• Changing government auditors is a strategic move that impacts transparency, compliance, and public trust.

• To make a smooth transition, focus on legal requirements, institutional knowledge, and communication style.

• Choosing an audit firm with deep public sector experience can deliver long-term value beyond just the lowest bid.

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For state and local governments, changing auditors isn’t just a matter of compliance — it’s about trust, transparency, and public accountability. Whether you’re making a required rotation or looking for a fresh perspective, choosing a new audit firm involves more than a cost comparison. It’s an opportunity to reassess how your audit function supports your mission, enhances internal controls, and maintains the public’s confidence.

If you’re preparing to transition audit firms, here are five essential moves to keep your agency on track:

1. Align the Switch With State Requirements and Oversight Bodies

Unlike private companies, you operate in a regulatory environment that blends state laws, federal grant requirements, and oversight from entities like the Government Accountability Office (GAO) or single audit requirements under Uniform Guidance. Before you change auditors, take time to map out the legal and procedural requirements specific to your jurisdiction.

Some questions to ask yourself:

• Is auditor rotation required by statute or policy?

• Do procurement rules mandate an RFP process?

• Are there any reporting deadlines tied to federal funding that might impact your timing?

Failing to align with these standards can delay your financial statements or risk your standing with grantors. Check with your finance team and legal counsel to confirm compliance before moving forward.

2. Look for Government-Specific Experience

Auditing a city, county, school district, or special district isn’t the same as auditing a corporation. You need an audit team that understands fund accounting, GASB standards, budgetary compliance, and the unique challenges of public sector operations — like pension obligations, enterprise funds, or capital project reporting.

Ask potential firms:

• Do you have experience with similar-sized government entities?

• How familiar are you with GASB updates that affect our reporting?

• Can you provide guidance on complying with the Uniform Guidance if we receive federal funds?

This isn’t about general financial knowledge — it’s about understanding how to apply that knowledge in the context of the public good.

3. Create a Transition Plan That Protects Institutional Knowledge

A smooth transition isn’t automatic. If your previous auditors have been with you for years, they’ve likely developed deep institutional knowledge that won’t appear in a handoff memo. Losing that knowledge can affect the audit timeline and your team’s efficiency.

Start planning early:

• Assign a staff lead to coordinate the transition.

• Facilitate the successor auditors’ inquiries of the predecessor auditors by providing contact information early.

• Document major accounting treatments, past audit findings, and any open recommendations.

The more clarity you provide up front, the faster the new firm can ramp up — and the less disruption your internal team will face during the change.

4. Evaluate Communication Style and Accessibility

You know that a government audit doesn’t just result in a report — it may be discussed at public meetings, reviewed by oversight boards, or used by external stakeholders to assess performance. That makes the auditor’s communication style a critical factor.

When meeting with candidates, look for:

• Responsiveness: Will they answer questions promptly during audit season?

• Clarity: Can they explain complex issues in plain language to council members or board trustees?

• Proactiveness: Will they flag potential issues early instead of waiting until the final report?

A firm that keeps you informed and is available throughout the process can help you avoid surprises — and prepare you for responding to public scrutiny if tough questions arise.

5. Balance Cost With Public Value

Budgets are tight, and it’s tempting to go with the lowest bid. But remember — the audit is a public trust tool, not just a procurement line item. A low-cost provider who lacks specific government knowledge or experience may cost more in the long run if the audit takes longer or puts federal funding at risk.

Instead of focusing only on fees, ask:

• What’s included in the base fee? Are there charges for follow-up work or extra support?

• How many hours will be dedicated to planning and fieldwork?

• What’s your track record for completing audits on time?

Value means more than price — it’s about what you’re getting in return, and how the audit supports your long-term goals for transparency, accountability, and operational excellence.

Make the Move With Confidence

Switching auditors is more than a change in paperwork — it’s a strategic move that reflects your values and commitment to sound governance. When done thoughtfully, the transition can bring fresh insights, stronger internal controls, and more effective use of public resources.

Take the time to choose an audit team that understands the public sector, recognizes your operational complexities, and communicates clearly with your leadership. Because at the end of the day, this isn’t just about compliance — it’s about credibility.

How MGO Can Help

We help governments like yours navigate auditor transitions with clarity and confidence. With one of the largest and most experienced State and Local Government practices in the nation, we bring deep knowledge of GASB standards, single audit requirements, and performance expectations to support your goals for transparency, accountability, and operational excellence.

Reach out to our team today to find out how we can meet your audit needs.

