Getting It Right in Year One: Navigating GASB 103 Requirements

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By Katherine Patnaude, CPA, Partner and Jennifer Clark, CPA, Director

Key Takeaways

1. GASB 103 introduces significant changes to core financial reporting areas.
Effective for fiscal years beginning after June 15, 2025, GASB 103 updates guidance on Management’s Discussion & Analysis (MD&A), budgetary comparison information and proprietary fund statements. Preparing now can help align internal records and reporting workflows.

2. Budgetary comparison schedules must meet new formatting and disclosure requirements.
Entities will need to add a column showing budget changes, define material variance thresholds and provide explanatory notes for significant differences between original and final budgets and actual results.

3. MD&A requires greater detail and clarity.
Boilerplate language is no longer acceptable in MD&A and explanations must be specific rather than generic.

Governmental Accounting Standards Board (GASB) Statement No. 103,  Financial Reporting Model Improvements, is effective for fiscal years beginning after June 15, 2025. While most governments won’t issue GASB 103-compliant statements until at least 2026, now is the time to ensure your reporting processes, budget documentation and internal records are aligned with the new requirements.

This article breaks down the key provisions of GASB 103 and offers practical guidance to help you stay on track as implementation begins.

Background and Implementation

GASB 103, first issued in April 2024, introduced revisions across several core areas of the financial reporting model, including:

• Management’s discussion and analysis (MD&A).
• Unusual and infrequent items.
• The proprietary fund statement of revenues, expenses and changes in fund net position.
• Major component unit presentation.
• Budgetary comparison information.
• Financial trend information in the statistical section.

For most governments, GASB 103 becomes effective as follows, depending on your fiscal year-end:

• June 30, 2026
• November 30, 2026
• December 31, 2026
• May 31, 2027

Budgetary Comparison Information

GASB financial statements previously required the presentation of budgetary comparison schedules for the general fund and all major special revenue funds with a legally adopted budget. This schedule could be presented as either a basic financial statement or required supplementary information (RSI). Under GASB 103, the schedule is required to be presented as RSI.

There are two key changes in the requirements for this schedule under GASB 103:

1. An additional column showing the change from the original budget to the final budget in addition to the variance between the final budget and actual amounts previously required. Some entities may already include this column, labeled differently (e.g., “additional appropriations and transfers”).
   
   
2. Entities will be required to include notes to the schedule to explain any significant variances between the original and final budget and between the final budget and actual results. This means that if your entity is in the habit of budgeting extra funds in certain lines to be transferred where they are needed later in the year, you will now be required to explain that in the notes to the schedule.

To help ensure compliance, we recommend taking this schedule from your most recent financial statement and:

• Adding the column for the change from original budget to final budget, if not already presented.
• Determining what dollar amount you would consider significant for your entity. You should consult with your auditor on this – it will likely be approximately 0.5% – 1.5% of the budget for that fund.
• Highlighting any variances from the original to final budget and from the final budget to actual results for those amounts that exceed your chosen threshold.
• Considering how you would explain these variances.

You can follow the above steps over multiple years for a better picture of any ongoing trends.

After completing the above analysis, keep in mind that variances will need to be explained for the lines presented on the budgetary comparison schedules. While you should budget as accurately as possible down to the individual account codes, variances for accounts grouped into the same line on the schedule will not need to be explained.

When implementing this standard, two variances you might continually see are caused by budgeting for leases and subscriptions. Most entities have continued to budget for leases qualifying for reporting under GASB Statement No. 87 and subscription-based information technology arrangements (SBITAs) qualifying for reporting under GASB Statement No. 96 in the functional expenditure where the payment for the lease/SBITA is recorded. As a result, if these expenditures are subsequently reclassified to principal and interest expenditure codes, a corresponding budgetary transfer is also needed.

Depending on the number and dollar value of these leases/SBITAs, this variance may need to be explained in the notes to the schedule. We recommend reviewing the amortization schedules for these liabilities during the budget development process and budgeting for the expenditures in the principal and interest codes in the original budget.

