Understanding the Impact of GASB Statement No. 102, Certain Risk Disclosures

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Governmental Accounting Standards Board Statement No. 102, Certain Risk Disclosures, was adopted to enhance the required risk disclosures of state and local governments by providing information to the users of government financial statements about certain concentrations and constraints.

GASB 102 applies to the financial statements of all state and local governments and is effective for fiscal years beginning after June 15, 2024, and reporting periods thereafter.

Concentrations or Constraints

Certain concentrations or restraints may limit a government’s ability to acquire resources or control spending.

The standard defines a concentration as a lack of diversity related to a significant inflow or outflow of resources. Examples of concentrations include workforces covered by collective bargaining agreements and suppliers of material, labor, or services.

A constraint is a “limitation that is imposed by an external party or by formal action of the government’s highest level of decision-making authority.” Examples of constraints include limitations on raising revenue, spending, incurring debt, and mandated spending.

In its basis for conclusions, the GASB noted that a constraint imposed by formal action of the government’s governing body can expose the entity to risk comparable to one imposed by a third party, though it acknowledged that internal constraints may not be as difficult to mitigate.

Disclosure Criteria

Disclosure is required if all the following criteria are met:

  1. A concentration or constraint is known to the government prior to the issuance of the financial statements.
  2. The concentration or constraint makes the government vulnerable to the risk of a substantial impact.
  3. An event associated with the identified concentration or constraint that could cause 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.
    1. “More likely than not” means a likelihood of more than 50%.
    2. Note the departure from the current going concern guidance, where the timeframe is based on the date of the financial statement. The financial statement issuance date used in the standard would be correlated with the auditors’ report date.

If mitigating actions taken by the government before the issuance date cause any of the three criteria to not be met, disclosure is not required.

If the criteria have been met and no mitigating actions have been taken, the following disclosures are required:

  1. A description of the concentration or constraint.
  2. A description of the event(s) associated with the concentration or constraint that could cause a substantial impact.
  3. Actions taken by the government to mitigate the risk.

The assessment related to concentrations and constraints disclosures should be made for the primary government. If a government has an individual reporting unit or fund that reports a liability for revenue debt, the government also needs to assess the disclosure criteria for that specific reporting unit.

“Vulnerable to the Risk of Substantial Impact”

This phrase conveys a degree of risk that is more than only the existence of a concentration or constraint. In Basis for Conclusions paragraph B22, the board provides an example of a state’s legal debt limit for general obligations bonds as a constraint.

While this constraint applies to all governments to a certain extent, only those whose general obligation bond outstanding is approaching its legal debt limit might make that government vulnerable to the risk of a substantial impact.

Event Occurrence

The Exposure Draft included a proposal that required governments to identify events that will cause a substantial impact, but the board modified the disclosure criteria in the final statement to require governments to identify events that could cause a substantial impact. The board concluded the term “could” was more suitable because it conveys less certainty than “will.”

In paragraph B24 of the Basis for Conclusions, the board also notes that in the debt limitation scenario described above, the disclosure requirement would likely be triggered if coupled with an event or events that may require additional borrowing.

Mitigation

The statement limits disclosure to only describe mitigating actions that had occurred prior to the issuance of the financial statements. Planned mitigations may not be included in the footnote. Note that if mitigation actions caused any of the disclosure criteria to no longer be met, none of the disclosures are required.

Effective Date and Transition

The requirements of this statement are effective for fiscal years beginning after June 15, 2024, and are applicable for the June 30, 2025, reporting year.

Considerations for Implementing Statement No. 102

As noted in the statement’s basis for conclusions, the GASB maintained a narrow scope when developing the standard. The standard may not result in a footnote requirement in a particular year. There is a requirement for ongoing assessment of constraints and concentrations that should be monitored for potential future disclosure.

The information required to be disclosed by the statement should relate to circumstances in effect as of the date the financial statements are issued, therefore, governments should not repeat prior-year disclosures. They should apply the disclosure criteria to circumstances in effect as of the date the current year statements are issued, even when presenting comparative financial statements.

As your government begins to assess relevant constraints and concentrations, we note the following constraint and concentration examples are included in Appendix C of the statement, and encourage you to read through the examples and analysis as you begin your own assessment:

  • City airport fund revenue bond, where charges for services are pledged and a large airport customer terminates service to the airport.
  • Concentration of workforce covered by a collective bargaining agreement.
  • Mandated spending constraint imposed by state regulation.
  • Concentration of one large employer in a small county.

Getting Started

The initial analysis of information necessary to implement the standard will require an assessment and documentation of current constraints and concentrations within the government. For each constraint or concentration identified, an estimate of magnitude should be made to determine whether the government might be vulnerable to a substantial impact if a triggering event should occur.

The assessment should be performed at regular intervals to determine the risk’s status or whether a triggering event might have or is expected to occur.

If you have questions about GASB Statement No. 102, Certain Risk Disclosures or governmental accounting, contact us. We’re here to help.