Effective Date – Governmental Accounting Standards Board (GASB) 103, Financial Reporting Model Improvements, 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 (GASB 103) requires subsidies to be presented in a new section of the statement of revenues, expenses, and changes in net position, outside of operating revenues and expenses. DZA has concluded that Medicaid supplemental payments qualify as subsidies and should not be included in operating income. The change should be made for both years in comparative financial statements.
More Detailed Guidance
Each state has its own Medicaid supplemental payment program. These programs have names such as the Safety Net Assessment Program, the Disproportionate Share Hospital program, the Upper Payment Limit program, etc. Usually, there is a related fee, such as a provider tax or bed tax, that hospitals are required to pay to the state. The state draws down matching funds from the federal government to match these fees, then allocates the total funds back out to the hospitals, usually based on quality measures and/or the proportion of Medicaid and uninsured patients served.
In our discussions with the GASB technical inquiry service, as well as two different states’ State Auditor’s Offices (SAO), we noted some uncertainty, but a definite preference that these supplemental payment programs can be considered subsidies. GASB had initially planned to issue an implementation guide that specifically described these programs and classified them as subsidies. A nationwide campaign by the Healthcare Financial Management Association convinced GASB to remove that specific guidance. However, the GASB representative we spoke with still seemed to prefer that these payments be classified as subsidies. She stated that the classification should be based on whether the payments were viewed as being part of the patient transaction, which would make them a payment for service, or as a separate transaction, which would make them a subsidy.
The New Mexico and Washington SAO representatives we spoke with both felt that the payments should be subsidies. The Washington SAO researched the payment calculations and concluded that they do not relate to specific patients and should be viewed as separate transactions.
Based on these discussions, DZA has concluded that for both payments received and the payments paid to the state, both should be classified as subsidies under GASB 103 and should not be included with operating income.
Implementation
Because the GASB 103 changes 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.
We recommend recording your supplemental payments and the related fees in separate general ledger accounts, so they are easier to identify and present properly in the financial statements. When preparing your financial statements, your financial statement preparer should present net supplemental payments and related fees in the “noncapital subsidies” section of the statement of revenues, expenses, and changes in net position. This change should be made for both years in comparative financial statements.
If you have questions, or if you would like additional assistance with the implementation of GASB 103, please reach out to Joe Lodge at jlodge@dza.cpa.
