GASB Update Part 1: What You Need To Know About GASB 102 & 103

DANNY MARTINEZ: Hello everyone. Welcome to Cherry Bekaert's Government and Public Sector Podcast. My name is Danny Martinez. I'm a partner with the CFO Advisory Group within Cherry Bekaert, and I focus specifically on government, higher education, and not-for-profit clients.

DANNY MARTINEZ: With me today is a frequent co-host and co-presenter on this podcast, Scott Anderson. Scott, would you like to introduce yourself to the audience?

SCOTT ANDERSON: Sure. Scott Anderson. I've been with Cherry Bekaert for 20 years. Currently, I am a director on a number of audit engagements in North Carolina and Virginia, and I also lead our technical efforts in our government audit practice.

DANNY MARTINEZ: Last month, Scott and I presented a GASB update at our annual conference. For those who prefer audio, we're going to discuss a GASB update covering pronouncements 102 through 104, the implementation guide update, and the projects GASB has underway.

DANNY MARTINEZ: This will be a two-part podcast. This first segment covers GASB 102 and 103. The second podcast, which should be located where you found this one, will cover the GASB 104 implementation guide update and GASB projects.

DANNY MARTINEZ: I'll tee us off. GASB 102 is effective for fiscal years ending in 2025, so for June 30, September 30, and December 31 year ends in 2025, GASB 102, Certain Risk Disclosures, is effective.

DANNY MARTINEZ: GASB 103, Financial Reporting Model Improvements, is effective for the next fiscal year: June 30, September 30, and December 31 year ends in 2026. We'll get started with GASB 102's Certain Risk Disclosures. Scott, you were actually at GASB while this was being developed. Where would you like to start?

SCOTT ANDERSON: I was at GASB when this project was going on. The project lasted longer than initially expected. It was intended to be completed within a couple of years, but as it extended, I became the project manager, taking it from board decisions to the exposure draft.

SCOTT ANDERSON: One reason the standard took so long was that GASB was implementing Concept Statement No. 7 at the same time. This project served as a trial run of those concepts. Concept Statement No. 7 directs the board on when to require specific disclosures, and GASB 102 is all about a disclosure.

SCOTT ANDERSON: GASB sought more input from users on what information would be essential, so they conducted additional outreach. That outreach extended the project's timeline, but it resulted in more focus on when a disclosure should be required rather than on the specific content of the disclosure.

SCOTT ANDERSON: I have a few clients who have asked for help drafting their GASB 102 disclosures, which usually means they don't fully understand what GASB 102 is trying to accomplish.

DANNY MARTINEZ: When clients ask for help drafting a new paragraph for their financial statements required by GASB 102, what are they missing about what triggers a disclosure versus when no specific disclosure is needed in a given fiscal year?

SCOTT ANDERSON: My first question is: how do you know you have a disclosure? What have you done to determine that? The goal is to disclose essential information. Under Concept Statement No. 1, essential information is any information that would have a material or substantial impact on a user's analysis and decision making.

SCOTT ANDERSON: Essential information goes beyond "nice to know" or "nice to understand." A user will integrate essential information into their assessments and make decisions based on it. Much of the disclosure criteria is about whether the information is essential.

SCOTT ANDERSON: If a disclosure is boilerplate, prepared at implementation and carried forward unchanged, that is not what the board intended. The board sought disclosures that shine a bright light on a specific risk that will have an imminent impact on a government's ability to provide services or to meet obligations as they come due.

SCOTT ANDERSON: GASB 102 focuses on concentrations and constraints. The guidance limits the scope so you do not have to assess every single risk a government faces. You can focus on concentrations or constraints, but they must be paired with an event that makes the concentration or constraint relevant to the government's ability to provide services or meet obligations.

DANNY MARTINEZ: For listeners, a concentration is a lack of diversity related to a significant inflow or outflow. Areas that may trigger a concentration include employers, industries, inflows of resources, the workforce covered by collective bargaining agreements, providers of financial resources, or suppliers of material labor or services.