The post Is Your Government Changing Auditors? Don’t Skip These 5 Steps appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• May apply to more types of leave than previous standard.

• Probability assessment requires analysis and judgment.

• Key changes include specific criteria for recognizing unused and used leave, measurement using current or expected pay rates, and streamlined disclosure requirements.

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As a state or local government entity, your financial reporting requirements are critical to maintaining transparency and accountability. One area that has seen an update is the treatment of compensated absences under Governmental Accounting Standards Board Statement No. 101, Compensated Absences (GASB 101). Understanding this standard is essential to accurately recognizing and measuring liabilities associated with employee leave benefits.

GASB 101 is effective for fiscal years beginning after December 15, 2023, and all reporting periods thereafter. In addition, the year of transition (implementation) will also need to consider the impact on beginning balances. For comparative financial statements (e.g., two-year presentation), you will need to consider the impact on starting with the earliest year presented.

This article breaks down the key aspects of GASB 101 and what it means for you.

What Are Compensated Absences?

Compensated absences refer to employee leave for which your organization provides monetary or non-monetary compensation. Examples include:

• Vacation leave

• Sick leave

• Paid time off (PTO)

• Holidays

• Parental leave

• Bereavement leave

• Certain sabbatical leaves (those where employees are not required to perform significant duties)

Compensated absences can involve direct payments to employees during their time off, payouts for unused leave upon termination, or non-cash settlements like conversions to defined benefit postemployment benefits.

Recognition: When Do You Record a Liability?

Under GASB 101, you must recognize liabilities for compensated absences in financial statements using the economic resources measurement focus. Specifically, liabilities should be recognized for:

1. Unused leave that employees are entitled to and meets specific criteria.

2. Used leave that has not yet been paid or settled.

For unused leave, a liability must be recognized if:

• The leave is attributable to services already rendered.

• The leave accumulates over time.

• The leave is more likely than not to be used or otherwise settled through cash or non-cash means.

For used leave, liabilities should reflect the amount of cash payment or non-cash settlement required. The probability assessment of “more likely than not” is defined as the likelihood of more than 50%. The application of the “more likely than not” criterion will require more effort in analyzing historical trends and utilizing judgment to build methods and assumptions into the calculation.

Leave Types Excluded from Recognition

Certain types of leave are excluded from liability recognition:

• Unlimited leave: Leave policies without specific limits do not accumulate and therefore are not recognized until used.

• Sporadic event-based leave: Parental leave, jury duty, and military leave are recognized only when the leave commences.

• Holiday leave: Holidays taken on specific dates are not at the discretion of employees and are recognized only when used.

Measuring Compensated Absence Liabilities

When measuring liabilities, GASB 101 provides clear guidelines:

• Use the employee’s pay rate as of the financial statement date.

• If leave is likely to be paid at a different rate in the future, measure it using that expected rate.

• For leave not attributed to a specific employee, such as pooled leave, use an estimated pay rate representative of the eligible population.

• Include salary-related payments (e.g., employer contributions to Social Security or Medicare) directly and incrementally tied to the leave.

Changes in pay rates that affect the liability should be recognized in the period the change occurs.

Examples of Recognized Liabilities

The following examples illustrate how liabilities for compensated absences are recognized under GASB 101, depending on the type of leave and its terms of use or payment:

1. Paid time off (PTO): PTO that accumulates without limits and is paid upon termination is recognized as a liability because it is more likely than not to be used or paid.

2. Sick leave: Sick leave that carries over to the next fiscal year but expires at the end of the calendar year is partially recognized based on the amount expected to be used before expiration.

3. Compensatory time: Comp time earned for overtime or holiday work that carries over and is paid upon termination is recognized as a liability.

Salary-Related Payments and Compensated Absences

Salary-related payments directly associated with compensated absences include:

• Employer shares of Social Security and Medicare taxes.

• Defined contribution pensions and OPEB expenses directly tied to leave usage.

These payments are recognized as liabilities incrementally, reflecting the portion directly tied to the compensated absences liability.

Relationship to Post-Employment Benefits

Compensated absences often intersect with post-employment benefits. For example, some governments allow unused sick leave to be paid into an account for future healthcare premiums. Such payments are included as liabilities under GASB 101 if they meet the criteria for recognition.

However, the effects of compensated absences on a government’s defined benefit post-employment liabilities are not included in the compensated absences liability itself.

Reporting in Governmental Funds

For governmental funds, liabilities for compensated absences should align with current financial resources measurement principles. Report only the portion of liabilities expected to be liquidated with expendable available financial resources.

