GASB 103 and 104: What State and Local Government Entities Need to Know

State and local government entities, which include municipalities, counties, special districts, authorities, and other organizations that follow Governmental Accounting Standards Board (GASB) guidance, are approaching one of the most significant updates to governmental financial reporting in over two decades. GASB has issued two new standards, Statement No. 103, Financial Reporting Model Improvements, and Statement No. 104, Disclosure of Certain Capital Assets, aimed at improving clarity, consistency, and decision-usefulness of financial statements.

Both standards are effective for fiscal years beginning June 15, 2025, meaning governments with a June 30 year-end will be the first required to implement the standards in their financial statements. While neither standard fundamentally restructures the reporting model, both introduce changes that will require thoughtful preparation.

GASB 103: A More Analytical and Consistent Reporting Model

GASB 103 focuses on strengthening key components of the existing financial reporting framework rather than replacing it. Its primary goal is to enhance how entities communicate financial results to stakeholders, including taxpayers, governing boards, and creditors.

One of the most significant changes is to Management’s Discussion and Analysis (MD&A). MD&A remains required supplementary information that precedes the basic financial statements, but GASB 103 refines its structure into five sections and emphasizes that entities should focus on explaining why financial results changed, rather than simply restating numbers already presented in the analysis. The intent is to move away from “boilerplate” disclosures and toward clearer, more meaningful analysis that helps users understand the underlying drivers of financial performance. GASB 103 narrows that scope, removes certain topics, most notably budgetary variance discussions and emphasizes focused, decision-useful analysis. The five required areas are: overview of the financial statements, financial summary, detailed analyses, significant capital assets and long-term financing activity, and currently known facts, decisions, or conditions. MD&A, in many governments’ financial statements, is the only place you can find comparative information. Preparers of MD&A should consider describing the reasons for change so that a reader without detailed knowledge of governmental accounting can understand what is being reported.

Another key update relates to the reporting of unusual or infrequent items, a single category replacing special and extraordinary items These transactions and events, which are either unusual in nature or occur infrequently, must now be presented separately in the financial statements, with related inflows and outflows shown individually (gross) and not netted, as the last presented flow(s) of resources prior to the net change in resource flows in the government-wide, governmental fund, and proprietary fund statements of resources flows. This improves transparency by helping users distinguish one-time events from ongoing operations, which is critical for evaluating trends and long-term financial health.

GASB 103 also introduces important changes to proprietary fund reporting, particularly through the definition of operating and nonoperating revenues and expenses and the introduction of a required subtotal for operating income (loss) and noncapital subsidies.

The most judgmental aspect of implementation will determine what qualifies as a subsidy. GASB 103 defines subsidies broadly to include resources received from another party or fund for which the proprietary fund does not provide goods or services, and that directly or indirectly keep fees and charges lower than they otherwise would be. This also includes certain resources provided to other funds and transfers that effectively support operations. Because this determination requires significant judgment, it is also an area where additional implementation guidance is expected and where preparers and auditors should anticipate increased focus during adoption.

In practice, this change will require many governments to reassess how revenues and transfers are classified. For example, transportation-related business-type activities such as airports or transit systems may charge users for services but are often substantially supported by tax allocations, interfund transfers, or other nonexchange revenues. Under GASB 103, those inflows may meet the definition of subsidies and be reported as nonoperating, which could significantly change how operating results are presented.

As a result, governments should begin evaluating revenue streams now, particularly where operations are supported by general revenues or transfers, as these determinations will require judgment and may lead to reclassification within the financial statements.

GASB 103 also updates how governments present budgetary comparison information. Budgetary schedules must now be presented as required supplementary information (RSI) rather than as basic financial statements. In addition, governments are required to present variance columns showing differences between original and final budget amounts, as well as between final budget and actual results.

A key change is the relocation of variance explanations. Under prior practice, many governments included explanations of significant budget-to-actual variances within MD&A. GASB 103 removes that concept from MD&A and instead requires those explanations to be presented as notes to the budgetary comparison schedules within RSI. This change is intended to better align the explanations with the underlying data while keeping MD&A focused on broader financial analysis.

Governments that present an annual comprehensive financial report should also be aware of changes to the statistical section. GASB 103 requires financial trends information, including changes in net position, to align with the updated reporting model. For governments reporting only business-type activities, this may require updates to historical schedules to reflect revised classifications, including the treatment of unusual or infrequent items and the distinction between operating and nonoperating activities.

GASB 104: Enhancing Capital Asset Transparency

While GASB 103 is broad, GASB 104 is more targeted, focusing exclusively on capital asset disclosures. Importantly, it does not change how capital assets are recognized or measured, only how they are presented in the notes to financial statements.

Under GASB 104, entities must provide separate disclosures for certain types of capital assets, including lease assets, public-private and public-public partnership assets, subscription-based IT arrangement assets, and other intangible assets. These categories have become more prevalent with the implementation of recent GASB standards, and separate disclosure improves transparency and comparability.

The standard also introduces new requirements for capital assets held for sale. A capital asset is considered held for sale when the entity has decided to pursue its sale, and it is probable that the sale will be completed within one year of the financial statement date. For these assets, entities must disclose the ending balance by major class, including both historical cost and accumulated depreciation, as well as the carrying amount of debt for which those assets are pledged as collateral.

These enhancements are designed to provide financial statement users with better insight into an entity’s asset base, liquidity considerations, and future financial plans.

What Entities Should Do Now

Although both standards are manageable, they require planning, particularly for finance teams already managing multiple reporting requirements.

Entities should begin by revisiting MD&A processes to ensure they align with the clarified expectations under GASB 103. While the requirement to explain changes from the prior year has not changed, the standard reinforces that MD&A should clearly describe the reasons behind those changes, rather than simply presenting amounts or percentage differences.

Finance teams should also review proprietary fund reporting practices, especially how operating and nonoperating items are classified, and prepare for the addition of the new required subtotal.

For GASB 104, entities will need to revisit their inventory of capital assets to ensure that lease assets, subscription assets, and other intangible assets are identified and tracked appropriately for disclosure purposes. Processes should also be established to evaluate whether any assets meet the criteria for classification as held for sale at each reporting date.

Early coordination with auditors is critical, particularly for entities that anticipate areas requiring professional judgment, such as classification, disclosure disaggregation, or transition considerations.

Positioning for a Smooth Implementation

GASB 103 and 104 are designed to help entities tell a clearer and more transparent financial story. While the changes are not disruptive to the underlying accounting model, they will elevate expectations around analysis, consistency, and disclosure.

Entities that invest time now in updating templates, refining processes, and aligning internal teams will be best positioned for a smooth implementation in 2026 and will ultimately provide stakeholders with more meaningful financial information.

Citrin Cooperman’s governmental audit team is actively working with entities to navigate these changes. With the right preparation, implementation of these standards can be a strategic opportunity, not just a compliance exercise, to enhance the value of your financial reporting. Please reach out to Sardou Mertilus or one of our governmental professionals for further conversation on how we can help you navigate this changing standard.