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Topic: GASB

Preparing Your Government for GASB 103 Compliance

Key Takeaways: 

  • GASB 103 introduces changes to governmental financial reporting, including updates to three key areas: Management’s Discussion and Analysis, presentation of proprietary fund financial statements, and budgetary comparison information.
  • While significant, GASB 103 is less extensive than initially anticipated — with changes scaled back compared to earlier drafts.
  • Governments should prepare for GASB 103 implementation by educating their teams, updating processes and templates, and considering the need for additional data collection or external assistance.

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The Governmental Accounting Standards Board (GASB) has issued Statement No. 103, Financial Reporting Model Improvements (GASB 103), introducing changes to the financial reporting model for state and local governments. This new guidance aims to enhance the clarity and usefulness of financial reports, providing stakeholders with more comprehensive and relevant information.

Here is what GASB 103 means for your government and how you can prepare for these changes.

Understanding the Scope of GASB 103

GASB 103 introduces new or modified guidance in several crucial areas:

  1. Management’s Discussion and Analysis (MD&A)
  2. Presentation of proprietary fund financial statements
  3. Budgetary comparison information
  4. Unusual or infrequent items
  5. Information about major component units
  6. Statistical section

Notably, GASB 103 does not change the basis of accounting or measurement focus for governmental funds financial statements.

Management’s Discussion and Analysis (MD&A)

The MD&A is an essential component of your financial reporting, providing a narrative overview and analysis of your financial activities for the reporting period. GASB 103 aims to make this section more insightful and user-friendly.

Follow these tips to align MD&A with GASB 103 emphasis and requirements:

  • Keep your analysis objective and easily readable.
  • Base it on currently known facts, decisions, or conditions.
  • Present short- and long-term analyses (but don’t duplicate your transmittal letter or the same information within your MD&A).
  • Write for users who may not have deep accounting knowledge.
  • Compare current year results with the prior year, emphasizing the current year.
  • Include three years of comparative data for two-year financial statement presentations.
  • Use charts, graphs, and tables to enhance understanding.
  • Focus on the primary government, distinguishing it from component units.

Remember, your MD&A should tell a story, not just present numbers. Explain why changes occurred and their significance. Avoid “boilerplate” discussions and focus on what’s most relevant each year.

MD&A Structure

GASB 103 requires that information presented in your MD&A be confined to topics in the following five sections:

  1. Overview of the Financial Statements
  2. Financial Summary
  3. Detailed Analyses
  4. Significant Capital Asset and Long-Term Financing Activity
  5. Currently Known Facts, Decisions, or Conditions

Significant capital asset/long-term financing activity should include the following:

  • Capital assets include intangible assets under GASB 51 and intangible right-to-use assets under GASB 87 (leases), GASB 94 (PPP), and GASB 96 (SBITA)
  • Long-term financing includes debt and obligations from GASB 87 (leases), GASB 94 (PPP), and GASB 96 (SBITA)

Presentation of Proprietary Fund Financial Statements

For proprietary funds, your statement of revenues, expenses, and changes in fund net position must now distinguish between operating and nonoperating revenues and expenses, as well as separately report noncapital subsidies (a type of nonoperating revenue and expense). Here are simplified definitions of how these are categorized:

  • Operating revenues and expenses — These are derived from the fund’s principal ongoing operations.
  • Nonoperating revenues and expenses — Includes subsidies, contributions to endowments, financing-related revenues and expenses, capital asset disposal, and investment income.
  • Subsidies — Resources exchanged between funds or other parties without a corresponding exchange of goods or services that either reduce the receiving fund’s fees/charges or are recoverable through the providing fund’s pricing policies. Subsidies also encompass any other transfers not meeting these specific criteria.

These changes aim to provide a clearer picture of your proprietary funds’ performance and financial position. Don’t underestimate the need to evaluate and separately classify subsidies from capital-related contributions and/or transfers, along with their impact on the statement of cash flows.