DANNY MARTINEZ: A constraint is a limitation imposed by an external party or by formal action of a government's highest level of decision-making authority. Examples include limitations on raising revenue, limitations on spending, limitations on incurring debt, and mandated spending.

SCOTT ANDERSON: A common question is why a constraint imposed by a government's highest decision-making authority would cause the government not to be able to provide services or meet obligations. It seems counterintuitive that a government would impose a self-limiting constraint.

SCOTT ANDERSON: That provision exists because, at the state level, a legislature or general assembly can impose constraints on a state that the finance department or program administrators cannot overturn. Thus, constraints placed by the highest level of authority can be relevant.

DANNY MARTINEZ: The triggering event for disclosure is that a substantial impact has occurred, has begun to occur, or is more likely than not to begin to occur within 12 months of the date the financial statements are issued.

DANNY MARTINEZ: Because of the level of impact required, identifying such triggers should generally be known by those within the government, so it should not require extensive hunting.

DANNY MARTINEZ: Scott, you prepared a GASB 102 checklist for audit teams. Can you share what that checklist includes and how governments could use it to double-check whether they need to disclose something?

SCOTT ANDERSON: We don't expect many governments to have this disclosure, but that does not mean there is nothing to do. On the audit side, it's important to document known constraints or concentrations. GASB 102 words it as "constraints or concentrations that are known by the government," meaning preparers do not need to perform an exhaustive search to identify them.

SCOTT ANDERSON: A well-managed government will already know the matters that cause concern. From an audit perspective, we want those known items documented. We document the issues that might cause management to lose sleep and how they are managed. Then, when an event happens or is likely to happen, we can recognize that it triggers a disclosure based on our documented understanding.

DANNY MARTINEZ: On the advisory side, we did not do extensive work for GASB 102. We did have a few of our GASB-as-a-service clients ask if we had a checklist, so we tailored the one Scott created. There was not much advisory work beyond that.

DANNY MARTINEZ: The next standard, GASB 103, is one where we are building substantial implementation resources for fiscal year 2026. GASB 103 is Financial Reporting Model Improvements.

DANNY MARTINEZ: GASB 103 took a long time to develop. One major component—changes to governmental fund presentation—was pulled from the final guidance after GASB listened to constituents and concluded the cost-benefit did not support implementation.

DANNY MARTINEZ: Although some major hurdles were removed, GASB 103 still requires a moderate level of effort to implement. It is only 19 paragraphs but addresses five major topics: Management's Discussion and Analysis (MD&A), unusual or infrequent items, presentation of proprietary fund statements, major component unit information, and budgetary comparison information. Scott, which would you like to address first?

SCOTT ANDERSON: I start with MD&A.

SCOTT ANDERSON: If you read the MD&A requirements in GASB 103 and compare them with GASB 34, paragraph 11, they seem very similar. GASB 103 reinforces what GASB 34 was trying to accomplish. MD&As sometimes become boilerplate, focusing on variance identification rather than analysis. GASB 103 aims to improve usefulness and reduce boilerplate.

SCOTT ANDERSON: Some items have been pulled out to make them more specific to the basic financial statements. Budgetary analysis will be moved to RSI. If you follow the modified approach for infrastructure assets, the GASB 34 requirement discussed it in the MD&A but treated it as an RSI schedule; GASB 103 clarifies that placement in RSI or notes to RSI as appropriate.

SCOTT ANDERSON: Overall, GASB 103 focuses on making the MD&A more useful to readers.

DANNY MARTINEZ: Our clients have used GASB 103 as a reason to refresh their MD&A. We are building an MD&A self-assessment or scorecard to evaluate MD&As against the GASB 103 criteria, including boilerplate levels, specificity to the government, chart quality, and the depth of analysis. The scorecard will likely rate items on a one-to-five scale to encourage more mature, specialized MD&As.