Note Disclosures

GASB 101 requires specific disclosures related to compensated absences, including:

• Increases and decreases in liabilities for compensated absences (reported as net amounts if preferred).

• Clear presentation of the amounts recognized as long-term liabilities.

GASB 101 also eliminates certain disclosure requirements from GASB 34, simplifying reporting in this area.

What This Means for Your Government

GASB 101 provides clarity and consistency in accounting for compensated absences, so your financial statements more accurately reflect your organization’s obligations. To comply:

1. Review your current leave policies and determine whether they meet the recognition criteria.

2. Confirm your financial reporting systems can accommodate the specific measurement and disclosure requirements outlined in GASB 101.

3. Train your staff to understand these changes and their impact on your financial statements.

By proactively addressing these requirements, you can improve the transparency and accuracy of your financial reporting — reinforcing trust with your stakeholders and setting a solid foundation for future audits.

How MGO Can Help

Have questions about how GASB 101 applies to your government? Our State and Local Government team can help you navigate GASB 101 requirements and update your liabilities to account for compensated absences. Reach out to our team today to find out how we can support your compliance and reporting needs.

The post GASB 101 and Compensated Absences: What Your Government Needs to Know appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• GASB Statement No. 104, issued in September 2024, enhances financial reporting by requiring separate disclosures for certain intangible capital assets and capital assets held for sale.

• Governments must now categorize and disclose right-to-use intangible assets separately in financial statements, making sure you’re prioritizing clarity and consistency in reporting.

• Capital assets held for sale must meet specific criteria and be transparently reported, improving insight into government asset management and potential liquidity impacts.

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In September 2024, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 104, Disclosure of Certain Capital Assets (GASB 104 or Statement). GASB 104 provides users of government financial statements with essential information concerning two types of capital assets: (1) capital assets associated with leases and other intangible assets and (2) capital assets held for sale. The requirements of GASB 104 are effective for fiscal years beginning after June 15, 2025.

Background

For the past quarter century, GASB Statement No. 34, Basic Financial Statements – Management’s Discussion and Analysis – for State and Local Governments (GASB 34) has served as the primary source of guidance for disclosures related to capital assets in government financial statements. Subsequent to the issuance of GASB 34, the GASB has issued statements pertaining to intangible right-to-use assets (Statements 87, 94 and 96), which are considered capital assets. Research conducted by the GASB found that intangible right-to-use assets (for example, lease assets and subscription assets), as well as other long-lived nonfinancial assets, are common in government financial statements. There is diversity, however, in how financial statement users generally evaluate information about certain types of nonfinancial assets.

Based on this research, the Governmental Accounting Standards Advisory Council (GASAC) supported the GASB pursuing a project on the classification of nonfinancial assets, which the GASB added to its technical agenda in August 2021. This project resulted in the release of an Exposure Draft, Disclosure and Classification of Certain Capital Assets, in September 2023. After taking into consideration comments received on the draft, the GASB issued GASB 104 in September 2024, which was limited to disclosures of certain types of capital assets.

Key Considerations

A relatively short statement with a narrow focus, GASB 104 has two parts: (1) separate disclosure of certain capital assets and (2) capital assets held for sale.

Separate Disclosure of Certain Capital Assets

Within the capital asset note disclosures, governments should disclose capital assets related to intangible assets separately. This includes intangible right-to-use assets associated with GASB 87 (leases), GASB 94 (right-to-use assets recognized by an operator) and GASB 96 (subscription assets), as well as any other intangible asset. Intangible assets should be organized by major class of asset (for example, buildings or equipment); however, intangible assets representing the right to use an underlying asset should not be disclosed within the same major class as capital assets owned by the government.

Capital Assets Held for Sale

GASB 104 establishes that capital assets held for sale should be identified and disclosed within the notes to the financial statements. The Statement establishes two conditions a government should consider in determining whether a capital asset should be disclosed as held for sale: (1) the government has decided to pursue the sale and (2) it is probable the sale will be finalized within one year of the financial statement date. The evaluation as to whether a capital asset is held for sale should occur each reporting period. Factors to consider as to whether it is probable a sale will be finalized within one year of the financial statement date include, but are not limited to, (a) whether the asset is available for immediate sale in its present condition, (b) whether there is an active program to locate a buyer, (c) whether present market conditions support a sale of that type of asset and (d) whether there are regulatory approvals necessary for a sale to occur.

Capital assets held for sale should continue to be reported within the appropriate major class of capital asset and continue to be depreciated, if applicable. The notes to the financial statements should also include a separate disclosure of the historical cost and accumulated depreciation or amortization by major class of capital asset held for sale. For capital assets held for sale that are pledged as collateral, the carrying amount of debt should be disclosed by major class of asset.

