GASB 103 Explained: Key Changes to Government Financial Reporting You Need to Know
If you work in government accounting or audit state and local government entities, GASB 103 is one of the most significant changes you’ll encounter this year. The Governmental Accounting Standards Board has overhauled the financial reporting model to improve transparency and comparability across government entities. In our practice at SW Accounting & Consulting Corp, we’re already helping clients prepare for the transition. Here’s everything you need to know. 😊
What Is GASB 103 and Why Does It Matter? 🤔
GASB 103, Financial Reporting Model Improvements, is a comprehensive update that redefines how state and local governments present their financial statements, with a focus on improving the usefulness of MD&A and the classification of operating and nonoperating activities.
The standard was issued by the Governmental Accounting Standards Board (GASB) and is effective for fiscal years beginning after June 15, 2025. It impacts five key areas of the financial reporting model:
- Management’s Discussion and Analysis (MD&A) — expanded detail requirements
- Operating vs. Nonoperating classification — new standardized definitions
- Subsidy reporting — new category requiring judgment
- Unusual or infrequent items — simplified presentation
- Major component units — single method of presentation required
In our experience working with government clients, the biggest challenge with GASB 103 will be the reclassification of operating and nonoperating items. Entities that previously classified bond interest expense as operating will need to move it to nonoperating. We recommend starting the transition analysis now rather than waiting until year-end.
How Does GASB 103 Change MD&A Requirements? 📊
GASB 103 requires governments to provide significantly more detailed explanations in their MD&A, moving beyond boilerplate language to explain the specific causes, timing, and impact of financial changes.
The standard structures the MD&A into five required sections: (1) overview of the financial statements, (2) financial summary, (3) detailed analyses, (4) significant capital asset and long-term financing activity, and (5) currently known facts, decisions, or conditions.
The key shift is in detailed analyses. Instead of simply stating that revenue increased by a dollar amount, governments must now explain:
- The amounts or percentages of significant changes
- Why those changes occurred and the magnitude of the impact
- Facts, decisions, or conditions that users might not be aware of
- Significant policy changes (e.g., tax rates, fee adjustments, hiring freezes)
- Important economic factors that significantly affect operations
📝 MD&A: Before and After GASB 103
Before (insufficient): “The Hospital’s net patient revenue increased by $50 million or 9% when comparing 20X5 to 20X6.”
After (compliant): “Effective July 1, 20X5, the State increased its portion of the Medicaid payor rates by 3%. Additionally, the Hospital experienced a 5% increase in outpatient activity. As a result, the Hospital’s net patient revenue increased by $50 million, or 9%, in 20X6 from 20X5.”
The standard also requires a new section on “currently known facts, decisions, or conditions” that management expects will have a significant effect on future financial position. This goes beyond traditional subsequent event disclosures — think reduced Medicaid reimbursement rates, new federal regulations, or upcoming major debt issuances.
What Are the New Operating vs. Nonoperating Definitions Under GASB 103? 🧮
GASB 103 replaces entity-defined policies with standardized definitions: nonoperating items now specifically include subsidies, endowment contributions, financing-related transactions, capital asset disposals, and investment income/expenses. Everything else is operating.
This is one of the most impactful changes for business-type activity (BTA) governments — entities like hospitals, universities, housing authorities, and utilities that provide services to the public for a fee.
Previously, each government established its own policies defining what qualified as operating vs. nonoperating. This led to significant diversity in practice where similar entities classified the same transactions differently.
Nonoperating Items Under GASB 103
| Category | Examples | Key Change |
|---|---|---|
| Subsidies received/provided | Government grants that keep fees lower | New category — requires judgment |
| Financing-related transactions | Bond interest expense | May move from operating to nonoperating |
| Endowment contributions | Permanent and term endowments | Always nonoperating |
| Capital asset/inventory disposals | Sale of equipment, land | Always nonoperating |
| Investment income/expenses | Interest income, unrealized gains | Always nonoperating |
How Should Governments Handle the New Subsidy Definition? 👩💼👨💻
GASB 103 defines subsidies as resources received or provided that directly or indirectly keep a proprietary fund’s fees lower than they would otherwise be, requiring governments to exercise significant judgment in classification.
The subsidy concept is entirely new and will require careful analysis. A subsidy is classified as a nonoperating item on the statement of revenues, expenses, and changes in fund net position (SRECNP). The definition includes:
- Resources received from another party where the fund does not provide goods/services in exchange, and the resources keep fees lower
- Resources provided to another party where the other party does not provide goods/services, and the costs are recoverable through pricing
- All other transfers between funds
Consider a municipal water utility that receives a general fund appropriation to keep water rates affordable for residents. Under GASB 103, this appropriation meets the subsidy definition: (1) the utility doesn’t provide goods/services back to the general fund, and (2) the resources keep water fees lower than they would otherwise be. This must now be reported as a nonoperating subsidy received.
What Other Changes Does GASB 103 Introduce? 📚
GASB 103 also simplifies the presentation of unusual or infrequent items and requires a single method for presenting major discretely presented component units.
Unusual or infrequent items: Governments no longer need to assess whether items are unusual in nature, infrequent, or within management’s control. All unusual or infrequent items must be presented as separate line items on a gross basis. Whether the item was within management’s control is disclosed in the notes instead.
Major component units: The standard now requires presenting each major discretely presented component unit separately in the reporting entity’s statement of net position and statement of activities. Alternative methods like footnote presentation are no longer permitted.
Statistical section: BTA governments presenting a statistical section must update it to reflect the new SRECNP presentation, distinguishing between operating, noncapital subsidy, and other nonoperating revenues and expenses. Earlier periods do not need to be restated, but the adoption of GASB 103 represents an accounting change that requires adjusting current reporting periods.
For additional technical guidance, EY has published a helpful Technical Line on GASB 103 that provides detailed illustrations and implementation considerations.
Conclusion: Key Summary 📝
GASB 103 represents the most significant overhaul of the government financial reporting model in years. Governments should begin evaluating the standard’s impact now, allocate resources for implementation, and monitor the GASB’s upcoming implementation guidance (comments due April 27, 2026).
If your entity is a BTA government or audits one, the time to start preparing is now. Our team at SW Accounting & Consulting Corp can help you navigate the transition. Have questions? Feel free to reach out! 😊