Budgetary Comparison Information

GASB 103 is standardizing how you present budgetary information. While budgetary comparison schedules continue to be required for the general fund and each major special revenue fund with a legally adopted annual budget, it must now be presented as required supplementary information (RSI) only (i.e., there is no longer a basic financial statement option). This includes:

  • Variance columns — Separate columns for the variances between original and final budget amounts and final budget amounts and actual results.
  • Explanation of variances in Notes to RSI — Detailed discussion explaining significant variations between the original and final budget amounts and final budget amounts to actual results. Also of note, the budget analysis will no longer be included in the MD&A.

Unusual or Infrequent Items

GASB 103 retains the definition of unusual or infrequent items from GASB 62 but adds requirements for presenting these items:

  • Separate presentation — Present inflows and outflows related to unusual or infrequent items separately as the last presented flows of resources before the net change.
  • Disclosure — Disclose in notes the program, function, or activity related to the unusual or infrequent item, and whether it is within management’s control.

Information About Major Component Units

Each major component unit should be presented separately in the statements of net position and activities — unless this reduces the readability of your statements. If readability is affected, you can include combining statements of major component units in your basic financial statements (after fund financial statements).

Statistical Section – Business-Type Activities (BTA)

Due to the changes in the presentation of proprietary fund financial statements discussed above, the statistical section needs an update for BTAs. In the statistical section of separately issued financial reports, governments engaged only in business-type activities or only in business-type and fiduciary activities should present revenues by major source for their business-type activities — distinguishing between operating, noncapital subsidy, and other nonoperating revenues and expenses.

How to Prepare Your Government for GASB 103

The requirements listed above will take effect for fiscal years beginning after June 15, 2025. Now that you know what’s coming, how do you prepare? Here’s a roadmap to help you navigate the transition:

  • Educate your team — Help your finance team understand the new requirements. Consider training sessions or workshops on GASB 103.
  • Assess your current reporting — Review your existing financial reports against the new standards. Identify areas that will need changes.
  • Update your processes — Develop new procedures for collecting and presenting the required information. This might involve changes to your accounting systems or reporting tools.
  • Revise your report templates — Create new templates for your financial statements and MD&A that align with GASB 103 requirements.
  • Engage stakeholders — Communicate with your governing board, audit committee, and external auditors about the upcoming changes. Their input and understanding will be crucial.
  • Plan for data collection — Some new requirements may necessitate collecting data you haven’t tracked before. Start planning for this now.
  • Consider external help — If you’re short-staffed or need additional knowledge, consider engaging consultants familiar with GASB 103 to assist with the transition.

How MGO Can Help

Transitioning to the new requirements of GASB 103 can be complex. Our dedicated and experienced State and Local Government team can assist you in navigating these changes, facilitating a smooth transition and compliance with the new standards.

Reach out to our team today to learn how we can support your government in adopting GASB 103 and enhancing your financial reporting processes.

Latest Update: GASB Expert Panel

Governmental Audit Quality Center

The Governmental Audit Quality Center (GAQC) promotes the importance of quality governmental audits and the value of such audits to purchasers of governmental audit services. GAQC is a voluntary membership center for CPA firms and state audit organizations that perform governmental audits. The GASB Matters section of the GAQC site highlights key interest areas, key resources, and advocacy efforts related to state and local government engagements.

Pension-related matters

GASB Pensions: Issues & Resources page of the GAQC Web site consolidates the various resources available to practitioners to assist with understanding the new standards and developing appropriate audit strategies. This page also includes links to various whitepapers and related auditing interpretations addressing cost-sharing and agent multiple-employer plans.
Comment Letters

  • September 16, 2019 comment letter on GASB’s Exposure Draft, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
  • September 16, 2019 comment letter on GASB’s Exposure Draft, Omnibus 20XX
  • April 30, 2019 comment letter on GASB’s Exposure Draft, Leases Implementation Guide
  • March 8, 2019 comment letter on GASB’s Exposure Draft, Fiduciary Activities Implementation Guide
  • February 14, 2019 comment letter on GASB’s Financial Reporting Model Improvements & Recognition of Elements of Financial Statements

GASB Highlights Existing Mechanisms for ESG-related Disclosures

Executive Summary:

Reporting and disclosure of environmental, social, and governance (ESG)-related information has long been a priority in the private sector and is now emerging as a key area of focus for state and local governments (or “government entities”).

