve consistency and comparability between entities. It includes the following sections:
- Presentation of proprietary fund statement of revenues, expenses, and changes in net position
- Definitions of operating and nonoperating revenues and expenses
- Major component units in basic financial statements
- Unusual or infrequent items
- Budgetary and statistical information
- Management’s discussion and analysis (MD&A)
More Detailed Guidance
Presentation of proprietary fund statement of revenues, expenses, and changes in net position – After the presentation of operating revenues and expenses will be a new section and subtotals for noncapital subsidies. This is followed by all other nonoperating revenue and expenses, including capital subsidies. Following nonoperating revenues and expenses is unusual or infrequent items, followed by beginning and ending net position. For differentiating between capital and noncapital subsidies, the determination should be based on the intent of the funding source (donor, grantor, etc.), not on what the funds are spent on.
Definitions of operating and nonoperating revenues and expenses – Nonoperating revenues and expenses are redefined as:
- Subsidies received and provided (see additional discussion below),
- Contributions to permanent and term endowments,
- Revenues and expenses related to financing (interest expense, debt issuance costs, amortization of debt premiums and discounts),
- Resources from the disposal of capital assets and inventory (gain or loss on sale of capital assets, insurance recoveries),
- Investment income and expenses (interest income, dividends, realized and unrealized gains and losses, investment costs, income from rental of tangible or intangible assets classified as investments).
Anything not meeting the nonoperating revenues and expenses definition above or classified as unusual or infrequent (see definitions above) is considered operating revenues and expenses.
Subsidies will be the most challenging component above to define and apply. GASB 103 defines subsidies as follows:
- Resources received from another party or fund (1) for which the proprietary fund does not provide goods and services to the other party or fund and (2) that directly or indirectly keep the proprietary fund’s current or future fees and charges lower than they would be otherwise
- Resources provided to another party or fund (1) for which the other party or fund does not provide goods and services to the proprietary fund and (2) that are recoverable through the proprietary fund’s current or future pricing policies
- All other transfers
The following areas will have the biggest potential changes from previous practice due to this updated definition and classification for subsidies:
- Grants and Contributions – Most grants and contributions will meet the definition of subsidies and will either be in noncapital subsidies (if not required to be used for capital purchases) or in nonoperating revenue/expenses (if required to be used for capital purchases). The exceptions will be for grants and contributions that are not offsetting operating expenses, such as salaries and labor costs, that would otherwise exist without the grant or contribution funds. These would not be subsidies and would be included in operating revenues and expenses. An example would be a grant that is funding a new behavioral health program that the hospital would not otherwise have without the grant funding. The grant is not offsetting operating expenses that would otherwise exist without the grant funds, so it is not a subsidy. This grant would be operating revenue.
- Supplemental Payments – Payments such as SNAP, DSH, and UPL may meet the definition of subsidies and may need to be included in the noncapital subsidies section. This is included in proposed implementation guidance from GASB. DZA will send an update when the implementation guidance is finalized.
- Tax Revenue – This revenue meets the definition of a subsidy and is nonoperating income. Tax revenue for operations will be included in the noncapital subsidies section. Tax revenue for debt payments, which are usually related to capital asset purchases, will be included with capital subsidies and included in nonoperating revenue/expenses.
Major component units in basic financial statements – Each major component unit should be presented separately in the statement of net position and activities.
Unusual or infrequent items – The prior guidance for extraordinary and special items is being replaced with guidance for unusual and infrequent items. While prior guidance required transactions to be both unusual and infrequent to be considered ‘extraordinary’ or had to be both within management’s control and either unusual or infrequent to be ‘special’, the new guidance does not consider management control and applies to any transactions that are unusual and/or infrequent.
Unusual and infrequent items are defined as follows:
- Unusual – The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the government, taking into account the environment in which the government operates.
- Infrequent – The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the government operates.
Any such transactions (that are unusual and/or infrequent) are included in the statements of revenues, expenses, and changes in net position separately as the last item before the change in net position.
Budgetary and Statistical Information – This is not applicable for hospitals. The statistical information is included in annual comprehensive financial reports, which are not issued by government. The budget requirements in GASB 103 only apply to the general fund and special revenue funds. As government hospitals do not use fund accounting and do not have these funds, this is not applicable.
MD&A – The guidance for the MD&A clarifies what information should be included in the MD&A. Most of the information is unchanged from previous guidance. The only differences from previous guidance are:
- Emphasis on not including boilerplate information—management should explain the reasons for changes in line items, not just the amounts or percentages.
- Emphasis on not duplicating information.
- Clarification that information on lease and subscription assets and liabilities should be included in the discussion of capital assets and long-term financing.
The MD&A may take longer to prepare now if your MD&A needs to add more detailed explanations.
Implementation
Because the GASB 103 changes all involve financial statement presentation and use information already provided for the audits, there should not be any significant new requests or changes in policies necessary. However, if these changes will significantly impact any key financial ratios you rely on, we recommend discussing that with all potentially interested parties, including management, the governing board, lenders, and grantors, as soon as possible.
Keep in mind the MD&A changes above when deciding whether to prepare the MD&A. If preparing, make sure you build in sufficient time in the audit and financial statement preparation process to prepare in accordance with the GASB 103 requirements.
Consider whether there were any significant events or transactions during the year that meet the unusual or infrequent item definitions above and provide documentation and explanations to your financial statement preparers related to those events and transactions.
Make sure you have adequate documentation on all grants and contributions to determine whether they meet the definition of subsidies above and whether or not they are for capital purposes.
Need Assistance? Don’t Hesitate to Reach Out.
If there are still questions or if additional assistance is needed with the implementation of GASB 103, please reach out to Joe Lodge at jlodge@dza.cpa.