Example Disclosures

The following illustration showcases the notable requirements to the capital asset note disclosures under GASB 104:

Illustration – Capital Assets Note Disclosure

The rows highlighted in red illustrate GASB 104’s requirement to separately disclose capital assets related to intangible assets within the capital asset note disclosures required by GASB 34, paragraphs 116 and 117.

Capital Assets Held for Sale Disclosure

Included in capital assets are buildings that are held for sale. Those buildings are reported in governmental activities. The historical cost of the buildings held for sale is $6,445 with accumulated depreciation of $3,760 as of June 30, 20X1. The buildings held for sale are pledged as collateral for debt with an outstanding balance of $2,465 as of June 30, 20X1.

Implementation Considerations

Financial statement preparers should review their current capital asset note disclosures and evaluate whether right-to-use assets and other intangible assets are correctly reported in accordance with GASB 104. If not, financial statement preparers should update the note disclosures.

Financial statement preparers should also evaluate whether any of their capital assets meet the requirements for disclosure as capital assets held for sale. Significant time and effort may be required to adequately assess the probability that the sale will be finalized within one year of the financial statement date. New note disclosures will need to be drafted to disclose the necessary information for capital assets held for sale.

Items to Communicate to Those Charged with Governance

The requirements of GASB 104 should improve financial reporting through better consistency in how financial statement preparers disclose intangible assets meeting the definition of a capital asset in the notes to the financial statements. In addition, the definition of capital assets held for sale and required note disclosures will promote greater transparency as to a government’s intention to sell capital assets in the coming year as well as provide financial statement users with essential information necessary to better understand how the potential sale may impact liquidity and to assess management’s operating effectiveness.

The limited scope of GASB 104 is an added benefit to financial statement preparers as the estimated time and effort needed to prepare for and implement the Statement should be less compared to other recent GASB standards. Nevertheless, proper planning and preparation is necessary to ensure successful implementation.

Effective Date

The requirements of the Statement are effective for fiscal years beginning after June 15, 2025, and all reporting periods thereafter. Earlier application is encouraged. The Statement should be applied retroactively to all periods presented in the basic financial statements, if practicable. If not practicable, the reason for not applying the Statement to prior periods should be disclosed.

How MGO Can Help

It’s important to know how to navigate the complexities of GASB 104 because it requires careful evaluation and strategic implementation to make sure you’re compliant and transparent in your financial reporting. MGO’s team of State and Local Government professionals has extensive experience in governmental accounting and can assist you with assessing your current capital asset disclosures, implementing the necessary changes, and preparing clear, accurate financial statements.

Whether you need guidance on classifying intangible assets, evaluating capital assets held for sale, or drafting new note disclosures, we provide tailored solutions to help your organization. Contact us today to learn how we can support your GASB 104 implementation efforts as we are closely monitoring changes as the situation evolves.

Written by Sam Thompson. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post GASB 104: Disclosure of Certain Capital Assets appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• GASB 103 introduces changes to governmental financial reporting, including updates to three key areas: Management’s Discussion and Analysis, presentation of proprietary fund financial statements, and budgetary comparison information.
• While significant, GASB 103 is less extensive than initially anticipated — with changes scaled back compared to earlier drafts.
• Governments should prepare for GASB 103 implementation by educating their teams, updating processes and templates, and considering the need for additional data collection or external assistance.

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The Governmental Accounting Standards Board (GASB) has issued Statement No. 103, Financial Reporting Model Improvements (GASB 103), introducing changes to the financial reporting model for state and local governments. This new guidance aims to enhance the clarity and usefulness of financial reports, providing stakeholders with more comprehensive and relevant information.

Here is what GASB 103 means for your government and how you can prepare for these changes.

Understanding the Scope of GASB 103

GASB 103 introduces new or modified guidance in several crucial areas:

1. Management’s Discussion and Analysis (MD&A)
2. Presentation of proprietary fund financial statements
3. Budgetary comparison information
4. Unusual or infrequent items
5. Information about major component units
6. Statistical section

Notably, GASB 103 does not change the basis of accounting or measurement focus for governmental funds financial statements.

Management’s Discussion and Analysis (MD&A)

The MD&A is an essential component of your financial reporting, providing a narrative overview and analysis of your financial activities for the reporting period. GASB 103 aims to make this section more insightful and user-friendly.

