GASB 102: Understanding the New Requirements for Certain Risk Disclosures

Summary:

• GASB 102 introduces new disclosure requirements related to concentrations and constraints that may expose governments to significant risks.
• Concentrations refer to dependencies in operations, revenues, workforce, suppliers or location that could impact financial stability.
• Constraints include legal or external limitations that restrict how governments can access these resources.
• Required disclosure focuses on identifying risks that could negatively impact service levels or financial positions in the near future.
• State and local governments should evaluate exposure, gather documentation and implement internal processes to comply before the standard comes into effect.

Governmental financial reporting continues to evolve as new standards aim to improve transparency, clarify risk and support more informed decision-making. GASB Statement No. 102, Certain Risk Disclosures, is designed to help stakeholders understand the types of risks that could affect a government’s ability to operate or deliver services. This standard focuses specifically on risks associated with concentrations and constraints, two areas where limited diversification or external limits could have a sizable financial impact.

What GASB 102 is Designed to Address

GASB 102 enhances clarity around the risks that state and local governments face by requiring more precise and timely disclosures. These disclosures are intended to give financial statement users, like legislators, oversight bodies, lenders, rating agencies and the public, a clearer idea of vulnerabilities that could influence a government’s service capacity.

This standard asks governments to identify situations in which they may be overly dependent on a particular revenue source, supplier, funding stream or economic trend and assess whether any restrictions or limitations of that resource could hinder their operations. By formalizing these disclosures, GASB 102 encourages stronger risk awareness, more proactive planning and enhanced governance at state and local levels.

What are Concentrations and Constraints?

Concentrations

Concentrations occur when a government relies too heavily on a specific revenue provider, employer base, industry, geographic region or workforce segment. These dependencies are not inherently negative but can become noteworthy when they expose the government to heightened risk.

For instance, a municipality whose tax base depends significantly on one major employer in the region faces potential operational challenges if that employer relocates or if the industry faces a downturn. Reliance on one single outsourced provider can also create notable structural vulnerabilities.

Under GASB 102, a concentration must be disclosed when it exposes the government to a risk of significant or near-term financial impact.

Constraints

Constraints are external limitations or restrictions that affect a government’s ability to access or use certain resources. These may include legal constraints, contractual requirements or situations driven by laws, regulations or external oversights.

Examples of this include funds restricted by legislation, dependency on voter-approved revenues measures, reliance on state-imposed allocation formulas or limitations created by federal grant rules. If these constraints materially restrict how a government can respond to changing conditions, they meet the criteria for disclosure.

Disclosure Requirements Under GASB 102

This new standard requires narrative disclosure when specific criteria are met. These must describe the nature of the concentration or constraint, the risks it creates and the potential impact on the government’s ability to provide services.

To trigger disclosure, the situation must involve the following:

1. Presence of a concentration or constraint
2. Exposure to a risk of a substantial financial effect
3. A reasonably expected near-term impact (usually within 12 months)

Disclosures should be clear, descriptive and focused on what financial statement users need to know about the government’s exposure. Each disclosure should include the nature of the concentration or constraint, how it exposes the government to risk, potential effects on future operations and the timeline in which the impact could occur.

These requirements apply to both general purpose and special-purpose governments, ensuring consistency in reporting across different entities.

Preparing for Implementation

Evaluate Current Risks

Governments should begin by identifying areas where concentrations or constraints may exist. This could involve evaluating major revenue sources, workforce demographics, supply arrangements or externally imposed limitations.

Strengthen Internal Communication

Finance teams will need input from department leaders, program managers, legal counsel, grant administrators and human resources to understand the full picture of operational and financial risk.

Document Findings and Assess Materiality

Clear documentation will support the assessment of whether a risk meets the threshold for disclosure. This includes reviewing past trends, budget projections and the likelihood of near-term financial impact.

Update Policies and Procedures

Governments may benefit from formalizing risk identification processes, updating internal controls and establishing routines for annual review as part of their financial statement preparation.

Get Support for GASB 102 Implementation

GASB 102 provides a structural framework for identifying and communicating the risks tied to concentrations and constraints. These areas may impact service deliverability and financial stability. By increasing transparency of these risks, the standard helps stakeholders better understand the challenges and vulnerabilities governments may face.

If your organization needs support evaluating potential exposures, preparing disclosures or implementing GASB 102, the team at Brown Plus can help. Contact us today to get started.

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