Significant changes to governmental financial statements are coming for fiscal years beginning after June 15, 2025 (fiscal year 2026). The Governmental Accounting Standards Board (GASB) approved the issuance of GASB 103, Financial Reporting Model Improvement in April 2024. This removes the topic of Governmental Funds and is expected to create more consistency for MD&A and budgetary schedules.
MD&A
The bulk of the Management Discussion & Analysis (MD&A) will remain unchanged. Your Financial Statement will continue to be presented in a manner that avoids unnecessary duplication and must continue to include a brief discussion on the basic financial statements, including the relationships of the statements to each other, and the significant differences in the information they provide as well as a discussion and analysis of year-to-year changes.
The major change is that the discussion of significant variations between the original and final budget amounts as between the final budget amounts and actual results for the general fund must be presented as notes to budgetary comparison information – and all of this will be presented as required supplementary information (RSI).
Unusual or Infrequent Items
Under GASB 103, unusual or infrequent items should be presented in the following way:
- Presented individually as the last presented flows of resources prior to the net change in resource flows in the government-wide governmental funds, and proprietary funds statements of resource flows.
- Include both inflows of resources and outflows of resources.
- Inflows of resources and outflows of resources related to unusual or infrequent items should be displayed separately on the government-wide, governmental funds and proprietary funds statements of resource flows and should not be netted.
- Information regarding whether an unusual or infrequent item is within the control of management should be disclosed in the notes to financial statements.
Operating vs. Non-Operating – Proprietary Fund Statements
GASB 103 aims to provide clearer definitions for operating and non-operating items to reduce the amount of differences among governments and to clarify the results from operations for proprietary funds.
Operating revenues and expenses should be defined as revenues and expenses other than nonoperating revenues and expenses and a new subtotal of operating revenues and expenses should be presented before other non-operating revenues and expenses. This is designed to provide a better understanding of which revenues support operations.
Nonoperating revenues and expenses should be described as (1) subsidies received and provided, (2) revenues and expenses related to financing, (3) resources from the disposal of capital assets and inventory, (4) investment income and expenses, and (5) contributions to permanent and term endowments. Governments may need to reclassify certain revenues and expenses upon adopting GASB 103 due to the new definitions and the removal of flexibility previously allowed in defining operating and non-operating items.
Certain loan programs are an exception to this new classification system – interest revenue should be classified as operating revenue and interest expense as nonoperating expense.
Nonoperating revenues and expenses should be described as (1) subsidies received and provided, (2) revenues and expenses related to financing, (3) resources from the disposal of capital assets and inventory, (4) investment income and expenses, and (5) contributions to permanent and term endowments. Governments may need to reclassify certain revenues and expenses upon adopting GASB 103 due to the new definitions and the removal of flexibility previously allowed in defining operating and non-operating items.
Certain loan programs are an exception to this new classification system – interest revenue should be classified as operating revenue and interest expense as nonoperating expense.
The definition of subsidies should be revised to (1) indicate that all transfers should be included, (2) clarify that subsidies can have a direct or indirect impact on user fees and charges, and (3) clarify that subsidies should be classified as noncapital subsidies unless limited to capital purposes.
The statement of revenues, expenses and changes in fund net position should distinguish between operating and nonoperating revenues and expenses, as well as separately report noncapital subsidies and provide a subtotal for operating income (loss) and noncapital subsidies.
Budgetary Comparison Information
Going forward, the analysis of budgetary comparison is only required as required supplementary information (RSI). The Budgetary Comparison should show variances between the original and final budget as well as between the final budget amount and actual results and contain an analysis of significant variation with the notes to RSI.
Component Units
GASB Statement No. 103 makes key changes to how major component units are presented in governmental financial statements. Specifically, major component units must be presented separately in the reporting entity’s statements of net position and activities, unless doing so would reduce the readability of the statements. If readability is reduced, combining statements for major component units should be included in the reporting entity’s basic financial statements after the fund financial statements.
Avizo’s assurance team will take care of the majority of these changes for the governmental entities we work with to ensure compliance. We will provide an in-depth review of the changes, and work directly with you to re-define needed changes, such as of operating and non-operating items. If you have any questions regarding these changes and how they will affect your financial statements in 2026 and 2027, please do not hesitate to reach out.
Kirsten Owens, CPA
A Manager on our assurance team, Kirsten maintains expertise to provide auditing services with a specialization in Avizo’s governmental and construction-based niches. She is one of the primary leads on our in-field audits and completes training for all members of the firm before they visit clients offices.