Follow these tips to align MD&A with GASB 103 emphasis and requirements:

• Keep your analysis objective and easily readable.
• Base it on currently known facts, decisions, or conditions.
• Present short- and long-term analyses (but don’t duplicate your transmittal letter or the same information within your MD&A).
• Write for users who may not have deep accounting knowledge.
• Compare current year results with the prior year, emphasizing the current year.
• Include three years of comparative data for two-year financial statement presentations.
• Use charts, graphs, and tables to enhance understanding.
• Focus on the primary government, distinguishing it from component units.

Remember, your MD&A should tell a story, not just present numbers. Explain why changes occurred and their significance. Avoid “boilerplate” discussions and focus on what’s most relevant each year.

MD&A Structure

GASB 103 requires that information presented in your MD&A be confined to topics in the following five sections:

1. Overview of the Financial Statements
2. Financial Summary
3. Detailed Analyses
4. Significant Capital Asset and Long-Term Financing Activity
5. Currently Known Facts, Decisions, or Conditions

Significant capital asset/long-term financing activity should include the following:

• Capital assets include intangible assets under GASB 51 and intangible right-to-use assets under GASB 87 (leases), GASB 94 (PPP), and GASB 96 (SBITA)
• Long-term financing includes debt and obligations from GASB 87 (leases), GASB 94 (PPP), and GASB 96 (SBITA)

Presentation of Proprietary Fund Financial Statements

For proprietary funds, your statement of revenues, expenses, and changes in fund net position must now distinguish between operating and nonoperating revenues and expenses, as well as separately report noncapital subsidies (a type of nonoperating revenue and expense). Here are simplified definitions of how these are categorized:

• Operating revenues and expenses — These are derived from the fund’s principal ongoing operations.
• Nonoperating revenues and expenses — Includes subsidies, contributions to endowments, financing-related revenues and expenses, capital asset disposal, and investment income.
• Subsidies — Resources exchanged between funds or other parties without a corresponding exchange of goods or services that either reduce the receiving fund’s fees/charges or are recoverable through the providing fund’s pricing policies. Subsidies also encompass any other transfers not meeting these specific criteria.

These changes aim to provide a clearer picture of your proprietary funds’ performance and financial position. Don’t underestimate the need to evaluate and separately classify subsidies from capital-related contributions and/or transfers, along with their impact on the statement of cash flows.

Budgetary Comparison Information

GASB 103 is standardizing how you present budgetary information. While budgetary comparison schedules continue to be required for the general fund and each major special revenue fund with a legally adopted annual budget, it must now be presented as required supplementary information (RSI) only (i.e., there is no longer a basic financial statement option). This includes:

• Variance columns — Separate columns for the variances between original and final budget amounts and final budget amounts and actual results.
• Explanation of variances in Notes to RSI — Detailed discussion explaining significant variations between the original and final budget amounts and final budget amounts to actual results. Also of note, the budget analysis will no longer be included in the MD&A.
  

Unusual or Infrequent Items

GASB 103 retains the definition of unusual or infrequent items from GASB 62 but adds requirements for presenting these items:

• Separate presentation — Present inflows and outflows related to unusual or infrequent items separately as the last presented flows of resources before the net change.
• Disclosure — Disclose in notes the program, function, or activity related to the unusual or infrequent item, and whether it is within management’s control.

Information About Major Component Units

Each major component unit should be presented separately in the statements of net position and activities — unless this reduces the readability of your statements. If readability is affected, you can include combining statements of major component units in your basic financial statements (after fund financial statements).

Statistical Section – Business-Type Activities (BTA)

Due to the changes in the presentation of proprietary fund financial statements discussed above, the statistical section needs an update for BTAs. In the statistical section of separately issued financial reports, governments engaged only in business-type activities or only in business-type and fiduciary activities should present revenues by major source for their business-type activities — distinguishing between operating, noncapital subsidy, and other nonoperating revenues and expenses.

How to Prepare Your Government for GASB 103

The requirements listed above will take effect for fiscal years beginning after June 15, 2025. Now that you know what’s coming, how do you prepare? Here’s a roadmap to help you navigate the transition:

• Educate your team — Help your finance team understand the new requirements. Consider training sessions or workshops on GASB 103.
• Assess your current reporting — Review your existing financial reports against the new standards. Identify areas that will need changes.
• Update your processes — Develop new procedures for collecting and presenting the required information. This might involve changes to your accounting systems or reporting tools.
• Revise your report templates — Create new templates for your financial statements and MD&A that align with GASB 103 requirements.
• Engage stakeholders — Communicate with your governing board, audit committee, and external auditors about the upcoming changes. Their input and understanding will be crucial.
• Plan for data collection — Some new requirements may necessitate collecting data you haven’t tracked before. Start planning for this now.
• Consider external help — If you’re short-staffed or need additional knowledge, consider engaging consultants familiar with GASB 103 to assist with the transition.

