Understanding GASB 102: Certain Risk Disclosures

Every organization has at least some vulnerability to a variety of risks. The risks can take many forms, and when a risk becomes an unfortunate reality, the impact can range anywhere from negligible to threatening the future existence of your organization. Readers of your organization’s financial statements don’t need to know every bump in the road, but it shouldn’t be left unnoted when an organization is facing a considerable risk. Here’s what the Governmental Accounting Standards Board (GASB) says about disclosing vulnerabilities to risks and the steps you should take to prepare the required disclosures.

An introduction to GASB 102, Certain Risk Disclosures

GASB Statement No. 102, Certain Risk Disclosures is effective for fiscal years beginning after June 15, 2024. The standard requires disclosure of an organization’s vulnerabilities “to risks from certain concentrations or constraints that limit its ability to acquire resources or control spending,” provided they meet certain criteria. 

Before determining whether the criteria are met, it’s important to know what constitutes a concentration or constraint. Per the statement:

• A concentration is a lack of diversity related to an aspect of a significant inflow of resources or outflow of resources.
• A constraint is a limitation that’s imposed by an external party or by formal action of a government’s highest level of decision-making authority.

With those definitions in mind, the following three criteria must all be met before disclosure is required:

1. A concentration or constraint is known to the government prior to the issuance of the financial statements.
2. The concentration or constraint makes the reporting unit vulnerable to the risk of a substantial impact.
3. An event or events associated with the concentration or constraint that could cause a substantial impact to 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.

As with many rules, there’s an exception: in this case, disclosure isn’t required if mitigating actions taken by the government, prior to issuance of the financial statements, cause any of the criteria to no longer be met.

When you do identify a concentration or constraint that meets all three criteria above and the exception doesn’t apply, it should be disclosed in enough detail that users of the financial statements can understand the nature of the circumstances and the vulnerability to the risk of substantial impact. Specifically, the disclosure should address:

1. The concentration or constraint.
2. Each event associated with the concentration or constraint that could cause a substantial impact if the event had occurred or had begun to occur prior to the issuance of the financial statements.
3. Actions taken by the government prior to the issuance of the financial statements to mitigate the risk.

Example scenarios

The statement provides several examples of types of concentrations (employers, industries, inflows of resources, workforce covered by collective bargaining agreements, providers of financial resources, and suppliers of material, labor, or services) and types of constraints (limitations on raising revenue, limitations on spending, limitations on the incurrence of debt, and mandated spending). 

The following scenarios illustrate the above three criteria in action.

Scenario one: A group of voters is gathering signatures to place a proposal on the ballot to eliminate property taxes in the state. It remains to be seen if the required number of signatures will be received, and if they are, whether or not the initiative will get enough votes to become law. A township, whose primary revenue source is property taxes, is preparing its financial statements, and is wondering if any disclosures related to this scenario are required under GASB 102. 

Here’s the analysis:

• There’s a concentration because the township’s revenue comes primarily from property taxes, so the first criterion is met.
• The concentration makes the township vulnerable to risk of substantial impact because losing its primary revenue source would have a substantial impact. So the second criterion is met. 
• However, the third criterion is likely not met at this point. While the group has started gathering signatures, there hasn’t been an event (such as the passage of a bill) that could have a significant impact. If the scenario were to change — for example, the proposal made the ballot — that event could potentially meet the third criterion, particularly as you evaluate the “more likely than not” criteria, depending on the specific facts and circumstances.

In this example, although the first two criteria were met, the third criterion is not, so no disclosure is required.

Scenario two: A small town airport receives 90% of its revenue from a single airline. The airline announces that it will no longer be servicing the airport. This time the analysis provides a different result.

• There’s a concentration because the airport receives 90% of its revenue from a single source, so the first criterion is met.
• The concentration makes the airport vulnerable to risk of substantial impact because without the airline, it loses 90% of its revenue, so the second criterion is met.
• An event causing substantial impact has occurred since the airline has already determined it will no longer service the small town airport, so the third criterion is met.

Since all three criteria were met, disclosure would be required given this fact-pattern. 

If we add to the scenario that the small-town airport secured an agreement with a new airline that mitigates the lost revenue to the point where there’s no longer a substantial impact, disclosure would no longer be required. Remember, the standard indicates that if management has taken mitigating action prior to issuance of the financial statements that causes one of the criteria to no longer be met, disclosure isn’t required.

A plan for implementation

Where should you start when implementing GASB 102 in your organization? A great first step is reading the statement from top to bottom (don’t worry, the core text is just four pages long).

The next step is identifying your organization’s significant concentrations and constraints. The business department preparing your financial statements may not be aware of all the significant concentrations and constraints your organization faces, so identifying potential concentrations and constraints should be a multidepartmental effort requiring communication and coordination.

Once potential concentrations and constraints are identified, the next step is to walk through the three criteria for disclosure for each item. Organizations may find they have many concentrations and constraints that meet the first two criteria but relatively few that meet the third criterion, as it’s expected to be less common for events that meet the criteria here to exist. Once you understand GASB 102, identify potential concentrations and constraints, and determine which ones meet all three of the disclosure criteria, the final step is simply to draft the disclosure. By the time you’ve gone through all the previous steps, you may find the disclosure almost writes itself.

Closing thoughts

The implementation of GASB 102 isn’t just a compliance exercise but an opportunity for your organization to enhance its risk management practices. By assessing potential vulnerabilities, you can better prepare for and mitigate risks that could significantly impact your organization’s operations. Ultimately, the goal of GASB 102 is to provide transparency and ensure that stakeholders are well-informed about the risks that could affect the financial health of your organization.