The Government Accounting Standards Board (GASB) recently issued Statement Number 102, Certain Risk Disclosures (“GASB 102”). GASB 102 requires state and local governments to disclose material concentrations and constraints in the notes of the financial statements. GASB 102 is effective for years beginning after June 15, 2024, and earlier application is permitted.
The purpose of GASB 102 is to provide information to the users of the financial statements regarding risks that may harm the state or local government by limiting its ability to acquire resources or control spending. GASB considered two approaches for disclosing risks in the notes to the financial statements:
- The first approach would have defined the pronouncements scope broadly by providing criteria so that the state and local government could decide which risks to disclose.
- The second approach would have provided specific risks by identifying conditions that would require disclosure.
GASB chose the second approach since they believe that identifying specific risks to provide disclosure would lead to consistent, comparable, and reliable risk disclosures among state and local governments.
GASB concluded that concentration and constraints should be the specific risks to be disclosed since those risks can restrict the state and local government’s ability to acquire resources and control spending. GASB also considered cyber, environmental, social and governance risks as a required disclosure, but ultimately concluded that those risks were outside the scope of this pronouncement but may be reviewed as part of future GASB projects.
Understanding Concentration and Constraint Risk Disclosures
A concentration is a lack of diversity related to an aspect of a significant inflow or outflow of resources. Examples of concentrations include direct or indirect benefit received from employers or industries that serve the government or benefit the government’s constituents, revenue received from another entity, workforce covered by collective bargaining, providers of financial resources such as financing and suppliers of material, labor, or services.
A constraint is a limitation that is imposed by an external party or by formal actions of the government’s highest level of decision-making authority. GASB decided to include a self-imposed constraint made by the government’s highest level of decision-making authority as part of the required disclosures since those constraints can impede operational decisions made by management. As a side note, the self-imposed constraint can be mitigated by further actions of the government’s highest level of discussion-making authority.
Examples of constraints include limitations on raising revenue or taxes such as caps imposed by law or another governmental unit, limitations on spending such as a budget constraint, limitations on incurrence of debt, and mandated spending imposed by another governmental unit.
GASB 102 requires disclosure of risk if all the following exists (assessment should be done for the primary government reporting unit and all other reporting units that report a liability for revenue debt):
- A concentration or constraint is known to the government prior to the issuance of the financial statements.
- The concentration or constraint makes the reporting unit vulnerable to the risk of a substantial impact. GASB concluded that “impact” conveys a financially disruptive effect on the normal functioning of government.
- An event or events associated with the concentration or constraint that could cause a substantial impact have occurred, have begun to occur, or are more likely than not to begin to occur within 12 months of the date the financial statements are issued.
GASB 102 requires the following disclosure in the notes to the financial statements for each impacted reporting unit:
- The concentration or constraint.
- Each event associated with the concentration or constraint that could cause substantial impact if the event had occurred or had begun to occur prior to the issuance of the financial statements.
- Actions taken by the government prior to the issuance of the financial statements to mitigate the risk.
For comparative financial statements, the risk disclosure applies only to the current period. Disclosure is not required if, prior to the issuance of the financial statements, the state and local government acts so that the concentration or constraint does not exist.
Appendix C of GASB 102 includes several illustrative examples and relevant disclosures that can be obtained through the GASB.org website.
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