How MGO Can Help

Transitioning to the new requirements of GASB 103 can be complex. Our dedicated and experienced State and Local Government team can assist you in navigating these changes, facilitating a smooth transition and compliance with the new standards.

Reach out to our team today to learn how we can support your government in adopting GASB 103 and enhancing your financial reporting processes.

The post Preparing Your Government for GASB 103 Compliance appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Pension-Related Matters

GASB Pensions: Issues & Resources page of the GAQC Web site consolidates the various resources available to practitioners to assist with understanding the new standards and developing appropriate audit strategies. This page also includes links to various whitepapers and related auditing interpretations addressing cost-sharing and agent multiple-employer plans.

Comment Letters

• September 16, 2019 comment letter on GASB’s Exposure Draft, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
• September 16, 2019 comment letter on GASB’s Exposure Draft, Omnibus 20XX
• April 30, 2019 comment letter on GASB’s Exposure Draft, Leases Implementation Guide
• March 8, 2019 comment letter on GASB’s Exposure Draft, Fiduciary Activities Implementation Guide
• February 14, 2019 comment letter on GASB’s Financial Reporting Model Improvements & Recognition of Elements of Financial Statements

The post GASB Expert Panel Issues Special Report appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The GASB has launched their first initiative to establish and introduce guidelines for ESG-related disclosures.
• The GASB has released an interpretation of its existing standards to help government entities further enhance ESG-related disclosures.
• We can expect that ESG-related disclosures will shift from voluntary guidance to mandatory reporting at some point.

Reporting and disclosure of environmental, social, and governance (ESG)-related information has long been a priority in the private sector and is now emerging as a key area of focus for state and local governments (or “government entities”).

In response to interested parties seeking more ESG-related information (e.g., investors, credit rating agencies, preparers and auditors of financial statements, citizens, policymakers, etc.) from government entities, the Governmental Accounting Standards Board (GASB) has released a publication to clarify how ESG-related information intersects with their existing standards.

The bottom line: GASB’s stakeholders and interested parties are seeking to understand the impacts of ESG-related matters on a government entity’s cash flows, financial position, and overall responsibility for fiscal accountability — and the publication can be seen as a form of interpretive guidance to bridge the gap.

What’s Inside the Publication?

GASB’s “Intersection of Environmental, Social, and Governance Matters with Governmental Accounting Standards” document was released on May 31, 2022, and it provides clear examples for government entities to make new, or enhance existing, ESG-related disclosures by leveraging their current standards and principles.

Up front, the publication acknowledges that “a single consistent definition of ESG is not prevalent in practice today.” However, broad examples are included in the publication for each pillar (note, the below list has been shortened for purposes of this article):

The interpretive portion of the publication goes on to assist government entities with detailed examples of how ESG-related information coincides with the current GASB standards (note, the below are 3 of 25 total examples from the publication):

Why This GASB Release Matters

In publishing this document, GASB is taking a traditional first step to introduce concepts and guidelines that set a foundation ahead for new reporting and disclosure rules in the future (also referred to as “interpretive guidance”).

This is not the first time a regulator or standard setter has issued interpretive guidance specific to ESG. In 2010, the Securities and Exchange Commission (SEC) released their own interpretive guidance to provide clarity to the private sector on how to leverage existing financial reports to make disclosures related to climate change. While it was uncertain how many companies would incorporate climate-related information in their financial reports, many chose to do so (at last count by the SEC in 2020, 33% of the 6,644 filings submitted to the regulator contained some form of climate-related disclosure). The interpretive guidance, therefore, laid the groundwork for a new climate-related proposal issued by the SEC in March 2022.

Essentially, interpretive guidance has historically preceded the release of new, formal guidance and the creation of new standards. If this proves true in the public sector, then we will first see an increase from state and local governments enhancing their existing financial reports and disclosures by incorporating ESG-related information. Subsequently, and after further analysis by GASB of those enhanced disclosures, we will likely see the release of a new ESG-specific standard from GASB.

Increasing the Pressure

As demand for ESG-related disclosures increases, pressure will also increase on governments to begin providing or enhancing the disclosures in their financial reports. Further, if your entity issues securities (e.g., municipal bonds), you may encounter pressure from credit rating agencies depending on your approach (or lack thereof) to disclose and address ESG-related risks.

