GASB 103: What Government Entities Need to Know About Financial Reporting Model Improvements

Governmental financial statements are only as valuable as they are clear. With Statement No. 103, Financial Reporting Model Improvements, the Governmental Accounting Standards Board (GASB) aims to make government financial reporting easier to understand, more transparent, and more useful to the people who rely on it. The statement refines key parts of the existing reporting model, including how governments present information in management’s discussion and analysis, how they classify certain revenues and expenses, and how they report unusual or infrequent items.

The requirements are effective for fiscal years beginning after June 15, 2025, so implementation is already underway for many governments. If they haven’t already, finance teams should begin evaluating how the changes will affect financial statement presentation, disclosures, and the processes used to prepare them.

GASB 103 is a targeted update to the governmental reporting model rather than a complete overhaul. It applies to all state and local governments.

GASB issued statement 103 with three primary aims:

GASB 103 makes changes in five key areas:

GASB 103 keeps the requirement that basic financial statements be preceded by MD&A, but it tightens MD&A reporting requirements. MD&A is now limited to five sections:

The emphasis is on analysis rather than repeating numbers. The detailed analyses should help readers understand why balances and results of operations changed from the prior year, not simply present the amounts or percentages by which they changed.

The statement also targets boilerplate. Governments are directed to present only the most relevant information, focused on the primary government, and to avoid unnecessary duplication.

Budgetary variance discussions are the main item moving out of MD&A. Previously, MD&A was required to discuss significant variations between original and final budget amounts and between final budget and actual results. Under GASB 103, that discussion moves to notes to required supplementary information (RSI).

Under GASB 103, budgetary comparison information must be presented in a single way, as required supplementary information (RSI). Governments can no longer choose to report it as a basic financial statement.

Budgetary comparison schedules are required for the general fund and each major special revenue fund that has a legally adopted annual budget. For most governments, the general fund is the largest and most closely watched budget, so this is where the change will be felt most. The same RSI requirement applies to any major special revenue fund with a legally adopted annual budget.

Budgetary comparison schedules must show more than the budget and the actual results. There are two kinds of variance to report, and each needs its own explanation.

One of the most consequential changes in GASB 103 is how proprietary funds distinguish operating from nonoperating items. The statement replaces the prior flexibility that let management set its own operating and nonoperating policies with defined presentation categories and new subtotals on the statement of revenues, expenses, and changes in fund net position. The goal is to address longstanding diversity in practice in how governments classify these items.

The approach is to define what is nonoperating and to treat everything else as operating. Nonoperating items include subsidies, investment income and expenses, financing-related activities, and the disposal of capital assets, and contributions to permanent and term endowments are also on the list.

The statement also introduces a formal definition of subsidies. Subsidies are resources received or provided where the proprietary fund does not exchange goods or services in return, and that directly or indirectly affect future fees and charges. They are classified as noncapital or capital based on the provider’s restrictions, not on how the money is ultimately spent.

A component unit is a legally separate organization that is closely tied to a government, usually because the government is financially accountable for it. Common examples include a public housing authority, a transit or airport authority, a hospital, a school or library district, or a foundation that raises money on the government’s behalf.

The government doesn’t run these organizations as ordinary departments, but its financial statements wouldn’t give a full picture without them. A government’s financial statements therefore include its component units, and the statements distinguish the primary government from any discretely presented component units.

GASB 103 changes how the most significant component units appear in the financial statements. The requirement applies to major component units, meaning the larger or more significant ones, rather than every component unit. Governments must now present each major component unit separately in the reporting entity’s statement of net position and statement of activities, unless doing so would reduce the readability of those statements. In practice, that typically means a separate column for each major component unit.

GASB 103 changes how governments report one-off events in their resource flows statements.

Previously, a special item was a transaction or event that was either unusual in nature or infrequent in occurrence and also within the control of management. An extraordinary item was a transaction or event that was both unusual in nature and infrequent in occurrence and was  outside the control of management. The statement eliminates both categories, along with the separate guidance for presenting them.

In their place is a single category. Unusual or infrequent items are transactions and other events that are unusual in nature or infrequent in occurrence, as those terms are defined in GASB Statement 62.

Unusual or infrequent items are presented individually, separately and on a gross basis, as the last flows of resources before the net change in resource flows. The notes must also identify each item’s related program, function, or identifiable activity, where applicable.

Some examples that should be evaluated when considering unusual and infrequent items include:

However, the analysis depends on individual circumstances. For example, some natural disasters are truly rare and others could reasonably be expected to recur. Events are presumed to be part of ordinary activities unless the evidence clearly supports classifying them as unusual or infrequent, so the conclusion should be supported and documented.

Financial statement templates. Start with the statements themselves. Templates may need to accommodate the new subtotal for operating income (loss) and noncapital subsidies in the proprietary fund statement, a line for unusual or infrequent items as the last flow before the net change, and separate columns for major component units. They also need the variance columns for the budgetary comparison schedules.

MD&A framework. Check whether the current structure follows the five required sections, and whether the narrative explains why balances and results changed rather than restating amounts.

Budget reporting processes. Budgetary comparison information now belongs in required supplementary information, for the general fund and each major special revenue fund with a legally adopted annual budget.

Fund classifications. Review how revenues and expenses are classified in proprietary funds against the new definitions of nonoperating items, and update the chart of accounts where they differ. Identify subsidies and transfers, and document whether each is capital or noncapital.

Component unit reporting. Confirm which component units are major and whether each can be presented in separate columns without hurting readability. If not, plan for combining statements after the fund financial statements.

A simple sequence of assessment, gap analysis, and communication works for most governments.

Assessment. Inventory what the standard touches: statements, MD&A, budget schedules, fund classifications, component units, and any unusual or infrequent items in the period. Note which are already in line with the new requirements and which are not.

Gap analysis. For each item, compare current practice with the requirement and record what needs to change, who owns the change, and what it depends on. Some gaps are quick, such as adding a column or subtotal, while others, such as reclassifying accounts, take more time. Prioritize by effort and by what must be in place before year-end close.

Stakeholder communication. Much of the information comes from outside the finance office, so bring in budget staff, department heads, component unit managers, and external auditors early.

Wherever your government is in the process of implementing GASB 103, a CPA firm can help:

Have questions about how to implement GASB 103? Talk to our team.