In response to interested parties seeking more ESG-related information (e.g., investors, credit rating agencies, preparers and auditors of financial statements, citizens, policymakers, etc.) from government entities, the Governmental Accounting Standards Board (GASB) has released a publication to clarify how ESG-related information intersects with their existing standards.

The bottom line: GASB’s stakeholders and interested parties are seeking to understand the impacts of ESG-related matters on a government entity’s cash flows, financial position, and overall responsibility for fiscal accountability — and the publication can be seen as a form of interpretive guidance to bridge the gap.

What’s inside the publication?

GASB’s “Intersection of Environmental, Social, and Governance Matters with Governmental Accounting Standards” document was released on May 31, 2022, and it provides clear examples for government entities to make new, or enhance existing, ESG-related disclosures by leveraging their current standards and principles.

Up front, the publication acknowledges that “a single consistent definition of ESG is not prevalent in practice today.” However, broad examples are included in the publication for each pillar (note, the below list has been shortened for purposes of this article):

The interpretive portion of the publication goes on to assist government entities with detailed examples of how ESG-related information coincides with the current GASB standards (note, the below are 3 of 25 total examples from the publication):

Why this GASB release matters

In publishing this document, GASB is taking a traditional first step to introduce concepts and guidelines that set a foundation ahead for new reporting and disclosure rules in the future (also referred to as “interpretive guidance”).

This is not the first time a regulator or standard setter has issued interpretive guidance specific to ESG. In 2010, the Securities and Exchange Commission (SEC) released their own interpretive guidance to provide clarity to the private sector on how to leverage existing financial reports to make disclosures related to climate change. While it was uncertain how many companies would incorporate climate-related information in their financial reports, many chose to do so (at last count by the SEC in 2020, 33% of the 6,644 filings submitted to the regulator contained some form of climate-related disclosure). The interpretive guidance, therefore, laid the groundwork for a new climate-related proposal issued by the SEC in March 2022.

Essentially, interpretive guidance has historically preceded the release of new, formal guidance and the creation of new standards. If this proves true in the public sector, then we will first see an increase from state and local governments enhancing their existing financial reports and disclosures by incorporating ESG-related information. Subsequently, and after further analysis by GASB of those enhanced disclosures, we will likely see the release of a new ESG-specific standard from GASB.

Increasing the pressure

As demand for ESG-related disclosures increases, pressure will also increase on governments to begin providing or enhancing the disclosures in their financial reports. Further, if your entity issues securities (e.g., municipal bonds), you may encounter pressure from credit rating agencies depending on your approach (or lack thereof) to disclose and address ESG-related risks.

At present, ESG-related disclosures are contingent on a variety of factors (including but not limited to the government entity’s location, the historical or anticipated impacts of climate change, the level of ambition to become a leader in ESG-related reporting, etc.), but at some point these disclosures will shift from voluntary to mandatory.

How MGO can help

Many state and local governments have proactively disclosed ESG-related information on their websites or in standalone ESG / sustainability reports; however, GASB’s interpretive guidance demonstrates that ESG-information also needs to be considered when preparing your annual financial reports.

To stay ahead, MGO is helping the public sector as well as the private sector, develop and enhance their ESG disclosure strategies.

If you are interested in learning more, schedule a conversation with our ESG team today.

The Time is Now: Supercharge Your GASB 87 Implementation

10 Preliminary Implementation Steps That Will Supercharge Your Action Plan

GASB 87 readiness

With an effective date within the next year for some governments (i.e., as soon as January 1, 2020, for governments with a calendar year ending December 31, 2020) – the countdown has begun for planning for the impending changes to accounting and reporting for leases.

Under these new rules, the recording of leases, including assumptions, will significantly impact financial statement amounts and disclosures. Because governments use a variety of leasing arrangements to stabilize cash flows and reduce risk and uncertainty, the new requirements have strong accounting and financial reporting implications requiring a readiness plan. But first, why are these changes occurring?

The backstory on GASB 87

It is important to have some context for the impending changes. The new statement was created because leasing guidance for state and local governments, as we know it, predates GASB’s existence. Because of this fact, the GASB’s conceptual framework was not taken into consideration, which includes definitions of assets, deferred outflows of resources, liabilities, and deferred inflows of resources. The updated guidance for lease accounting has rectified the situation, which is currently underreporting the economics of a lease transaction.