At present, ESG-related disclosures are contingent on a variety of factors (including but not limited to the government entity’s location, the historical or anticipated impacts of climate change, the level of ambition to become a leader in ESG-related reporting, etc.), but at some point these disclosures will shift from voluntary to mandatory.

How MGO Can Help

Many state and local governments have proactively disclosed ESG-related information on their websites or in standalone ESG / sustainability reports; however, GASB’s interpretive guidance demonstrates that ESG-information also needs to be considered when preparing your annual financial reports.

To stay ahead, MGO is helping the public sector as well as the private sector, develop and enhance their ESG disclosure strategies.

If you are interested in learning more, schedule a conversation with our ESG team today.

The post What GASB’s ESG Guidance Means for Your Government appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Under these new rules, the recording of leases, including assumptions, will significantly impact financial statement amounts and disclosures. Because governments use a variety of leasing arrangements to stabilize cash flows and reduce risk and uncertainty, the new requirements have strong accounting and financial reporting implications requiring a readiness plan. But first, why are these changes occurring?

The Backstory on GASB 87

It is important to have some context for the impending changes. The new statement was created because leasing guidance for state and local governments, as we know it, predates GASB’s existence. Because of this fact, the GASB’s conceptual framework was not taken into consideration, which includes definitions of assets, deferred outflows of resources, liabilities, and deferred inflows of resources. The updated guidance for lease accounting has rectified the situation, which is currently underreporting the economics of a lease transaction.

The new lease accounting standards will replace the current operating and capital lease categories with a single model for lease accounting, based on the concept that leases are a means to finance the right to use an asset.

Lease Assessment Timeline

With the effective date approaching quickly, the time to prepare is NOW!

Taking the Lead

The MGO GASB 87 Implementation Team has created a readiness assessment tool providing 10 preliminary implementation questions for consideration in your planning. These will not only prepare you for the new lease accounting standards, but may uncover matters that were not previously considered or identified.

This 10-step Implementation Plan is more of a general guide designed to assist you in identifying issues and help you organize your implementation process, rather than being an all-inclusive plan with specific technical guidance. As you evaluate the leases that are unique to your organization, you will most likely find that further research and analysis is necessary to ensure proper accounting considerations. For example, if you operate an airport and have aviation leases with air carriers regulated by the U.S. Department of Transportation and the Federal Aviation Administration, it will be necessary to understand how the regulated lease provisions affect your contracts, especially in situations where there are multiple lease components.

Preliminary Implementation Steps

This 10-step implementation plan is a general guide designed to assist you in identifying issues and help you organize your implementation process:

Step 1. Know where to find your leases.

It may seem obvious, but the first step in managing your leases is knowing where they are and, specifically, who is responsible for maintaining them. A good place to begin is with organizational charts. This is an example for a municipal government.

Depending on how your government contracts services, leases may be held centrally within the Finance Department or they may be decentralized in a multitude of departments, and possibly even managed by various entities.
Keep in mind that most leases that were previously expensed as operating leases will need to be accounted for as a lease obligation under the new standards, including option years if you are reasonably certain they will be exercised.

After the “where” has been established you can move into the “what” by identifying the universe of leases for your organization. This can be accomplished by evaluating the general ledger, reviewing contract files and surveying purchasing and operating departments, which leads to assembling a task force and formulating a plan for data collection.

Step 2. Assemble a lease implementation task force.

Identify people who are critical to a successful implementation. Consider including operational and legal staff who are already familiar with existing lease terms and conditions. The Lease Implementation Task Force should remain in place until the action plan for lease implementation is finalized. The benefits are many, including a collective think tank to evaluate and apply appropriate accounting treatment to each class of leases.
This task force may also be important to developing internal policies and procedures, such as whether or not a materiality threshold is appropriate, and whether or not lease accounting software should be utilized to manage the lease database. Furthermore, the implementation of the lease accounting standards is only a start, proper accounting treatment, including the remeasurement of the initial lease liability when certain lease changes have occurred and the evaluation of new leases subsequent to implementation, will be an on-going requirement.

Step 3. Identify the plan for lease data collection.

Converting your lease data into an organized structure is not without its challenges. You may encounter incomplete lease files, “hard copy versions only” of certain lease agreements, voluminous amendments, and the need to translate data from lease agreements into databases. This is all part of the process leading to a successful implementation of the new standards. Once you complete the database, you’ll then need to properly classify the leases.

Step 4. Understand what types of leases do NOT apply to GASB 87.