Management’s Discussion & Analysis (MD&A)

GASB makes it clear that it is no longer considered acceptable to use boilerplate language in the MD&A and that explanations must be specific rather than generic. For example, it is not sufficient to explain that an increase in expenditures within the general fund is due to “increases in general government support and employee benefits, offset by a decrease in public safety.” You are now required to explain not only what specifically changed but why. Explanations should include details such as “settling of a new collective bargaining agreement, which resulted in a decrease in the entity’s share of medical insurance” or “a decrease in heating costs due to a warmer winter than in the prior year.”

Because the MD&A will present changes from the current year to the prior year, your entity will need to give details surrounding these changes. We recommend keeping a document where you can make notes, as events happen, of anything that might cause increases or decreases significant enough to require explanation. Doing so will result in a more efficient completion of the MD&A. For example, if your entity has had a significant number of vacant positions during the current year, which you have been able to fill toward the end of the year, you should note that. That might be the explanation for an increase in expenditures within those functions during the following year.

While the topics are similar to previous standards, GASB 103 requires that the MD&A be limited to these five topics:

1. Overview of the financial statements
2. Financial summary
3. Detailed analyses
4. Significant capital asset and long-term debt financing activity
5. Currently known facts, decisions or conditions

This means that the format of the MD&A will change somewhat, but the MD&A should become much more robust and valuable to financial statement users.

Proprietary Fund Statements

For entities that have proprietary funds, GASB 103 has resulted in a change to the proprietary fund statement of revenues, expenses and changes in fund net position. While it is not the only change, the most significant change is the addition of the noncapital subsidies category to the statement. This new category will be presented before other nonoperating revenues and expenses. If your entity transfers funds into a proprietary fund, you will need to make sure that you differentiate between the purpose of the transfer: Is the transfer to fund a capital project or is it to subsidize the operations of the proprietary fund? That distinction should be clear for all transfers to the proprietary fund beginning in the year of implementation of GASB 103.

Additionally, GASB 103 defines nonoperating revenues and expenses. These are:

1. Subsidies received and provided (subsidies could include grants or transfers to/from other funds).
2. Contributions to permanent and term endowments.
3. Revenues and expenses related to financing.
4. Resources from disposals of capital assets and inventory.
5. Investment income and expenses.

All other revenues and expenses are considered operating. If any of the above revenues and expenses make up the fund’s primary operations, however, they should be reported as operating revenues. For example, if the fund is established to provide loans to entities to finance clean energy, the interest revenue would be reported as operating revenues.

Unusual or Infrequent Items

Another change resulting from GASB 103 is the new concept of unusual or infrequent items, which replaces extraordinary items and special items.

* Each example or scenario must be compared to the definition of either unusual or infrequent to determine which is the proper category for your entity based on your operations, location and situation.

In order to properly report unusual or infrequent items, the entity will need to report all inflows and outflows of resources (gross, not net) relating to the event or transaction. Additionally, the footnotes will need to disclose the program, function or identifiable activity that the item is related to and whether the item is within control of management.

If during the year you identify a transaction or event that may qualify for reporting under this category, be sure to track all associated revenues and expenditures.

Component Units

Since GASB 103 applies to all entities issuing GASB financial statements, contact management of any component units of your entity to ensure that they are aware of this change. The primary government and all of its component units are required to implement GASB 103 during the same reporting period.

Note that previous guidance allowed major component units to be presented using more than one method. Now, under GASB 103, each major component unit is required to be presented separately in the reporting entity’s statements of net position and activities, unless it reduces the readability of the statements. If this is the case, combining statements of the major component units should be included in the basic financial statements after the fund financial statements.

Illustrations

Due to the various changes applied by GASB 103, it may be challenging to understand how these financial statements will look after implementation. Luckily, GASB has provided 22 illustrations in Appendix C of GASB 103.

Contact Us

If you have questions about how GASB 103 may affect your reporting processes or if you’d like to discuss specific implementation considerations, please reach out to your PKF O’Connor Davies client service team or:

Katherine Patnaude, CPA
Partner
kpatnaude@pkfod.com | 860.419.3404

Jennifer Clark, CPA
Director
jclark@pkfod.com | 631.299.3476