GASB Statement No. 103, Financial Reporting Model Improvements, is a targeted update to the governmental financial reporting model. It does not replace the basic government-wide and fund financial statement structure. Instead, it is intended to improve the usefulness, comparability, and understandability of information reported by state and local governments.

For finance officials, the practical message is straightforward: the annual financial report should tell a clearer story. Readers should be able to understand not only what changed during the year, but why it changed and why it matters.

That matters to councils, boards, management, citizens, creditors, grantors, and other financial statement users who rely on the annual financial report to understand the government's financial position and results.

GASB Statement No. 103 is a governmental accounting standard focused on financial reporting model improvements. In plain English, it is designed to make certain parts of a government's financial statements easier to understand and more consistent from government to government.

The standard focuses on areas where users often need better explanations or more consistent presentation, including:

• Management's discussion and analysis, commonly called MD&A.
• Unusual or infrequent items.
• Proprietary fund operating and nonoperating presentation.
• Noncapital subsidies.
• Major component unit presentation.
• Budgetary comparison information.
• Certain statistical section information.

The most important planning point is that GASB 103 should not be treated as a last-minute disclosure update. Governments will likely need time to update templates, gather explanations, evaluate classifications, and coordinate with auditors before the financial statements are drafted.

GASB 103 continues the requirement that the basic financial statements be preceded by management's discussion and analysis, or MD&A. MD&A remains required supplementary information.

The key change is tone and focus. MD&A should not simply repeat amounts or percentages from the financial statements. It should explain why balances and results of operations changed from the prior year, with emphasis on the current year.

Under GASB 103, MD&A is organized around 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.

Finance teams should review the prior-year MD&A and remove language that is repetitive, stale, or too generic. The revised MD&A should be tied to actual current-year activity, such as:

• Tax base changes.
• Rate changes.
• Grants.
• Labor contracts.
• Capital projects.
• Debt issuances.
• Leases, PPPs, and SBITAs.
• Service-level changes.
• Economic trends.
• Significant changes in major funds.

MD&A should help a reasonable reader understand what happened during the year, why it happened, and whether management is already aware of facts, decisions, or conditions expected to significantly affect future financial position or results.

Less useful:

General Fund revenue increased by $650,000, or 5.2%.

More useful:

General Fund revenue increased primarily because taxable value growth increased property tax collections and state-shared revenue increased. These increases were partially offset by lower building permit revenue as construction activity slowed.

The second version is more useful because it explains the reason for the change instead of only repeating the amount and percentage.

GASB 103 describes unusual or infrequent items as transactions and other events that are unusual in nature or infrequent in occurrence.

When present, the related inflows and outflows should be displayed individually as the last presented flows before the net change in resource flows in the applicable government-wide, governmental fund, and proprietary fund statements.

In plain English, significant items that are not part of normal activity should not be buried in ordinary revenue or expense line items. They also should not be netted.

The notes should identify the related program, function, or activity, if applicable, and state whether the item is within management's control.

During year-end close, finance teams should make a list of large, unusual, one-time, or nonrecurring transactions and events. Management should discuss potential unusual or infrequent items with the auditor before the financial statements are drafted.

Examples to evaluate may include unusual settlements, significant one-time events, major transactions outside normal operations, or other items that could distort the reader's understanding of current-year results if they are not presented clearly.

Governments with enterprise funds or internal service funds should pay close attention to GASB 103.

The standard keeps the distinction between operating and nonoperating revenues and expenses, but it provides specific definitions and requires noncapital subsidies to be reported separately.

The statement of revenues, expenses, and changes in fund net position should include, as applicable:

• Operating revenues.
• Operating expenses.
• Operating income or loss.
• Noncapital subsidies.
• A subtotal for operating income or loss and noncapital subsidies.
• Other nonoperating revenues and expenses.
• Income or loss before unusual or infrequent items.
• Unusual or infrequent items.
• Change in fund net position.

Operating revenues and expenses are revenues and expenses other than nonoperating revenues and expenses.

Nonoperating revenues and expenses include subsidies received and provided, endowment contributions, financing-related revenues and expenses, resources from disposal of capital assets and inventory, and investment income and expenses.

A revenue or expense that otherwise would be nonoperating may be operating if it is part of the proprietary fund's principal ongoing operations.

Subsidies generally include certain resources received or provided without goods or services being exchanged, when those resources affect the proprietary fund's current or future fees and charges, and all other transfers.