DANNY MARTINEZ: Scott, the next topic is unusual or infrequent items.

SCOTT ANDERSON: Not much is changing here. GASB Statement No. 62 defines unusual and infrequent items, and it required categorization into extraordinary items and special items. That requirement caused confusion about which category applied, particularly regarding whether an event was within management's control.

SCOTT ANDERSON: GASB 103 determined that differentiating categories for presentation is less important. GASB 103 requires presenting each unusual or infrequent item in the same place where extraordinary or special items were normally presented—at the bottom of the statement, just before the change in net position.

SCOTT ANDERSON: The note disclosure will describe whether the item was within the government's control. The change primarily requires more disaggregation on the face of the statements.

DANNY MARTINEZ: Presentation of the proprietary fund statements will have significant presentation changes. Governments with proprietary funds—airports, higher education institutions, utilities—will be most impacted, so we are focusing education efforts there.

SCOTT ANDERSON: GASB 103 reduces options that GASB 34 allowed. Under GASB 34, governments could define operating and nonoperating activities under their policy, aiming for consistency with the cash flow statement. This led to many varying interpretations and presentations.

SCOTT ANDERSON: GASB 103 removes that flexibility by providing a definition of nonoperating. The board opted to define nonoperating and treat operating as anything not defined as nonoperating to avoid creating gaps between two narrowly defined categories.

SCOTT ANDERSON: The purpose of proprietary fund statements is to demonstrate an activity's ability to recover its own costs. Proprietary fund statements are required when there is a cost recovery requirement, either externally imposed or based on a pricing policy, so operating revenue typically consists of rates and charges.

SCOTT ANDERSON: GASB 103 defines nonoperating revenue essentially as nonexchange revenue. Subsidies are a new category within nonoperating; subsidies are nonexchange transactions that affect rates and charges reported as operating revenue.

SCOTT ANDERSON: This change will make the statements look different from prior presentations. We will cover the subsidy definition, examples, and practical considerations in a dedicated webinar.

DANNY MARTINEZ: We know many organizations are issuing thought leadership on where they believe the subsidy line is. We'll provide additional resources and examples as we develop materials for GASB 103.

DANNY MARTINEZ: Two more topics: major component units and budgetary comparisons. Scott, can you describe the change to major component unit presentation options?

SCOTT ANDERSON: GASB 34 provided three options for major component units: present each major component unit in separate columns on the government-wide statements; present them in combining statements after the fund statements within the basic financial statements; or present condensed financial statements in the notes.

SCOTT ANDERSON: GASB 103 removes those options and requires that all major component units be presented separately on the statement of net position and statement of activities. If presenting each separately would make the statements unreadable, you may present combining statements in the back of the fund statements.

SCOTT ANDERSON: "Unreadable" depends on context. For example, a state with 16 major component units should not display 16 separate columns on the face of the statements. In such cases, present a single column and include the combining schedules in the back.

DANNY MARTINEZ: Budgetary comparisons also lose an option under GASB 103. GASB 34 encouraged placing budgetary comparisons in RSI but allowed them in the basic financial statements if there was no budgetary difference. GASB 103 requires budgetary comparisons to be in RSI.

DANNY MARTINEZ: For clients of Cherry Bekaert's advisory team who are dealing with GASB 87, 96, and 101, know that we are developing a four-phase approach for implementing GASB 103.

DANNY MARTINEZ: Implementation advice: governments with proprietary funds should start early. Consider budgetary presentation impacts and educate boards or those charged with governance about how presentation changes may affect key monthly metrics.

DANNY MARTINEZ: Use GASB 103 as an opportunity to take a holistic approach to updating financial statements. While updating the MD&A, consider a cleanup of notes and other disclosures.

DANNY MARTINEZ: This concludes the first part of our two-part GASB update. If you have questions, please reach out to Scott or me. My email address is danny.martinez@cbh.com. Scott's email address is s.anderson@cbh.com.

DANNY MARTINEZ: Be on the lookout for part two.