GASB approves financial reporting model improvements

By Laura Hay, CPA, CAE, OSCPA executive vice president

Nearly 25 years since the issuance of GASB Statement No. 34, and more than ten years in the making, GASB Statement No. 103, Financial Reporting Model Improvements were issued in April 2024 to modernize the governmental financial reporting model in the U.S. Its requirements are designed to enhance the decision usefulness of governmental financial reports, better assess financial health and accountability and address certain application issues.

Key improvements include:

1. Enhancing management’s discussion and analysis

Management’s discussion and analysis (MD&A) continues to be required preceding the basic financial statements and should be written for a reader who may not have a detailed knowledge of governmental accounting and financial reporting. The MD&A should discuss significant activities that had either a positive or a negative effect on changes in current-year balances and results of operations in comparison with the prior year. The Statement puts a strong emphasis on discussing the reasons for changes rather than simply presenting change amounts or percentages.

The MD&A discussion should focus on the primary government and is limited to five sections: (1) Overview of the Financial Statements, (2) Financial Summary, (3) Detailed Analyses, (4) Significant Capital Asset and LongTerm Financing Activity, and (5) Currently Known Facts, Decisions or Conditions. The Statement emphasizes avoiding repeat or boilerplate explanations.

2. Changes to presentation of the proprietary fund statement of revenues, expenses and changes in fund net position

Statement No. 103 changes the presentation of information in the proprietary fund statement of revenues, expenses and changes in fund net position. Following a subtotal for operating income (loss), the financial statement will include a new section for noncapital subsidies, with a subtotal for operating income (loss) and noncapital subsidies preceding other nonoperating revenues and expenses.

The Statement clarifies the definitions for operating and nonoperating revenues and expenses. Operating revenues and expenses are defined as revenues and expenses other than nonoperating revenues and expenses. Nonoperating revenues and expenses are defined as (1) subsidies received and provided, (2) contributions to permanent and term endowments, (3) revenues and expenses related to financing, (4) resources from the disposal of capital assets and inventory, and (5) investment income and expenses.

Subsidies are resources received from another party or fund for which the proprietary fund does not provide goods or services to the other party or fund that directly or indirectly keep current fees and charges lower than they should be otherwise. Subsidies also include resources provided to another party or fund without goods or services being returned, recoverable through the proprietary fund’s current or future pricing policies.

The statistical section for governments that are engaged in only business-type activities or only business-type and fiduciary activities should report the same categories of revenues and expenses that are required for the statement of revenues, expenses and changes in fund net position.

3. Budgetary comparison information

Governments are required to present budgetary comparison information only as required supplementary information (RSI) for the general fund and each major special revenue fund that has a legally adopted budget. Budgetary comparison information should include (1) variances between original and final budget amounts and (2) variances between final budget and actual amounts. An explanation of significant variances is required to be included in notes to RSI.

GASB concluded that budgetary information did not rise to the level of financial statement information, removing the current option for the budget comparison to appear as a financial statement.

4. Major component unit information

Each major component unit is required to be reported separately in the reporting entity’s statement of net position and statement of activities if it does not reduce the readability of the statements. If the readability of the statements would be reduced, combining statements of major component units should be presented after the fund financial statements.

Statement No. 103 eliminates the option to disclose condensed financial statements in the notes, because GASB concluded that component information was so important that disclosure in notes would be insufficient.

5. Unusual or infrequent items

Governments previously had difficulty distinguishing between extraordinary items and special items. The Statement combines these into unusual or infrequent items, which are described as transactions and other events that are unusual in nature and/or infrequent in occurrence. Governments are required to display the inflows and outflows related to each unusual or infrequent item separately, as opposed to netted, as the last presented flow(s) of resources prior to the net change in resource flows in the government-wide, governmental fund and proprietary fund statements of resource flows.

Effective date

The Statement is effective for fiscal years beginning after June 15, 2025, with early application encouraged.

How the changes will affect governmental financial reporting in Ohio

Members of OSCPA’s Accounting and Auditing Committee weighed in on the GASB changes.

“I view this as a necessary refresh of the MD&A, with discussion of reasons for changes providing more useful information,” said Danny Sklenicka, CPA, Rea & Associates. “Focusing on the changes to income statement terminology and presentation will be important; and the budgetary comparison information changes are also significant in Ohio, as many auditors would opine on budgetary schedules for the general fund and each major special revenue fund. Now, they will be required to be RSI, for which auditors disclaim an opinion.”

“GASB was originally signaling a major overhaul to the income statement,” said Amr Elaskary, CPA, Clark Schaefer Hackett & Co. “The final Standard scaled back to more presentation changes, which will make the Standard easier to implement. Also, I think the entities that apply for the GFOA Certification may have an easier time implementing the MD&A rules, as the GFOA already calls for these items in their comments.”

“The MD&A, operating/nonoperating revenue, and budgetary RSI will affect nearly every client across the State of Ohio,” said Brett Burns, CPA, Perry & Associates. “In particular, many MD&A disclosures have become more boilerplate, and this will necessitate a move to truly providing next-level analysis.”

Next steps

• New line items and subtotals will require reaggregating accounts in financial reporting systems.

• Accounting processes may need to be updated to capture the required information.

• Approaches to additional analysis in the MD&A should be discussed with leadership and key stakeholders.

• Continue to monitor the GASB agenda for items excluded from this Statement to be revisited in future projects.

Laura Hay, CPA, CAE, is executive vice president of The Ohio Society of CPAs and the staff liaison to the Accounting, Auditing, Professional Ethics Committee and the Peer Review Ethics Committee. She can be reached at Lhay@ohiocpa.com or 614.321.2241.