Governments should inventory all enterprise funds and internal service funds. For each fund, finance teams should review:

• Transfers.
• Grants.
• Investment income.
• Financing-related revenues and expenses.
• Capital asset disposal activity.
• Subsidies.
• Whether subsidies are capital or noncapital.
• Statement captions and subtotals.

Updating templates before audit drafting begins will reduce the risk of late changes during the financial statement review process.

If a government has major component units, GASB 103 requires each major component unit to be presented separately in the reporting entity's statements of net position and activities if doing so does not reduce readability.

If separate presentation would make the statements too crowded or difficult to read, combining statements of major component units should be included in the basic financial statements after the fund financial statements.

Governments should confirm the current component unit population and determine which component units are major. Then management should assess whether the government-wide statements remain readable if each major component unit is shown separately.

This is a presentation decision that should be made before the draft financial statements are assembled.

Budgetary comparison schedules should be presented as required supplementary information for the general fund and for each major special revenue fund that has a legally adopted annual budget.

Separate variance columns are required for:

• Original budget to final budget.
• Final budget to actual results.

Significant variations also need to be explained in notes to required supplementary information.

Finance teams should update budgetary comparison templates early. They should also maintain support for budget amendments throughout the year and develop a practical approach for identifying and explaining significant variations.

The best time to draft variance explanations is during year-end close, not at the end of the audit.

For 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.

The presentation should distinguish between operating, noncapital subsidy, and other nonoperating revenues and expenses.

This will matter most for stand-alone authorities and other entities that prepare annual comprehensive financial reports and operate primarily through business-type activities.

GASB 103 is important, but it is also targeted. Knowing what the standard did not require can help finance teams focus implementation efforts on the areas that actually changed.

GASB 103 does not require:

• A new schedule of government-wide expenses by natural classification.
• A new government-wide statement of cash flows.
• A new governmental fund statement of cash flows.
• Additional debt service fund presentation or disclosure requirements.
• Changes to recognition of elements in governmental fund financial statements.
• Application to immaterial items.

Before the financial statements are drafted, management should be able to answer these questions:

• What were the three largest reasons net position or fund balance changed this year?
• Can we explain significant current-year changes without simply repeating dollar changes and percentages?
• Did each major fund change for reasons that users will understand?
• Were budget amendments or final-to-actual variations significant enough to require clear explanation?
• Do any transactions or events appear unusual in nature or infrequent in occurrence?
• Are transfers supporting enterprise fund rates or otherwise meeting the definition of subsidies?
• Would separate presentation of each major component unit make the government-wide statements more useful or less readable?
• Are there currently known facts, decisions, or conditions that are expected to significantly affect future financial position or results?

GASB Statement No. 103 is a governmental accounting standard that improves how local governments present and explain financial statement information. It is mainly focused on communication, presentation, and consistency.

GASB 103 is effective for fiscal years beginning after June 15, 2025, and all reporting periods thereafter. For many June 30 year-end governments, that generally means the June 30, 2026 financial statements.

For many governments, GASB 103 will not significantly change how common transactions are recorded. Its larger impact is on how information is presented and explained in the financial statements.

MD&A should be more focused, current, and useful. It should explain why significant changes occurred, not just repeat dollar changes and percentages from the financial statements.

Governments with enterprise funds or internal service funds should review operating and nonoperating classifications, subsidies, transfers, financing-related activity, and required statement subtotals.

Start with last year's financial statements. Create a crosswalk identifying each section affected by GASB 103, then update the MD&A outline, proprietary fund statement templates, budgetary comparison schedules, and component unit presentation decisions.

GASB 103 should be treated as more than a compliance checklist. It is an opportunity to make the annual financial report more useful to councils, boards, management, citizens, creditors, grantors, and other readers.

A good test is simple: can a reasonable reader understand what happened during the year, why it happened, and what management already knows about the road ahead?

Please contact your Gabridge & Company engagement team with questions about applying GASB 103 to your government's financial statements.

Governmental Accounting Standards Board, Statement No. 103, Financial Reporting Model Improvements, issued April 2024.

Key areas addressed include objective and scope, MD&A, unusual or infrequent items, proprietary fund statement presentation and definitions, major component units, budgetary comparison information, statistical section information, effective date, and transition.

This newsletter is intended for general informational purposes only and should not be considered accounting, auditing, tax, legal, or other professional advice. Each government should evaluate GASB 103 based on its own facts and circumstances.