While a multitude of leases will be impacted by the new GASB 87 standards, there are several classifications that are not subject to GASB 87, including: intangible assets (such as computer software licenses); biological assets, including timber, plants and animals; inventories; service concession arrangement contracts; leases in which the underlying asset is financed with outstanding conduit debt; and supply contracts, such as power purchase contracts. Additionally, nonexchange agreements are exempt: for example, in the case of leasing property to a school district for a reduced price of $1/year for 30 years.

In the end, it is all about evaluating the leases subject to GASB 87.

Step 5. Understand what criteria to use when evaluating leases.

After eliminating leases that are not subject to GASB 87, as identified in Step 4, further classification of leases is necessary to ensure that the appropriate accounting treatment is applied. Short-term leases, contracts that transfer ownership, leases of assets that are investments (lessors only), and certain regulated leases (lessors only) all qualify as leases, but have differing accounting treatments than the typical long-term, noncancellable leases.

Step 6. Determine the lease term.

A lease term is defined as the period during which a lessee has a noncancellable right to use an underlying asset, plus any extension periods and options that are reasonably certain to be exercised. The GASB wants organizations to consider extension periods and options, so there is no incentive to structure initial lease terms to avoid meeting the definition of a lease. Since month-to-month leases that continue into a holdover period until a new lease is signed are not part of the noncancellable period or a formal extension, there is no basis in the standard for currently including them. Let’s discuss the calculation of the lease liability.

Step 7. The lease liability should be measured at the present value of payments expected to be made during the lease term.

The lessee should initially measure the lease liability at the present value of payments expected to be made during the lease term, which includes the following elements:

• Fixed payments
• Variable payments that depend on an index or a rate, initially measured using the index or rate as of the commencement of the lease term
• Variable payments that are fixed in substance
• Amounts that are reasonably certain of being required to be paid by the lessee under residual value guarantees
• The exercise price of a purchase option if it is reasonably certain that a lessee will exercise that option
• Payments for penalties for terminating the lease, if the lease term reflects the lessee exercising (1) an option to terminate the lease or (2) a fiscal funding or cancellation clause
• Any lease incentives receivable from the lessor
• Any other payments that are reasonably certain of being required based on an assessment of all relevant factors

For additional guidance and context to these bulleted items, refer to GASB 87 paragraph 21. In order to determine the present value, you may need to develop the discount rate.

Step 8. Consider how to calculate the lease liability for contracts with multiple components.

Proper classification of leases is not always straightforward when both lease and nonlease components are included in the same contract. What if a building lease has utilities and common area maintenance costs? The answer can be found in guidance covering contracts with multiple components, which identifies maintenance services as a nonlease component. What if a lease involves multiple assets and those assets have different lease terms? The answer can also be found in guidance covering contracts with multiple components, which provides that each asset should be accounted for as a separate lease component. Many rental leases embed the cost of utilities and common area maintenance into the lease payment. Contract components should be separated using the best estimate available based on observable information. If it is not practicable to estimate these separate costs, then account for the contract as a single lease unit (see GASB 87 paragraph 67).

Step 9. Measurement of the leased asset.

The initial measurement of the leased asset should be based on the measurement of the associated lease liability. In the case of contracts with multiple components, the value of the underlying leased asset is not always clearly stated in the agreements, and many lease agreements will not cover the life of the leased asset. Some leased assets may involve proprietary information that lessors are not willing to share. Therefore, determining the value of the underlying asset is not always straightforward in these cases. Whenever possible, identifying comparable assets that are sold in a market transaction is an important part of the process. You can then utilize the knowledge of internal or external experts who can provide a basis for an estimate.

You are now ready for the final step.

Step 10. Define the threshold for recording leases in the financial statements.

Unfortunately, while GASB provides explicit guidance on capitalization thresholds for capital assets, it does not specify any such consideration for lease obligations. Using a threshold may help you avoid recording leases that are immaterial and avoid a mismatch with leased assets that are too small to capitalize. A good starting point may be to use the capitalization thresholds that are already established for your organization. Once you determine your initial criteria for establishing leases, verify that it does not exclude significant leases from application of the new standard. You can revise these thresholds as needed.
Now that we have provided you with our 10-step GASB 87 readiness plan, you should have a fairly good idea what your next steps will be.

So you can plan for compliance, this is an excellent time for the MGO GASB 87 Implementation Team to review your leases. This will ensure that you are ready to take the most important step: Implementation. In addition, we have put together an online readiness assessment that helps you evaluate where you stand in the implementation process.

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