The new lease accounting standards will replace the current operating and capital lease categories with a single model for lease accounting, based on the concept that leases are a means to finance the right to use an asset.

Lease assessment timeline

With the effective date approaching quickly, the time to prepare is NOW!

Taking the lead

The MGO GASB 87 Implementation Team has created a readiness assessment tool providing 10 preliminary implementation questions for consideration in your planning. These will not only prepare you for the new lease accounting standards, but may uncover matters that were not previously considered or identified.

This 10-step Implementation Plan is more of a general guide designed to assist you in identifying issues and help you organize your implementation process, rather than being an all-inclusive plan with specific technical guidance. As you evaluate the leases that are unique to your organization, you will most likely find that further research and analysis is necessary to ensure proper accounting considerations. For example, if you operate an airport and have aviation leases with air carriers regulated by the U.S. Department of Transportation and the Federal Aviation Administration, it will be necessary to understand how the regulated lease provisions affect your contracts, especially in situations where there are multiple lease components.

Preliminary implementation steps

Step 1. Know where to find your leases.

It may seem obvious, but the first step in managing your leases is knowing where they are and, specifically, who is responsible for maintaining them. A good place to begin is with organizational charts. This is an example for a municipal government.

Depending on how your government contracts services, leases may be held centrally within the Finance Department or they may be decentralized in a multitude of departments, and possibly even managed by various entities.
Keep in mind that most leases that were previously expensed as operating leases will need to be accounted for as a lease obligation under the new standards, including option years if you are reasonably certain they will be exercised.

After the “where” has been established you can move into the “what” by identifying the universe of leases for your organization. This can be accomplished by evaluating the general ledger, reviewing contract files and surveying purchasing and operating departments, which leads to assembling a task force and formulating a plan for data collection.

Step 2. Assemble a Lease Implementation Task Force.

Identify people who are critical to a successful implementation. Consider including operational and legal staff who are already familiar with existing lease terms and conditions. The Lease Implementation Task Force should remain in place until the action plan for lease implementation is finalized. The benefits are many, including a collective think tank to evaluate and apply appropriate accounting treatment to each class of leases.
This task force may also be important to developing internal policies and procedures, such as whether or not a materiality threshold is appropriate, and whether or not lease accounting software should be utilized to manage the lease database. Furthermore, the implementation of the lease accounting standards is only a start, proper accounting treatment, including the remeasurement of the initial lease liability when certain lease changes have occurred and the evaluation of new leases subsequent to implementation, will be an on-going requirement.

Step 3. Identify the plan for lease data collection.

Converting your lease data into an organized structure is not without its challenges. You may encounter incomplete lease files, “hard copy versions only” of certain lease agreements, voluminous amendments, and the need to translate data from lease agreements into databases. This is all part of the process leading to a successful implementation of the new standards. Once you complete the database, you’ll then need to properly classify the leases.

Step 4. Understand what types of leases do NOT apply to GASB 87.

While a multitude of leases will be impacted by the new GASB 87 standards, there are several classifications that are not subject to GASB 87, including: intangible assets (such as computer software licenses); biological assets, including timber, plants and animals; inventories; service concession arrangement contracts; leases in which the underlying asset is financed with outstanding conduit debt; and supply contracts, such as power purchase contracts. Additionally, nonexchange agreements are exempt: for example, in the case of leasing property to a school district for a reduced price of $1/year for 30 years.

In the end, it is all about evaluating the leases subject to GASB 87.

Step 5. Understand what criteria to use when evaluating leases.

After eliminating leases that are not subject to GASB 87, as identified in Step 4, further classification of leases is necessary to ensure that the appropriate accounting treatment is applied. Short-term leases, contracts that transfer ownership, leases of assets that are investments (lessors only), and certain regulated leases (lessors only) all qualify as leases, but have differing accounting treatments than the typical long-term, noncancellable leases.

Step 6. Determine the lease term.

A lease term is defined as the period during which a lessee has a noncancellable right to use an underlying asset, plus any extension periods and options that are reasonably certain to be exercised. The GASB wants organizations to consider extension periods and options, so there is no incentive to structure initial lease terms to avoid meeting the definition of a lease. Since month-to-month leases that continue into a holdover period until a new lease is signed are not part of the noncancellable period or a formal extension, there is no basis in the standard for currently including them. Let’s discuss the calculation of the lease liability.

Step 7. The lease liability should be measured at the present value of payments expected to be made during the lease term.

The lessee should initially measure the lease liability at the present value of payments expected to be made during the lease term, which includes the following elements:

  • Fixed payments
  • Variable payments that depend on an index or a rate, initially measured using the index or rate as of the commencement of the lease term
  • Variable payments that are fixed in substance
  • Amounts that are reasonably certain of being required to be paid by the lessee under residual value guarantees
  • The exercise price of a purchase option if it is reasonably certain that a lessee will exercise that option
  • Payments for penalties for terminating the lease, if the lease term reflects the lessee exercising (1) an option to terminate the lease or (2) a fiscal funding or cancellation clause
  • Any lease incentives receivable from the lessor
  • Any other payments that are reasonably certain of being required based on an assessment of all relevant factors

For additional guidance and context to these bulleted items, refer to GASB 87 paragraph 21. In order to determine the present value, you may need to develop the discount rate.

Step 8. Consider how to calculate the lease liability for contracts with multiple components.

Proper classification of leases is not always straightforward when both lease and nonlease components are included in the same contract. What if a building lease has utilities and common area maintenance costs? The answer can be found in guidance covering contracts with multiple components, which identifies maintenance services as a nonlease component. What if a lease involves multiple assets and those assets have different lease terms? The answer can also be found in guidance covering contracts with multiple components, which provides that each asset should be accounted for as a separate lease component. Many rental leases embed the cost of utilities and common area maintenance into the lease payment. Contract components should be separated using the best estimate available based on observable information. If it is not practicable to estimate these separate costs, then account for the contract as a single lease unit (see GASB 87 paragraph 67).

Step 9. Measurement of the leased asset.

The initial measurement of the leased asset should be based on the measurement of the associated lease liability. In the case of contracts with multiple components, the value of the underlying leased asset is not always clearly stated in the agreements, and many lease agreements will not cover the life of the leased asset. Some leased assets may involve proprietary information that lessors are not willing to share. Therefore, determining the value of the underlying asset is not always straightforward in these cases. Whenever possible, identifying comparable assets that are sold in a market transaction is an important part of the process. You can then utilize the knowledge of internal or external experts who can provide a basis for an estimate.

You are now ready for the final step.

Step 10. Define the threshold for recording leases in the financial statements.

Unfortunately, while GASB provides explicit guidance on capitalization thresholds for capital assets, it does not specify any such consideration for lease obligations. Using a threshold may help you avoid recording leases that are immaterial and avoid a mismatch with leased assets that are too small to capitalize. A good starting point may be to use the capitalization thresholds that are already established for your organization. Once you determine your initial criteria for establishing leases, verify that it does not exclude significant leases from application of the new standard. You can revise these thresholds as needed.
Now that we have provided you with our 10-step GASB 87 readiness plan, you should have a fairly good idea what your next steps will be.

So you can plan for compliance, this is an excellent time for the MGO GASB 87 Implementation Team to review your leases. This will ensure that you are ready to take the most important step: Implementation. In addition, we have put together an online readiness assessment that helps you evaluate where you stand in the implementation process.

About the Author:

David Bullock is a thought leader in MGO’s State and Local Government practice. An Assurance and Government Advisory Services Partner with 25 years of professional experience, he currently oversees numerous audits and other services to governmental organizations throughout California. In 2018, David was appointed to the AICPA State and Local Government Expert Panel. He is also on the Governmental Accounting Standards Board’s (GASB) Financial Reporting Model Reexamination Task Force. In 2018, he was appointed to the California Society of CPAs’ Governmental Accounting and Auditing Committee. His numerous presentations cover topics related to generally accepted accounting principles promulgated by the GASB, and auditing standards, promulgated by the AICPA and the GAO.